Military Financial Independence

Do You Really Need Retired Military Dental Insurance

Posted on July 14, 2016 by Doug Nordman

When you’re on active duty, dental insurance seems essential. After all, most of us grew up visiting the dentist every six months. Lots of us spent quality time with the orthodontist. Frankly, many of us grew up eating a diet high in sugar and simple carbohydrates while perhaps not brushing or flossing often enough. Our mouths became perpetual cavity factories, and some of us may have even needed braces while serving. But what about Retired Military Dental Insurance?

Maybe later you started a family of your own, and the cycle began anew.

When you leave active duty, though, you’ll suddenly become keenly aware of the cost of dental insurance. You’ll compare the premiums to the expense of visiting the dentist twice a year (“Would you like X-rays with that?”) and the deductibles for almost everything beyond a simple exam & cleaning. Depending on the size of your family and your dental hygiene, the cost of the insurance could be almost as much as the cost of the procedures.

Let’s talk about a taboo subject: going without dental insurance.

But before we get there, we’ll review the insurance business and the most popular policies.

The Finances Of Dental Insurance

Why is dental insurance so expensive, and why does it cover so little compared to health insurance?

The insurance companies are not necessarily the problem. (Admittedly the insurance industry has more than their share of waste, incompetence, and even customer abuse.) Even if a company is the best in the business, though, they still have to take in more money for premiums than they pay out in claims. (They also have to minimize their payroll and bureaucracy– and their cost of customer service.) The best way for any insurance company to survive is to sell policies to a bunch of clients who never file a claim.

By those standards, running a health insurance company seems a lot “easier” than dental insurance. Everybody needs some form of medical insurance to offset the catastrophic costs of life-threatening accidents or diseases, but not everyone files a claim. Those serious incidents can cost millions of dollars, so clients are willing to pay hundreds (or even thousands) of dollars in annual premiums.

But what if medical insurers had clients like dental insurers? Imagine if everyone visited the medical doctor every six months for a full-body scan, a head-to-toe cleaning, and education on using a better washcloth. Imagine if a most of the teenage patients had to have all the bones in their hands re-aligned with special “braces” for a couple of years to ensure that their fingers didn’t wear out too soon. The shortage of medical doctors would be a lot worse, and medical insurance would cost a lot more because everyone was filing so many claims. Meanwhile we’d all be complaining (even more) about the high cost of medical insurance because we’d feel as though the premiums were almost as high as the expenses.

What can we do about the expense of dental insurance?

Employer’s Dental Insurance

When you’re on active duty, your dental insurance is free. (A few “lucky” Reserve & National Guard servicemembers will appreciate this during the drill weekend if there’s a dental clinic with their unit.) Your family has to pay for dental insurance, but you’re earning a paycheck and their premiums are subsidized by the “employer” (the Department of Defense). When you’re running a large corporation with a few million employees, it’s easier to negotiate rates with the insurance companies. It’s also easier to subsidize the employee insurance premiums instead of paying employees more money to buy their own coverage.

When you leave active duty for a bridge career, the logic is similar– with a different employer. Perhaps your corporation of your new bridge career offers a reasonable menu of dental care options with premiums that are lower than you’d have to pay on your own.

But what if you can’t get large-scale corporate dental insurance? What if your employer doesn’t offer it? What if you have to pay the entire premium by yourself? What if you’re unemployed, or an entrepreneur, or a financially-independent retiree?

VA Dental Insurance

Believe it or not, one option might be the Veterans Administration.

The VA started offering dental insurance in 2014 through civilian companies. The VADIP covers all vets who are eligible for healthcare through the VA, although the veteran still pays the premiums. It’s even available to families who are eligible for CHAMPVA.

I’m not going to cover the details of each policy, and veteran eligibility for VA healthcare is complicated. (Check your own eligibility at that link, and also review the priority groups for VA care.) Readers who are most likely to benefit from VA dental insurance usually already know that they’re eligible for care at a VA clinic, or they’re the families of veterans who are permanently and totally disabled.

