Each branch of the U.S. military has its own mission and tradition, but all recognize the value of discipline. In that spirit, and in support of Military Saves Week 2018, here are some ideas for applying some of that discipline into planning for your own future.
First, 2018 is a pivotal year for many active-duty service personnel because of the introduction of the Blended Retirement System (BRS), which introduces a component of civilian 401k retirement plans that hadn't previously been available to military personnel: contribution matching.
Since 1986, the U.S. military has encouraged members to save for retirement via Thrift Savings Plan accounts (TSPs), which are similar to civilian 401(k) plans. Now, for every dollar you save in your TSP, up to 5% of your paycheck, the Department of Defense will contribute another dollar. Not taking advantage of that match is leaving money on the table, so service members would be well advised to sock away the full 5% if possible.
Military personnel who enlisted before this year and have served less than 12 years have a choice to make: Stick with the legacy military pension program (the High-3 Retirement System) or switch over to the BRS. (Service members with 12 or more years of service must stick with High-3.)
The choice isn't exactly straightforward: While the BRS matches contributions on service members' TSP accounts, its pension payments are lower than those of the legacy plan. Under certain circumstances, the BRS also offers bonus payments to personnel members who choose to extend their service.
Which choice is best for you will depend on your length of service, how much savings you have in the High-3 plan, and when you plan to leave the service. A good place to start working through the process is the USAA Education Foundation's "Command Your Cash" calculator, but it'd also be wise to consult the Financial Readiness Program offered at your installation.
Whichever route is best for you, the secret to successful savings is to make it a habit and to let your nest egg build over time. Even if you start small by setting aside a fraction of each paycheck, your savings can grow mightily over the course of your career.
Alecia Blair, the Military Saves director for the Consumer Federation of America, which sponsors Military Saves Week, recommends that you "life-hack the heck out of savings" by making the process automatic via automatic fund transfers available at the Department of Defense's MyPay website.
Blair knows the importance of military savings firsthand. The spouse of an active-duty service member, she has navigated many of the financial challenges military families face, and she's passionate about sharing what she's learned along the way.
Financial Readiness for Active-Duty Military
In addition to retirement savings, it's critical for active-duty military personnel, especially those with families, to set up and maintain a "rainy day" savings account to cover unforeseen expenses, Blair says. "Access to an emergency fund or transition savings is critical to mission readiness and the resiliency of military families."
Savings are essential for managing two specific challenges of military life:
1. Service-Member Deployments to Missions Around the World
When a service member is serving overseas and the car needs an unexpected repair, an appliance fails, or a family emergency requires unplanned travel, "having cash on hand really allows less stress" at an already-stressful time, Blair said.
2. Permanent Changes of Station (PCS)
PCS is the frequent base reassignments that keep military families relocating every few years. While PCS-related expenses are often reimbursable, moving a family around the country (or the globe) typically requires a significant outlay, and adequate cash reserves are crucial to managing the process.
To build sufficient rainy day funds, Blair recommends:
- Setting up regular cash transfers from every paycheck, into one or more dedicated savings accounts.
- Starting modestly, with, say $25 every pay period week, can help new savers accumulate more than $500 in a year—a sound base to build on, as individual and family needs increase. Blair has multiple savings accounts, with nicknames in MyPay such as Rainy Day, Emergency, and Vacation Fund, to keep track of the goals and intended use for each.
- Using reenlistment bonuses, tax returns, and pay increases to boost savings. Instead of splurging when you get some extra cash, consider stashing it for future use to thank yourself for your service.
Planning the Transition out of Military Life
The need for transition funds extends in a major way to service members planning to leave the military via retirement or ETS (expiration of time in service—the process of leaving after completing contracted military service).
Reverting to civilian life after a stint in the service "is a really big change," Blair says, and it can come with really big financial adjustments:
Service members transitioning to civilian careers may go through several jobs before they find an ideal post-military position, she said.
And retirees typically incur moving costs and may have to cover living expenses for a time before their retirement benefits start to flow.
1. Develop a Budget
Focus on creating a budget while taking into careful consideration "invisible" out-of-pocket expenses that were covered as part of military benefits. Depending on the service member's rank, length of service, and family situation, those expenses could encompass:
- Housing, groceries, and gasoline, all of which are likely to cost more off-post
- Life Insurance
- Health insurance (once military TRICARE coverage expires)
2. Set a Goal
Using your budget, set a goal of having three-to-six months of income available for use by the time you leave the military.
3. Establish a Good Credit History
While not directly related to savings, a good credit history can reduce what you pay in fees and interest on credit cards, mortgages, and other types of loans, leaving more money on hand for you to sock away.
Before you begin your transition, it's a good idea to check your credit report and credit score and, if need be, take steps to improve your credit score so you'll be well-positioned when applying for credit after you leave the service.
When You've Completed Your Service
Whether in retirement or continuing into civilian careers, veterans can and should continue to save.
As a veteran receiving pension payments, you may not need to contend with the same transitions as active-duty personnel, but the discipline of automatic transfers can help you maintain a rainy day fund for household emergencies—as well as setting funds aside for travel and leisure activities.
Reducing expenses is a form of saving that can be extremely valuable to veterans. Veterans Benefits Administration programs for insurance, healthcare, and pharmaceuticals, and home loans can provide significant savings, and you'd be smart to take advantage of them.
Service members transitioning to civilian jobs should think twice before rolling over your military retirement plans into an IRA or 401(k) plan, Blair said. Fees on civilian accounts are almost always higher than those for TSPs, and TSP funds do a great job of optimizing investment strategies against military retirement dates, investing more aggressively funds early in your career to build value, and then shifting to more conservative investments to protect your savings as you approach retirement.
Thank You for Your Service
Service members and their families all benefit significantly from good savings habits. Military Saves offers a variety of resources including video tips, motivational text messages, and Twitter and Facebook feed to offer advice and encouragement.
For Military Saves Week 2018, we salute your efforts to save for your future as you safeguard ours.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on March 1, 2018, and has been updated.