I’m a huge fam of Jim Lange. He’s a noted expert in financial management, saving for retirement, and estate planning. He’s written a number of books, some of which you can get for free on this page. If I ever move back to Pennsylvania, I’ll probably have him do my estate planning so that I don’t have to worry about anything in retirement.
He sends out a monthly newsletter that I get via snail mail, and it usually has a useful article in it. If you want it, you can get it here.
A previous edition had a section called “Jim’s Point-by-Point Summary of the Whole Retirement & Estate Planning Process.” It was simple but extremely useful. Below in bold are each of the points he lists for people who are still working, which is most of my readership. Let’s take each bolded point and militarize it for you so it is specific to those of us in the military.
Contribute at least the amount to your retirement plan that your employer is willing to match or partially match.
For those under the legacy retirement plan, this is not an option. For those under the new Blended Retirement System (BRS), you need to contribute 5% of your basic pay to the Thrift Savings Plan (TSP) to get the pull 5% DoD match:
You also need to make sure you contribute 5% every month and don’t fill the TSP too early. If you max it out in October, you won’t get a match in November or December.
If you can afford to, contribute the maximum allowed to your retirement plan even if your employer does not match.
This is $19,500 in 2020. You can do an extra $6,500 if you are 50 or over. You can even do more if you are in a combat zone.
Once you have maximized contributions to your plan at work, contribute the maximum you can to an IRA, even if you cannot take a tax deduction on it.
If you are able to fill your TSP account, next you’ll need to open an IRA at an investment firm. Vanguard is the obvious choice due to their across the board low investment fees and unique non-profit structure, but you can do this anywhere (Schwab, Fidelity, etc.).
If you make too much to contribute to a Roth IRA, you just use the back door Roth IRA option.
Consider your personal tax bracket when trying to decide if you should contribute to a Roth or a traditional IRA/retirement plan.
With a traditional plan, you take a tax deduction now and pay taxes later when you take the money out. With a Roth plan you pay the taxes now and the withdrawals are completely tax free.
The general principle is that if you are in a lower tax bracket now than when you are retired, you do the Roth. If you are in a higher tax bracket now, you use the traditional.
No one really knows what the future holds, though, making this decision tough. Here are some resources for you to check out when making this decision:
Do not take loans against your retirement plan. Allow the tax-deferred or tax-free status of the account to maximize the growth of your money.
While the TSP allows loans, I refuse to link to any information about it. Once you put money away for retirement, you don’t borrow from it unless it is an ABSOLUTE EMERGENCY.
The Bottom Line
Here are the point-by-point summary of steps Jim Lange suggests you take if you are saving for retirement:
- Contribute at least the amount to your retirement plan that your employer is willing to match or partially match, which is 5% of basic pay in the BRS.
- If you can afford to, contribute the maximum allowed to your retirement plan even if your employer does not match, which is $19,500 in the TSP ($26,000 if you’re 50+).
- Once you have maximized contributions to your plan at work, contribute the maximum you can to an IRA, even if you cannot take a tax deduction on it. Use a back door Roth IRA if you need to.
- Consider your personal tax bracket when trying to decide if you should contribute to a Roth or a traditional IRA/retirement plan.
- Do not take loans against your retirement plan. Allow the tax-deferred or tax-free status of the account to maximize the growth of your money.
From Chief of Naval Personnel Public Affairs
WASHINGTON (NNS) — Navy announced improvements to the Transition Assistance Program (TAP) in NAVADMIN 223/19, released Sept. 30.
The message outlines five key elements of the changes effective Oct. 1:
- Mandatory initial counseling/self-assessment to be completed 365 days or more prior to release from active duty.
- Assign Sailors to at least one of three pathways (Tier I, Tier II, & Tier III)
- Mandatory pre-separation counseling to be commenced 365 days or more prior to release from active duty as part of Day 1 of TAP class.
- Adjustment of Department of Labor Employment Workshop to one day vice three.
- Completion of one of four two-day tracks as part of day 4 and 5 of transition course.
- Documentation of TAP completion via DD Form 2648 in DMDC.
“Implementing these changes aligns the Navy with direction provided by the National Defense Authorization Act,” said Tom Albert, Navy TAP Manager, OPNAV N17 Competency and Compliance branch. “But more importantly, these changes offer a better individualized transition process to civilian life for our Sailors and their spouses.”
Under the three-tier system, Sailors preparing to leave the service will meet with a counselor to discuss their plans after separation or retirement. From there, they will be classified into one of three tiers.
