By FPA member Phil Dyer, CFP®, RLP® and Certified Professional Co-Active Coach
Last Updated: June 21, 2010
With the current financial challenges facing many in today’s unsteady economy, many young people are evaluating military service as a viable career path to entering the workforce after high school or college graduation. The monetary and non-monetary benefits of military service are significant: steady paycheck, guaranteed housing and medical care, attractive higher education benefits in the form of tuition assistance, ROTC and Service Academy scholarships and the new Post 9-11 GI Bill and training in state-of-the-art technology that is in high demand by many civilian employers. Better still, 20 years of service guarantees a lifelong, Cost of Living Allowance (COLA)-adjusted pension that is hard to beat.
There are — of course — some potential drawbacks to military service, including frequent lengthy deployments away from family and friends, a 24/7 dangerous work environment where the demands of the mission come first and dealing with unpleasant people who are intent on causing injury and death. Despite these downside risks, increasing numbers of men and women between the ages of 18 and 42 — many of whom have numerous employment choices — are electing military service.
To make the most of their military service, there are important financial decisions each military member should consider, including:
Even though 20 years of service provides an attractive pension, service members should still contribute 10 percent of their pre-tax income to a tax-advantaged savings vehicle. Fortunately, Uncle Sam provides the Thrift Savings Program (TSP) which is available to both military members and federal civilians. This 401(k)-type account allows service members to put up to $16,500 of their basic pay, special pay and bonuses into a tax-advantaged account for retirement (service members age 50 and older may save an additional $5,500 annually).
The TSP offers 10 investment options: five individual accounts ranging from the very conservative G Fund (Government Bonds) to the more aggressive S Fund (Small Company stocks) and I Fund (International stocks) along with five “Lifecycle Funds” that contain varying mixes of the five basic investment options and act as “fire and forget missiles”. The L Income Fund is very conservative and designed for current retirees, while the L 2040 Fund is designed for those just getting started. These funds have incredibly low expenses — less than .03 percent annually — and are index investments.
The TSP is very easy to start, stop and adjust as a service members' needs change. Also, if a service member is deployed in a combat zone or contingency operation where they are receiving hazardous duty pay, they may direct up to $49,000 in a calendar year into a tax-free account within the TSP [this may be rolled over later into a Roth Individual Retirement Account (Roth IRA)].
While some financial advisers who work with military members recommend funding Roth IRAs first — since the military doesn’t match TSP contributions except for a few select specialties — the low fees, ease of enrollment and ability to use the combat zone tax-free account make the TSP a great choice for most people starting their military career.
The military provides basic group term life insurance at very affordable rates. Service members can purchase Serviceman’s Group Life Insurance (SGLI) in units of $50,000 of coverage up to a maximum of $400,000 at $0.065 per $1,000 per month regardless of age. The maximum coverage of $400,000 costs just $27 per month and low-cost SGLI family coverage is also available to cover spouses and children.
For most service members, it makes sense to elect the maximum coverage that is sufficient for many. However, those with families and higher ranking officers and non-commissioned officers (NCOs) may need additional insurance. Unfortunately, for years unscrupulous insurance agents preyed on unsophisticated service members and sold them over-priced policies of questionable worth. Department of Defense rules have curbed most of these abuses, but many service members do need additional insurance to cover mortgages and colleges costs, but are unsure where to turn.
The best option is to explore “military-friendly” insurers that have developed policies custom-built for the special needs of service members (no “war clause,” favorable re-instatement terms or premium deferral while deployed). A partial list of those worth looking into include:
- Army – Air Force Mutual Aid Association
- Navy Mutual Aid Association
- Military Officers Association of America
This list is not meant to be exclusive, but is a good place to start a search.
Buying a Home
The conventional wisdom that recommends buying a home as soon as possible doesn’t hold true for military members. Based on the transient nature of military service (two-four years before a geographical move), home ownership doesn’t necessarily make sense for a significant portion of service members. The acquisition and selling costs are too high and the housing market is too unstable around many military installations to make purchasing a home make sense unless:
- It is in a location the military member plans to return to later in their career and that location has a strong rental market, or
- It is the last duty assignment before retirement and the service member plans to stay in that area.
Military service can be a great way to start (or restart) a career and service members should take care to pay attention to military finances 101.
Note: An excellent financial resource for service members is www.militarymoney.com.
FPA member Phil Dyer is a 1985 graduate of the United States Military Academy at West Point and former Army Captain. He has been a fee-only financial planner since 1996 and is the founder and principal of Dyer Financial Advisory in Towson, MD. He also serves as the Deputy Director of Financial Education for the Military Officers Association of America.