Military Investing - For Military Personel (Air Force, Navy, bad credit, loans)

[BucFan]

Military Investing ----Emergdoc bogleheads

Military folks occasionally frequent the forum with basic investing questions. I’m writing this post so I can refer back to it for them rather than typing all this stuff out each time.

General Military Issues:

1) You move a lot. Landlording is a second job. Do you really think it wise to leave your investment worth tens of thousands of dollars in the hands of someone not responsible enough to own their own home and move across the world hoping they take good care of it? Contrary to popular belief, housing values do not always go up, and transaction costs are huge when you buy and sell. You won’t want to go back to your starter house/townhome/condo when you get out. It will be a big pain to manage from another state. Give very serious consideration to just renting your entire career, carefully saving up a down payment for your dream house when you get out. Obviously this doesn’t apply to everyone, but it does apply to far more people than usually realize it.

2) Just because the BAH is $2K doesn’t mean you have to spend $2K on housing. Feel free to spend less and save the difference.

3) You hardly pay any taxes at all. Most military members have an effective federal tax rate well below 5%, and many are negative. Your allowances are tax-free. Your basic pay is tax-free when you deploy. Even your re-enlistment bonuses can be tax-free if you take them while deployed. You may never pay this little in income tax again. In general, choose a Roth account (pay tax now instead of later) instead of a tax-deferred account (pay tax later instead of now.) You should max out a personal and a spousal Roth IRA before putting a dime in the TSP. Starting in 2011, there is supposed to be a Roth option in the TSP. USE THIS!

4) If you aren’t a resident of Nevada, Washington, Alaska, Florida or Texas, what are you waiting for? Do you like paying extra taxes? Do whatever it takes to establish your residency in one of these states, especially Alaska if you get stationed there. The permanent fund dividend is just icing on the cake to the state-tax free income.

5) You have a very secure, very regular income. Take advantage of that to make your investments automatic. Set-up automatic withdrawals into your retirement accounts. You’ll be surprised how quickly a few bucks here and there can grow. You can get away with a smaller emergency fund than the typical person. 3 months worth of expenses is plenty.

6) Take advantage of educational opportunities available in and through the military. One of the smartest things I’ve seen done is when people enlist at 17, go to college while on active duty, transition midway through their career into an officer field (I see med tech to nurse a lot), “retire” and begin your career at 37 with health benefits for life and a lifetime pension. The new GI bill is AWESOME. It is tons better than the old one. Learn the benefits and take advantage of it.

7) You aren’t what you drive. Two of the highest paid people on my base drive beaters. Yet all the E-2s are cruising around in BMWs they don’t own. Car dealers around bases will absolutely prey on you. They’ll even give you a free ride to the dealership. They are not your friends. You’ll get into a debt cycle that will take you half your career to climb out of, if you ever get out at all.

8) If you thought the car dealers were bad, check out the payday loan guys at the entrance to the base. Never, ever, ever take a loan from a payday or title loan company. There is no higher interest rate out there. Keep your debt under control. A bad credit score will affect your security clearance and your career.

Military Specific Investments

1) The TSP is the military “401K”. It is the lowest cost 401K in the country. In investing, costs matter. Vanguard is the low-cost leader in the investment field due to their unique structure. Their investing fees are 1/10th that of most of their competitors. The TSP investing fees are 1/10th that of Vanguard. It is a great place to invest (after you’ve maxed out any Roth accounts available to you.) There are several different index funds in it. The C fund is an S&P 500 index fund. The S fund is an extended market index fund (all the US stocks that aren’ t big enough to be in the S&P 500 index.) The I fund is a very inexpensive Developed Markets International Index fund (think Europe and Japan). It doesn’t contain any emerging market stocks (like Latin America, Russia, Brazil, China etc.) The F fund is a total bond market index fund, holding basically all the bonds sold in the US. The G fund is a very special free lunch type account. It pays you a bond rate of return, yet with zero risk of loss. Although its expected return is lower than other funds, it is much higher than other similar risk-free investments. As such, many Bogleheads with TSP access use the G fund as their primary bond investment. If you’re just starting out, pick an L fund, which is a reasonable mix of the other funds with no additional costs for the diversification. Be sure to look under the hood and find the mix you’re comfortable with. Don’t worry, you can change any time with no transaction fees, commission costs, or taxes. Don’t take all your money out of the TSP when you get out. Your next 401K probably won’t be as good and as long as you keep some money in the TSP you can always move money back into it in later years, even if you leave the service. You can currently put up to $16,500 per year into the TSP.