“For Tier I Sailors, they don’t need as much as far as services. They’re pretty much engaged in their transition,” said Anthony Stevens, the military readiness section lead at Commander Naval Installations Command. “Many of them already have a job lined up, or they’re retiring.”
Service members in Tier II are ready to transition, but not yet fully prepared. In other words, they may be saving their money and looking into careers, but may even still be on the fence about staying in the service, he said.
Tier III service members, “Don’t have any plans whatsoever,” Stevens said. This could include service members who are being discharged under other-than-honorable circumstances or are leaving the service on short notice because of an injury or disability.
Once service members are funneled into one of the three tiers, the counselor recommends a specific track — either higher education, employment, entrepreneurship or vocational skills training — based on the person’s goals for life after the military.
TAP is mandatory for active and reserve personnel who serve 180 or more days of consecutive active duty and must be completed prior to release and issuance of DD214.
Sailor 2025 is the Navy’s program to improve and modernize personnel management and training systems to more effectively recruit, develop, manage, reward, and retain the force of tomorrow.
(Enjoy this always relevant re-post.)
Two recent events led to this post. First, this article about becoming a multimillionaire in the military appeared on military.com. Second, I was having a discussion with some other officers about this topic and they thought my opinion on the subject was different from what they had heard before. Because of this, we’re going to examine the value of a military pension.
How Much of a Pension Do You Get?
Let’s look at two likely scenarios for a physician. First, someone who stays in for 20 years and retires as an O-5. Second, someone who stays in for 30 years and retires as an O-6. Their pensions in today’s dollars based on this calculator would equal approximately:
20 year O-5 = $4,102.50/month or $49,230/year
30 year O-6 = $8,053.50/month or $96,642/year
Remember that your military pension payments are adjusted annually for inflation, a very valuable benefit.
How Much is This Worth?
The easiest way to answer this is to examine the pension and figure out how much money you’d need to have invested in order to pay yourself exactly the same amount of money inflation adjusted for the rest of your life. Unfortunately, this is not a simple issue.
Military.com Article “Can Military Service Make You a Millionaire?”
The aforementioned military.com article states, “The Defense Department puts the value of the monthly check of an O-6 retiring today with 30 years of service at $2.2 million…The DoD made a number of assumptions, but the idea was to put a price tag or value on the monthly military retirement check a military retiree will receive.” This article doesn’t go into the assumptions made, but let’s just take it at face value.
My MBA Finance Professor
In 2013 when I was taking my MBA, I asked my Finance professor this very question. I asked him how he would value a 21 year O-6 pension, another common circumstance for a physician. At the time this pension was approximately $53,400/year. Here is what he said:
“If you looked at this as an ‘endowment’ where one would not spend the principal, then take the annualized benefit $53,400 ($4,455 x 12) and divide by a long-term rate such as the 30 year T-Bond rate (3% in 2013) $1,782,000. In other words, if you had that $1,782,000 and put it all into 30 year T-Bonds at 3% you would get your $4,455/month. Of course, the issue is whether the 3% is a good number for the long-term. If, however, you were to look at this as an ‘annuity’ where you would spend down the principal until time of death, then you have all sorts of demographic stats issues (e.g., expected life after retirement, future interest rates, variability of the annuity investment, cost of living adjustments, etc.). In a nutshell, it can get quite complex. There are a number of websites available often through reputable firms such as Fidelity, Vanguard, etc., that you can perhaps access that have such calculations available already (instead of having to create your own model). You can plug in your what if’s and see what pops out.”
Using the 30 year T-bond (Treasury bond) rate from 3/18/16, which was 2.68%, here is the valuation with his methodology:
20 year O-5 = $49,230/2.68% = $1,836,940
30 year O-6 = $96,642/2.68% = $3,606,044
The problem with this analysis is that a regular 30 year T-bond is not inflation adjusted, so in my opinion you’d have to compare it to TIPS (Treasury Inflation Protected Securities). A recent yield on a 30 year TIPS bond is 1.12%, which would value the two pensions we’re considering at:
20 year O-5 = $49,230/1.12% = $4,395,536
30 year O-6 = $96,642/1.12% = $8,628,750
Keep in mind that the lower the Treasury bond yields go, the more valuable your pension is because you’d have to invest more money to get the same payout. Since today’s Treasury yields are at historic lows, these valuations are probably as high as they’ll ever get.
If you go to annuity websites and try to purchase an annuity for these two amounts, here is how much they would cost:
For a 20 year male O-5 who is 50 years old, lives in Virginia, and wants to earn $4,103/month or $49,236/year with a 2% annual income increase (equivalent to the inflation adjustment of your military pension) the pension would cost $1,322,826.
