Rising Interest Rates and Military Retirement Impacts

Last week, Russia raised its key interest rate 17% to 10.5%. (Bloomberg, 2014) While I personally believe raising the interest rates would be good for America’s economy and long-term economic success, I do recognize the rise would impact our military; specifically, our military retirement plans. Rising interest rates will make our military retirement less valuable.

Our military retirement is fixed; which means the variables do not go up and down. Our retirement is based on what rank we retired as and how many years we served. Our retirement doesn’t change based off of America’s interest rates; only the annual inflation adjustment.

We can see the impact to our retirement plan using my “Military Retirement Value” calculation blog post. A Major at 20 years (I use this because it applies to me) will receive $3,715 a month in retirement.  By comparing it to the yield on a 30-year bond (3%), the retirement is worth $1.5M. If interest rates rise to 4% then the retirement would be worth $1.1M; 5% is $892K. The reason why is because civilians can invest their retirement and gain from higher interest rates, while a fixed military retirement suffers because of rising interest rates.

I personally believe the economy will see inflation and America will be too slow to raise the interest rates to slow it down. The costs of normal consumer goods and borrowing money will rise. Groceries will be more expensive and your credit card interest rates will rise while your retirement will stay the same and you’ll have to wait for the lagging annual inflation adjustment.

What can you do to reduce the impact?

The first thing to do is eliminate all adjustable-rate credit sources. These will increase when the interest rates rise while your income will probably not.

Next, take advantage of the rising interest rates. When then interest rates increase you can find safer investments then stocks to get the same yields. Most people won’t have the flexibility to take advantage unless you’ve been a long-time reader of this blog.

If you’ve been a long-time reader, leave me a comment.

Source: http://www.bloomberg.com/news/2014-12-15/russia-increases-key-interest-rate-to-17-to-stem-ruble-decline.html

I'm Ready to Start Making Money!

Many people have asked me, “My finances are in order, so now what?” I’m very pleased to get this question. When I get asked this, I ensure, and/or assume, they have: accounted for all their expenses (as suggested in my 30-day challenge post), eliminated or reduced their debt levels and, most importantly, established an emergency savings account. If this describes you and you’re ready to start investing and making money, then read on.

·         The first step is to take advantage of tax-sheltered investments. I typically recommend everyone have an Individual Retirement Account (IRA). To determine if you should open a ROTH or Traditional IRA, then read this previous blog post: You can invest up to $5,500 annually in an IRA. Once you have the money in an IRA, you can invest it in pretty much any investment possible—mutual funds, stocks, gold, bonds, etc.

·         If you have more than $5,500 annually to invest, then you should fund your Thrift Savings Plan (TSP). Again, you can choose the ROTH or Traditional accounts, but you are limited to the funds offered by TSP.  For military members, the TSP does not match and for civil service employees, the TSP does match (up to 5% in a complicated matter). You can invest $17,500 (does not include your employer’s contributions) annually to your TSP.  With an IRA and the TSP, you can contribute to $23,000 a year in tax-sheltered investments.

·         On a lateral financial decision, if it makes sense for your particular financial situation, then purchasing a house while in the military is a great investment. When living in the dorms, base housing or renting, you are theoretically “losing” the BAH we receive. If you were a civilian, it would be factored into your base pay, but it is separated in the military. This is a basic discussion and gets more complicated on how to make the decision to buy or rent, but buying a house allows military members to “earn” that BAH.

·         Back to normal investing, if you have more than $23,000 a year to invest, then you can open up a normal taxable, brokerage account with any large bank and purchase stocks, mutual funds, bonds, art, oil, etc up to however much you want to invest.

Mathematically, the earlier you invest the better potential you have for earning a large return on your money. If you do it right, by using tax-sheltered accounts, avoiding fees and saving as much as possible, you could retire early and live a long, financially independent, life.