[Note: Military retirees can use the VA for their healthcare, and can apply for VADIP or the Tricare Retiree Dental Program. If you’re a military retiree then your family is already eligible for TRDP. See the next section below for more information.]

Remember that dental insurance “coverage” is full of limits. For example, the VADIP will fully cover most routine exams and cleanings. However, it may only cover 50%-80% of the cost of fillings, 30%-50% of the cost of crowns, and (at most) 50% of orthodontia. There is also an annual maximum payout and an annual deductible.

Tricare dental insurance brought to you by…

Even when you meet the requirements for VADIP or CHAMPVA, you’ll still have to pay the premiums. The dental policies are offered by Metlife and Delta Dental, and the programs are similar to their corporate dental insurance. Premiums vary by ZIP code and may also be comparable (or slightly less) than the premiums of other Metlife or Delta policies. The range is from ~$30/month (for a veteran) to hundreds of dollar per month (for the vet’s family) depending on several factors.

You’ll have coverage through Metlife or Delta Dental, yet you’re still going to pay a meaningful amount of your insurance budget.

Tricare Retiree Dental Program

TRDP is the next-best insurance policy (after an employer’s benefit or the VA). For most vets (and their families), the major obstacle is being one of the 17% of servicemembers who manage to reach retirement. TRDP covers active-duty retirees (and families) as well as the Reserves and National Guard, even if the latter are “gray area” and not yet receiving a pension.

Coverage is offered by major dental insurers so the benefits are fairly similar to the other programs described above. Routine exams and cleanings are completely covered, but only 80% of fillings and only 60% of root canals. Orthodontics is only 50% covered, and it includes a lifetime cap of $1750 per person. TRDP also has annual deductibles and maximums.

One of the most frequent TRDP surprises is the requirement to enroll within four months after retiring. If the Defense Enrollment Eligibility Reporting System takes a while to update your family’s retiree status, or if you’ve held off applying for coverage while you find a job or move to a new location, then you may have to deal with a 12-month waiting period for crowns, bridges, orthodontics, or implants. If you’re one of the families who leisurely roams Asia or Europe after retirement, or who explores America in an RV for months before deciding where to live, then remember to plan your retiree insurance before you hit the road.

Premiums are a lot easier to parse (again by ZIP code) but are still roughly $16/month (just the retiree) to $140/month (family).

“Do We Really Need Retired Military Dental Insurance?”

At some point during the transition, almost every veteran asks that question. If you’re paying hundreds of dollars per year for coverage (or your family is paying thousands), then the expense of the insurance premiums can approach the actual cost of the dental care. This is by design– refer back to the section above on the finances of dental insurance.

How badly do you need dental insurance? What’s the worst that could happen?

First, check your sleep-at-night comfort factor. If dental insurance makes you feel happier about taking care of your family, then it’s worth more to you than merely the cost of the labor & materials. If you have a large family or busy accident-prone teens then the reassurance of having dental insurance may be well worth the cost. However, that comfort factor comes at a cost, and until you reach financial independence then you have to be willing to work the additional months to earn the money to pay for it.

Next, check your health. If you’re already dealing with chronic medical issues then they may affect your dental health as well. You may be genetically susceptible to gum disease or tooth decay, or blood-pressure medication may affect your oral health, or a straightforward cleaning could affect your heart. Living with diabetes may impact your gums. If you smoke or chew tobacco then maybe it’ll help you to compare the cost of dental care to the money you spend on nicotine… and on cancer treatment.

Finally, check your diet and exercise. If you’re consuming a lot of sugar or soda then you’re setting your mouth up for cavities and worse. (Seriously, check your labels. Food & beverage companies put sugar in everything, and dining out just exposes you to more of it.) The phosphoric acid and citric acid in soda have been linked to accelerated erosion of tooth enamel. If your kids are apathetic about brushing their teeth (or if they’re fueled by sugar & soda) then the cost of multiple fillings could be much higher than the insurance premiums. If you (or your family) engage in contact sports like martial arts, hockey, or soccer, then dental insurance (and a quality mouthguard) may cost less than some of your gear.

