Assets Deployed
Military personnel enjoy unique opportunities.
By Kimberly Lankford, Contributing Editor
From Kiplinger's Personal Finance magazine, July 2006
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Beagle recommends not factoring a pension into your planning until you've been in the service at least six years and think you might stay. You're usually entitled to 50% of your base salary after you retire, adjusted for inflation (for calculators, go to www.defenselink.mil/militarypay). Note that pension benefits are tied to your base pay. Specialty bonuses, paid in fields such as law and medicine, aren't included.
Carlson didn't count on a pension until he had served for 13 years. When he retires from the Marines this year at age 42, he'll use the money as a backup while he starts a law practice. He'll also be eligible for lifetime health insurance. "Without that cushion, I'd be hesitant to start my own business," he says.
Retirement savings. Even without a pension, you can save for retirement through the government's Thrift Savings Plan. Similar to a civilian 401(k), the TSP is open to federal and military employees. Military participants can invest 100% of their pretax base pay, up to $15,000 per year, plus all of their tax-exempt pay while serving in a combat zone. Total contributions can't exceed $44,000 in 2006. When you withdraw the money, you won't be taxed on contributions from tax-exempt pay (for information, see www.tsp.gov). But if you roll the money into another employer's 401(k), you'll need to track that money separately.
Taurean Washington, an Army staff sergeant, is socking away money while deployed to Iraq for a year as a maintenance chief for unmanned aerial vehicles. At age 25, he has already accumulated more than $37,000 in his TSP account -- all of it invested in stock funds -- by maxing out his regular contributions and adding most of his bonuses and special pay. "There's little to spend money on when you're deployed, and what is available usually doesn't qualify as a need," says Washington. The parents of two children, ages 5 and 1, Taurean and his wife, JoAngela, "still live on the same amount as when I was a specialist and she was a full-time student."
Taurean and JoAngela, who has a civilian job in Wiesbaden, Germany, also try to max out their Roth IRAs. Most military personnel are in a much lower tax bracket than they will be after they leave the service, so it makes sense to pay tax on Roth contributions now and enjoy tax-free income later.
Housing. A tax-free housing allowance helps military families cover all or part of their monthly rent or mortgage payment. Military personnel are also eligible for a VA loan, which allows them to borrow up to $417,000 with no down payment or private mortgage insurance (see www.homeloans.va.gov or www.military.com).
But if you have a good credit rating, you might get a better deal on a standard mortgage, says Beagle. And because the VA requires an additional appraisal, a standard mortgage with fewer contingencies would also give you a better shot at competing against other prospective buyers in a tight market.
Life insurance. If you need life insurance because you have dependents who rely on your income, you can buy Servicemembers' Group Life Insurance (SGLI) for 6.5 cents per $1,000 of coverage per month -- $312 per year for the maximum $400,000. You can also get coverage of up to $100,000 for your spouse (see www.insurance.va.gov/sglisite/default.htm).
But you lose your SGLI coverage when you leave the military, and you may need more than the maximum anyway. So it's smart to buy extra insurance on your own while you're on active duty. Get a policy that doesn't have a war exclusion, from a company such as USAA or MetLife.
Don't be talked into buying a high-fee, cash-value insurance policy as a tax-advantaged way to save. You have plenty of better choices.