"Begin with the end in mind.” That’s the second habit from Stephen R. Covey’s 7 Habits of Highly Effective People, often taught in Strong Bonds events to military couples and families.
It’s also terrific advice for people who know they should plan for their financial future but are not quite sure where to start.
The Blended Retirement System has been in place now for almost three years. A lot of soldiers and airmen are trying to understand how to make BRS work best for their future needs. For that matter, participants in the legacy retirement program can also benefit from the same concepts that will make BRS effective for younger officers.
What is “the end” to keep in mind? The answer simple: financial readiness.
The objective is to create a sufficient level of income for a military retiree (or any other person) when typical employment ends. What is “sufficient?” Enough to provide food, shelter, clothes, transportation, medical care and similar needs. Occasional travel with a spouse, perhaps dining out with friends and the ability to contribute to church or a charity (like the National Guard Educational Foundation) are also items that can be anticipated.
The alternative is being short on income at a time when finding suitable employment may be difficult.
Trick question: When is the best time to retire? Financially speaking, never retiring is the best option. (Like I said, a trick question.) Few will make as much money in retirement as they do when working, so it will nearly always be better to work as long as possible.
In some circumstances, mandatory retirement forces a change, or perhaps health considerations alter your plans. Your own health or attending to the health of a spouse may prevent you from working. The time to prepare for retirement is while you are still able to generate income. Ideally, when the time comes for you to stop working, you’ll have enough to sustain yourself.
As we begin with the end in mind, we may have a good vision of the retirement circumstances we’d like. How we use BRS, legacy pensions and any other resources is an important decision, but it won’t matter much if we do not already control our financial future. Our retirement picture is only one part of an overall financial plan we all need for now and for later.
Why have a plan? Without a plan, there is no real chance to achieve financial stability. Even an imperfect plan dramatically increases your odds of success.
Military participation brings some financial opportunities, such as a pension for a part-time job and even TRICARE medical coverage. However, our participation does not automatically endow us with financial intelligence. The same principles of sound money management must be learned by us and civilians alike.
Only about 10% of Americans believe they have a good grasp of their retirement situation, according to the business news channel CNBC. Another source of financial news and information, Bankrate, conducted a survey of household and found only 39% of respondents could scrounge $1,000 from savings or checking to pay for an unexpected expense like a failed water heater.
Let’s start with concepts financial planners wish were obvious to everyone. There are some fundamental practices to be heeded no matter what retirement plan you have, or what other financial resources may be available later in life.
Our retirement picture is only one part of an overall financial plan we all need for now and for later.
Spend less than you earn. Probably everyone who works in a financial planning career has had someone ask for the “secret” to prosperity. Spending discipline isn’t a secret, but it seems too simple to be the key. With only about 10% of our population paying any heed to the principle of spending less than their net income, maybe it is, in fact, a secret — but it shouldn’t be.
Spending less than you earn has always been the best, simplest advice for money management.
Use a budget. You cannot control your money if you don’t know where it is spent. If you can’t identify where your money goes, it controls you. Financial stability will only come when you (1) know how much you earn; (2) know how much you spend; and (3) know where the spending occurs. You need all three. Write them down. Have a system for tracking income and expenses. If you don’t monitor and protect your financial interests, no one will.
Build savings into your budget. For financial reasons, savings is a critical component and the overall point of this article. But what many of us don’t realize is that there are additional reasons for saving and having financial discipline. Financial stress is by far the No. 1 source of conflict in a relationship. A disciplined budget reduces conflict in relationships.
Knowing you can manage unexpected expenses brings peace of mind. We can almost guarantee that as time passes, the refrigerator will die, the car’s transmission will fail or a child will need some sort of expensive medical or dental treatment not covered by insurance. Truly, there is no such thing as an “unexpected” financial event, so be prepared for an event because the only unexpected part is when.
Pay down existing debt and avoid future debt. Debt makes money your master. If you follow the news, you know that individuals and nations have little appetite for restraint in spending. Individual consumer debt outpaces savings, and nations — including our own — borrow to keep spending. You can debate the merits of debt markets with economists, but for most of us, debt is not our friend. Borrowing to maintain a lifestyle almost always ends badly.
Student debt has garnered a lot of recent attention, and the situation does not appear to be improving. Many of our younger officers are continuing their education, and many of our older officers may be carrying their own student loans or have borrowed to pay college tuition for their children.
It’s risky to inject my own biases here, but here I go: A lot of people pay large sums to send a child to another state for college. A quality education can be gained closer to home, paying in-state tuition, with the student gaining experience for the future job market with a job that helps cover expenses.
Only about 10% of Americans believe they have a good grasp of their retirement situation.
On to retirement. Before we go too far, let’s put Social Security in perspective. When Social Security came into existence, the savings rate in America declined rapidly. It is not a pension system, although many treat it that way. On average, Social Security will replace about 40% of your annual pre-retirement earnings. It can be a nice supplement, but it will not meet your needs.
The average monthly Social Security benefit for 2019 was $1,461 for full retirement age (67 for those born in 1960 or later), with reduced benefits for earlier ages and increased benefits for later ages. If you can afford to wait and your health is good, it may be worth delaying Social Security until age 70. As always, consult with a personal financial counselor about your personal circumstances.
Please note that the Congressional Budget Office now believes the Social Security Trust Fund, the program’s reserve fund, will be depleted sometime in 2031. After that, the system will have only the annual payroll tax dollars available. Benefits won’t stop, but available revenue will only cover about 80% of promised retirement amounts, unless Congress takes action.