For a 30 year male O-6 who is 60 years old, lives in Virginia, and wants to earn $8,054/month or $96,648/year with a 2% annual income increase (equivalent to the inflation adjustment of your military pension) the pension would cost $2,103,257.
The 4% Rule
The 4% rule is a commonly accepted retirement “rule” that says you can take 4% out of your retirement nest egg every year, annually adjusted for inflation, and never run out of money. In other words, for every $40,000/year of income you need in retirement, you need to have $1 million saved for retirement. Whether the 4% rule is valid in today’s low yield environment has been debated, but let’s just assume it is still valid (because I think it is).
If you divide the annual military pension by 4% it would give you the size of the nest egg you’d need to withdraw that amount:
20 year O-5 = $49,230/4% = $1,230,750
30 year O-6 = $96,642/4% = $2,416,050
Keep in mind that your government pension is guaranteed by the federal government but the assets used in the typical application of the 4% rule, like your retirement accounts and other assets, are not, making your pension a much safer bet that is probably worth more than the numbers above.
There is some value in the military pension that people tend to underestimate. First, it is guaranteed by the US government, which makes it “risk free”. The only option discussed above that would offer this same value is the valuation comparing the pension to Treasuries. Even an annuity from an insurance company is not risk free because insurance companies do go out of business. (I will admit, though, that this is a rare event, and you could diversity by purchasing annuities from multiple companies, so an annuity can be pretty close to “risk free”.)
Second, you can’t screw it up. Investors are their own worst enemy. They buy high, sell low, trade too frequently, don’t save enough, over estimate how high their returns will be, pay excessive investment fees, and other errors that can very easily screw up your well planned retirement. You can not screw up your military pension.
Fourth, and this benefit is HUGE for me. I see my military pension as equivalent to a massive pile of TIPS. This allows me to take much more risk with the remainder of my investment portfolio and net worth. How much risk? Overall my asset allocation is 90% in stocks, which is a lot more risk than most people would recommend at my age of 40. Because of my pension, though, I don’t think I’m taking too much risk.
The Bottom Line
As you can see, a military pension is risk free, inflation adjusted, and can be quite valuable. Can you make more money as a civilian, save well, and accumulate even more than this? Yes, but this is all determined by your civilian salary, discipline as an investor, and rate of return on your investments, which no one knows since they can’t predict the future. A military pension is a very valuable and underappreciated financial asset that is probably worth somewhere between $1,200,000 and $2,500,000, depending on how long you stay in and what rank you achieve. If you try to match the risk with Treasury bonds at today’s rates, it is worth a lot more.
Final FY19 Promotion List is Out – What is the Obligation for Accepting Promotion? What if You Don’t Want the Promotion?
The final FY19 promotion list is out (with my name on it), so it seemed appropriate to answer a few promotion related questions:
Question: What is the obligation for accepting promotion?
Answer: There is no obligation if you end up resigning. If you want to retire, though, the additional obligation is:
- 2 years for LCDR
- 3 years for CDR and CAPT
This can all be found on page 5 of OPNAVINST 1811.3A. Or you can read one of my other posts called “You were accepted for promotion to O5 or O6 – should you accept it?” where I break it all down for you.
Question: What if you want to decline the promotion? The promotion NAVADMIN tells you how to decline it in paragraph 2:
2. If a selected officer does not decline promotion in writing prior to the
projected date of rank (noted above in paragraph 1), that officer is
considered to have accepted the promotion on the date indicated. An officer
who chooses to decline promotion must submit the declination in writing to
COMNAVPERSCOM (PERS-806) within 30 days of the release of this NAVADMIN.
A bunch of people have asked me for a go-by for this, and I didn’t have one, but one of the Detailers sent me this screenshot below to show where you go to start the request. Hard copies of your request are required to be uploaded ONLY if you are requesting a waiver to get out early:
If you don’t have the link, you need to contact the NSIPS Help Desk:
Here’s a link to the article about the 33 CDRs and CAPTs that they cut. I have no idea if any were medical:
There have been recent discussions about cuts in military medicine and POM20, and some people found this recently signed policy about early retirements. They put 2 and 2 together and figured that they might be able to retire early.
The message from BUMED is that this was merely the required periodic update of the existing early retirement policy. It was unfortunate timing and there are no plans to use it that they know of.
If that changes, you’ll hear it here as soon as I can get it out there.