2) Your military pension is better than most pensions. Consider sticking it out for 20 years to get this. I have a friend who was considering separating at 14 or 15 years, despite having little prospect of significant earning power once he separates. When I pointed out just what his pension is worth, he quickly changed his tune. Your pension is special for two reasons- First, it starts when you retire, rather than when you turn 65. A pension beginning in your 40s is a whole lot more valuable than one that begins in your 60s. Second, it includes health benefits. This is such a significant cost to most early retirees that many end up having to work until they qualify for Medicare primarily due to the cost of health care. Yet it is just free to you. Crazy I know. How much is that pension worth? Well, let’s say you retire as an E-7 after 20 years. That would pay you about $2100 per month, or about $25,000 a year, indexed to inflation. An inflation indexed annuity that pays out $25K a year would currently cost you about $450,000. Add in health care costs for 40-50 years and you can probably safely double that amount. An officer that retires at O-5 would have a pension equivalent to an annuity costing $800K, plus health care benefits. Your regular, secure income combined with this pension allows you to take a great deal of investment risk with your TSP and Roth IRAs.

3) The Savings Deposit Program (SDP) is a program that allows you to put in up to $10K while you are deployed. It pays 10% per year, guaranteed, and continues to pay for 3 months after you come home. Take advantage if you can. Give your special deployment bonuses, lower expenses, and tax-free income, it should be easy to do. You can also defer tax-exempt money into the TSP, but you should only consider doing this if you are already maxing out the SDP AND Roth IRAs for the year. Even then, you may be better off putting that money toward a mortgage, a downpayment, or even a taxable investing account. Be sure to max out your tax-deferred TSP contribution (at least until the Roth TSP becomes available) before or after you deploy, assuming you’re not gone the whole year.

4) Be sure to look into USAA for your insurance needs. The service is great and the price is right. Their banking and investments aren’t bad either, although most Bogleheads prefer Vanguard for investments.

5) If you need a good cash rewards credit card (no point in having one of these if you don’t pay it off in full each month) consider opening an account at PenFed. It only costs you $5 (which you technically get back if you ever close the account.)

6) Be sure to shop on base to enjoy tax-free savings at the commissary and the BX/PX/Navy exchange. That adds up over time. Remember the laws of economics don’t actually apply at the BX so sometimes you find things ridiculously cheap and sometimes they cost way more than they would elsewhere, so be sure to shop around. Also be sure to ask for a military discount everywhere you go. You’ll be surprised how often you get one. The fewer the number of military people in the area the more likely you are to get a significant discount.

7) Stay away from anything that says “First Command” on it. Stay away from anyone who encourages you to invest in something because it is better than the TSP (with the exception of a Roth IRA until the Roth TSP begins.) People who cater to military members are not usually looking out for you, even if they’re former military folks.

[Kalbo]

Excellent post, with great advice!

[johnphil29]

Great post.

I am going to plagiarize it and pass it to my Airmen. I am a First Sergeant in the Air Force.

Great summary of the benefits we all get.

John

[BucFan]

Originally Posted by Kalbo

Excellent post, with great advice!

I didn't write it, but agreed w/ most of what was written. I'd share the link, but this forum doesn't allow competing forums to be linked here.

1SG, be careful about claiming state residency. It can be considered fraud if one claims a state and don't qualify. This is something I'd have your airmen investigate through the legal folks (JAG in the Army).

[Submariner]

Originally Posted by BucFan

Military Investing ----Emergdoc bogleheads

Military folks occasionally frequent the forum with basic investing questions. I’m writing this post so I can refer back to it for them rather than typing all this stuff out each time.

General Military Issues:

1) You move a lot. Landlording is a second job. Do you really think it wise to leave your investment worth tens of thousands of dollars in the hands of someone not responsible enough to own their own home and move across the world hoping they take good care of it? Contrary to popular belief, housing values do not always go up, and transaction costs are huge when you buy and sell. You won’t want to go back to your starter house/townhome/condo when you get out. It will be a big pain to manage from another state. Give very serious consideration to just renting your entire career, carefully saving up a down payment for your dream house when you get out. Obviously this doesn’t apply to everyone, but it does apply to far more people than usually realize it.

Buying apartment buildings did us really well.

... 2) Just because the BAH is $2K doesn’t mean you have to spend $2K on housing. Feel free to spend less and save the difference.

3) You hardly pay any taxes at all. Most military members have an effective federal tax rate well below 5%, and many are negative. Your allowances are tax-free. Your basic pay is tax-free when you deploy. Even your re-enlistment bonuses can be tax-free if you take them while deployed. You may never pay this little in income tax again. In general, choose a Roth account (pay tax now instead of later) instead of a tax-deferred account (pay tax later instead of now.) You should max out a personal and a spousal Roth IRA before putting a dime in the TSP. Starting in 2011, there is supposed to be a Roth option in the TSP. USE THIS!

The military and the IRS get along really well with each other. Every base I was homeported at offered IRS courses every year, for people to become certified to do taxes.

The courses are taught by IRS auditors and they are free.

I did it eight years total and my DW did it seven years.

During all of that side from helping nearly everyone on my boats to do their taxes, I also learned a lot about how taxes work.

We had no tax obligation [we become tax exempt] for most of my Active Duty career.

A great many US servicemembers can also learn to utilize their various deductions and to keep their AGI zero, during all of their careers.