The consequences for neglecting your own financial readiness are severe. You need multiple sources of income, and the only source you control is your own personal retirement accounts. Don’t wait for Congress to find a solution — officials have been predicting a Social Security funding shortfall since 1986. There are no easy corrections, and Congress hasn’t found methods that are actuarially sound and politically feasible.
Even a reserve-retirement pension for most part-time Guardsmen will only be another nice supplement. It will pay out at age 60 for the rest of your life, but the amount — even when coupled with Social Security — will likely not enable you to retire comfortably. You will need other retirement savings.
Now back to what you control. You have a written budget. You spend less than you earn. You are paying down debt and avoiding further debt. And you are putting money aside for both ordinary savings and retirement. Two questions to immediately address: How much should I save without neglecting existing needs and how much should I put toward retirement savings?
Many financial planners suggest 3-6 months of net pay in savings. If you net $4,000 per month, try to amass $10,000-12,000 in nonretirement savings. It will take time, but start with $100, $200 or more each month if you can. If you pay off a car loan, keep making the payment to yourself in anticipation of your next vehicle purchase. Maintain the car and keep it as long as it serves your needs. Eventually you will replace the vehicle, but you may never see another car payment, and you won’t need to wipe out your savings.
Know the details of your retirement plan. People who join the military for the first time as of January 1, 2018, are automatically enrolled into BRS. Those who joined earlier could opt-in to BRS through the end of 2018, but it was not automatic. Opting in as a member of a reserve component didn’t change your points accrued or qualifying years. It gave you a Thrift Savings Plan matching contribution in exchange for a modest reduction in the monthly pension.
And if you have enough time remaining to serve, BRS — between matching contributions and growth — can actually put more money in your retirement pocket.
The greatest benefit of BRS is the TSP matching contribution. For troops who served under 20 years, they separated with only their own TSP savings, if any. Under BRS, they can leave after and have a bit of government matching funds to show for their service.
In legacy retirement or BRS, if someone intends to maximize the opportunity to contribute to a TSP, 401(k) or any other personal retirement plan, I advise 15% in your own contributions — more if you can afford it up to the legal limit. If you can’t do 15%, how about 13%? How about 5%? Do something. Your first goal should be to divert enough income to get the maximum match on a TSP or 401(k). For those under about age 40, your personal retirement savings is most likely the largest piece of your financial future.
Time is your ally — the longer you can have retirement savings grow before you need it, the better. An early start with small amounts can be worth more than substantially bigger investments started later. No matter your age, save something! Ideally, you will be able to periodically increase your contribution with promotions and cost-of- living allowances. If you can manage more than 15%, keep increasing the contribution until you reach the legal limit. A lot of plans offer automatically escalating contributions.
What should you do with the money you save? Always look for a better return. If your money is sitting in a checking account that does not pay interest, consider an interest-bearing savings account. Your financial institution’s money market likely pays more than standard savings. Make your money work as hard for you as you worked for it.
Depending upon the individual income tax situation, most of us can benefit from the Roth option. A TSP Roth, 401(k) Roth, Roth IRA, and other Roth types are all accounts that grow tax free, and withdrawals in retirement are also tax free. You give up the pre-tax deduction from income now in exchange for tax-free withdrawals later in life. Your individual situation may be unique, so discussing details with an advisor is the best move for choosing between a traditional or Roth plan.
The personal financial counselor may suggest different mutual funds as a consideration. Some mutual funds are very conservative and don’t pay much because they invest in mortgages, government bonds or similar products. They also don’t have a lot of risk, but your reward is somewhat small. If you can stomach more risk, other funds may be suitable.
An equity fund has the potential to yield higher returns, but it will have more risk. Different equity funds have different percentages of stock holdings. One fund may have 80% stocks and 20% bonds, while another may be 50% stocks and 50% bonds.
Carefully determining what type of fund you are considering is important. Too often we have the tendency to look at returns of the last 10 years and pick the investment option that had the highest returns. Once again, with a financial advisor available at no cost, you have an opportunity to choose the right investment mix to match growth needs and risk tolerance.
My hope is that you can be accustomed to living on less than you earn, and that you will have sufficient savings to live comfortably in retirement. And then if you work during your senior years, it will be by choice, not necessity. Begin with the end in mind.
ABOUT THE AUTHOR
Lt. Col. Gene Whitmore is an investment advisor and chaplain in the Utah Army National Guard. He has an additional duty as member of the Investment Advisory Committee to the Defense Department Investment Board, which provides strategic guidance on $1.7 trillion in DoD trust funds, including the Military Retirement Fund. He also serves on the NGAUS finance committee, which is a small group of volunteer financial professionals nationwide that reviews the association budget twice a year.
1. Spend less than you earn.
2. Those who understand interest collect it; those who don’t, pay it.
3. Make your money work as hard for you as you worked for it.
4. Ruthlessly distinguish between wants and needs.
5. Only buy value.
Additional Planning Tips
1. Have a current Last Will & Testament. Keep beneficiary information updated on insurance policies and retirement accounts.
2. Create a funeral plan decades before you need it and update annually. An ordinary funeral can be $10,000, with costs increasing annually. Costs add up quickly with the many optional services that mortuaries offer. Having a plan before it is needed will save the bereaved the need to make decisions under duress.
3. Power of Attorney: Only the most trusted people should be given authority to act in your name. Similarly, be cautious sharing login information to access even small accounts.
Some online resources:
militarypay.defense.gov — This Defense Department site offers comprehensive information on military compensation and retirement programs.
www.ssa.gov — The official website of the Social Security Administration.