I just finished reading your book yesterday, and I want to thank you for putting all that information together. My wife has been encouraging me to do the same thing for a couple of years, so now that I showed her you beat me to it you’ve saved me a lot of writing!
In your book, you ask for improvements for future editions, so here are my suggestions:
Reserve careers
At a few points you mention the criticality of balancing civilian work and military work with family life while serving in the Reserves. Balance truly is important; however, as a reservist without a civilian job for the last decade (by choice), I’d like to alert you to the fact that it’s quite possible to be “just” a Reservist.
By working a few months as an Individual Mobilization Augmentee each summer and spending/investing wisely, I have sufficient funds to live in a reasonable-cost area. It’s like semi-retirement while still serving, and it provides a spectacular transition opportunity before full retirement. I left active duty for the reserves specifically because I didn’t want to work all the time, as you indicated in your book…so I was very pleased to see you list it as an option which many unfortunately overlook.
Great advice! This works best in military towns with large bases (Fort Hood, Fort Bragg) or big commands (NORTHCOM, PACOM) where active-duty billets are supplemented with Reserve personnel. It also works for deployments to “hot fill” overseas mobilization billets or on other orders for shorter periods. The lifestyle can be great for singles and acceptable for couples. It might even work for families who are willing to deal with the separation.
Reservists who choose this path should have a very clear idea of how they want to manage their career, reach retirement eligibility, and achieve financial independence. By mobilizing for a number of IAs instead of drilling with the unit, their unit may feel that their career lacks Reserve experience with that particular unit or specialty. Promotions are not guaranteed. As you get more senior, billets may be tough to find and you’ll have to develop your own contact network for mobilization opportunities– or be willing to focus on the “hot fill” list. Your objective is to save & invest until you reach 20 good years.
In any case, midwatches and weekend duty at a major command staff can add up to put the finishing touches on a plan for financial independence.
Roth IRAs (and the Roth Thrift Savings Plan)
Although you mention both traditional and Roth IRAs, I believe your writing implies a preference for the wrong one…potentially. Sure, it’s great to lower your tax obligation now and defer it to a later date when many people will theoretically be in a lower income bracket; however, what about people like me and junior members who are already in low brackets? Since I’m not going to get much of a tax advantage out of another deduction now, a Roth IRA allows my money to grow over time and not be taxed in the future when it should be worth an incredibly outrageous amount by the time I can withdraw without penalties (assuming, of course, that legislation doesn’t change significantly and I live that long).
Roth IRAs are a fantastic after-tax opportunity. (The tax benefits are also compelling for the Roth TSP, which is available now for all active-duty services and should finally be coming soon for the Reserve and National Guard in 2013.) Servicemembers in the 10% or 15% personal-income tax brackets would only get a small savings from setting aside before-tax income, so they don’t “lose” much tax benefit by simply paying their taxes now and investing after-tax dollars in a Roth.
The Roth IRA payoff comes after age 59½. There’s no required minimum withdrawals, so the money can be taken out of the account only when needed– and with no additional tax bill. Contributions can also be withdrawn at any time, although this will reduce the compounding of returns.
The Roth TSP also offers a huge advantage in paying low income taxes now. Again there’s only a small tax savings for contributing to the TSP while you’re in the 10%-15% tax bracket, so it’s relatively cheap to pay taxes now and contribute to the Roth TSP. After you reach age 59½, Roth TSP distributions are not taxed. (There is a required minimum distribution, but even this can be avoided by rolling a Roth TSP over to a Roth IRA.) If you retire and are still in the 10-15% income tax bracket then you break even. If your tax bracket is higher in retirement then you’ve paid lower taxes up front to enjoy tax-free benefits later.
“The Military Guide” was published before the Roth TSP was implemented, but we’ve blogged about it here and I’ll add that information to the next edition.
Keep in mind that you’ll need to save more than “just” the Roth IRA and the Roth TSP. If you want to reach financial independence in less than 20 years then you’ll either need to save at least 40% of your income or dramatically cut your retirement expenses.
I think your book is tremendously wonderful. Thank you so much for getting the information published, as well as for donating proceeds to military charities. If I had the connections, I’d try to convince each military service’s chief of staff to add it to their annual reading lists. In fact, I’ve already recommended it to four of my active-duty colleagues, and I’m not even on orders right now!
Thanks! If any of you readers know how to get the book on a four-star’s reading list, tell me what I should do. Of course you can always spread the word so that servicemembers, veterans, and their families can add it to their own reading lists.
If you or your family have a story or advice to share, you’re welcome to write a guest post for the blog or contribute material to the next edition of the book. It’s reader feedback like yours that motivates more readers… not just me pontificating on the process.
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Where to put your savings while you’re in the military
Is the Roth Thrift Savings Plan right for you?
Ask your Dad if you should contribute to the Roth TSP.
How many years does it take to become financially independent?
Guest post Wednesday: Financial independence on an E-5 paycheck
Guest post Wednesday: Reader story (Living well below your means)
Do you really need $2M to retire?!?
Guest Post Wednesdays and other plans
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