The primary reason for US servicemembers to pay any income taxes is ignorance, they simply have not been taught how the schedules work.

... 4) If you aren’t a resident of Nevada, Washington, Alaska, Florida or Texas, what are you waiting for? Do you like paying extra taxes? Do whatever it takes to establish your residency in one of these states, especially Alaska if you get stationed there. The permanent fund dividend is just icing on the cake to the state-tax free income.

You forgot California.

I was a 'resident' of California for all of my AD career, and I paid zero income taxes to that state. No servicemember pays state taxes to California, so long as they stay on Active Duty and remain out-of-state.

... 5) You have a very secure, very regular income. Take advantage of that to make your investments automatic. Set-up automatic withdrawals into your retirement accounts. You’ll be surprised how quickly a few bucks here and there can grow. You can get away with a smaller emergency fund than the typical person. 3 months worth of expenses is plenty.

6) Take advantage of educational opportunities available in and through the military. One of the smartest things I’ve seen done is when people enlist at 17, go to college while on active duty, transition midway through their career into an officer field (I see med tech to nurse a lot), “retire” and begin your career at 37 with health benefits for life and a lifetime pension. The new GI bill is AWESOME. It is tons better than the old one. Learn the benefits and take advantage of it.

CLEP is fantastic. It helped me a lot when working on my degrees.

I think your thinking about the Montgomery GI bill and comparing it to the current GI bill. The Montgomery GI bill was horrible. However the VN GI bill was great, much better than the current GI bill.

I retired at 42. I cashed out our portfolio and used it to buy our farm. So we have no mortgage. As such my military pension is enough to support a family, with no need for a secondary career.

... 7) You aren’t what you drive. Two of the highest paid people on my base drive beaters. Yet all the E-2s are cruising around in BMWs they don’t own. Car dealers around bases will absolutely prey on you. They’ll even give you a free ride to the dealership. They are not your friends. You’ll get into a debt cycle that will take you half your career to climb out of, if you ever get out at all.

8) If you thought the car dealers were bad, check out the payday loan guys at the entrance to the base. Never, ever, ever take a loan from a payday or title loan company. There is no higher interest rate out there. Keep your debt under control. A bad credit score will affect your security clearance and your career.

Good advise.

... 4) Be sure to look into USAA for your insurance needs. The service is great and the price is right. Their banking and investments aren’t bad either, although most Bogleheads prefer Vanguard for investments.

They are pretty good now.

I looked at USAA a few times during my career. So much better now that they have finally decided to open their services to enlisted. But that change in policy happened after I retired.

... 5) If you need a good cash rewards credit card (no point in having one of these if you don’t pay it off in full each month) consider opening an account at PenFed. It only costs you $5 (which you technically get back if you ever close the account.)

We like no-fees CCs that give air-miles.

We have used our air-miles many times.

[Crew Chief]

EXCELLENT advice, All!! The only thing I'd like to add is that we haven't darkened the doors of a bank since 1974! We've been credit union members since then and have paid less in fees, earned better rates, gotten loans easier and just been generally better treated than when we used commercial banks. There are several credit unions that cater to military members and can serve your needs worldwide!

[hindsight2020]

Um, TSP is a non-matching "401k". That's crap. As to the Roth option, I haven't heard of that. Maybe I'd put a nickel in if it was a Roth, otherwise, pass.

[GeorgiaTransplant]

Originally Posted by hindsight2020

Um, TSP is a non-matching "401k". That's crap. As to the Roth option, I haven't heard of that. Maybe I'd put a nickel in if it was a Roth, otherwise, pass.

TSP compounds tax-free. Roth is the best deal going for most. Once you have maxed out your Roth, TSP is the next best deal going.

[BucFan]

Originally Posted by hindsight2020

Um, TSP is a non-matching "401k". That's crap. As to the Roth option, I haven't heard of that. Maybe I'd put a nickel in if it was a Roth, otherwise, pass.

To each his own. Me? Took advantage of all that the military/gov't had to offer and I'm pretty comfortable afterwards.

[Eastern Roamer]

Originally Posted by BucFan

4) If you aren’t a resident of Nevada, Washington, Alaska, Florida or Texas, what are you waiting for? Do you like paying extra taxes? Do whatever it takes to establish your residency in one of these states, especially Alaska if you get stationed there. The permanent fund dividend is just icing on the cake to the state-tax free income.

If you make more that half of your income for the year outside of a state, you are not subject to that state's income tax. If you're in the military you should be filing as an "out-of-state resident" which exempts you from state income tax. You should not be paying state income tax if you're in the military.

The E-6 who helped us with our taxes my first year didn't know this. I found out later and ammended my return. You should do your own taxes unless you've got some weird, complicated scenario. There are free programs online (e.g. TaxAct & TurboTax) that make filing very easy. And the jerkwad who got voluntold to help you has no vested interest in making sure your taxes get done right.