Once you’ve parsed your family history and your lifestyle, then how much risk are you willing to take? A severe vehicle collision? (Including motorcycles & bicycles.) Yardwork or home-repair accidents? A dozen root canals? A full set of implants or dentures? If a surgeon has to put your body back together (covered by medical insurance), then how much would it cost for the dentist to put the smile back on your face?

The questions in that last paragraph don’t have easy answers. However, the risks of those incidents are very small, almost in the same probability as lightning strikes and shark attacks. In addition, the financial impact may be relatively small (compared to other types of insurance): $10,000 or less per person.

After you’ve assessed the issues in those last five paragraphs, then analyze your insurance policy. How much of your expenses is it really paying? Note that $4500 of orthodontia (for adults as well as kids) might only have $1750 of insurance coverage. Insurance for other major procedures may only cover 30%-60% of the total cost. You’ll probably even pay at least 20% of the expense of most fillings. The policy only pays 100% for routine exams and cleaning.

After examining your risk factors, now you can research how much you’d pay for your own dental care (without insurance). This will take time and effort, and a lot of conversations with the dentist’s insurance expert. You may find that the dentist will give you a 25% discount for paying with cash (or a credit card). They’ll be happy to share the savings, too, because they won’t have to file insurance claims! The orthodontist may give you an even larger discount for paying up front (in cash) instead of stretching out the payments for several years. (The orthodontist’s insurance clerk does the math to compare an up-front lump-sum payment to a long series of monthly payments.) Instead of buying cheap toothbrushes, check into electric models (with oscillating heads) that your kids might actually want to use. Spend time on YouTube learning how to floss quickly and effectively, with quality dental floss and tools, and then make it part of your daily routine.

Now that you know what you’d really pay to visit the dentist (without insurance), how often do you want to go? Are you more comfortable continuing with the six-month routine, or do you have very low risk factors? Could you stretch out the time between dentist visits to a year? Two years?

You may be surprised to verify what the industry already knows: the cost of the premiums for routine care is close to the cost of the care itself. Even “worse”, when you factor in the discounts then the insurance premiums might be higher than your actual costs. When everyone shows up in the dentist’s office twice a year, the insurance companies have to pay out a lot of claims.

You might even determine that it’s cheaper to travel to Thailand or Latin America for your dental care– including airfare and lodging.

I Don’t Have Dental Insurance.

When I retired from active duty in 2002, we re-examined every single expense in our budget. We were pretty sure that we were financially independent, but we wanted to check every detail one more time. Dental insurance quickly went on the chopping block.

Going through the analysis forced us to examine our lifestyle as well as our budget. My spouse seems to be genetically blessed and her dental health is excellent (she’s never even had a cavity), while I had nine fillings as a teenager. Our daughter was nine years old when I retired and she’d never had a problem– although we already knew she’d have braces in a few years. When we reached financial independence and retired, we had plenty of time to overhaul our diet and cut back the sugar. I changed my flossing habit to daily (whenever I sit down to read a book) and we bought electric toothbrushes. When our daughter and I trained taekwondo we wore headgear and mouthguards.

Our dentists (and our daughter’s orthodontist) were happy to negotiate their fees. “No insurance” meant less hassle and bureaucracy for them, too, and our discounts ranged from 25%-40%. We asked the long-term questions too: how long would my fillings last? (Decades.) Would our daughter need to have her wisdom teeth extracted? (No.) My spouse and I stretched out our dentist’s visits to one year– then two years– and we couldn’t tell the difference. More importantly, the dentists couldn’t tell the difference either. By the time our daughter was finishing high school and headed for college, it was clear that she could revert to annual visits too.

We’ve been without dental insurance for over 14 years, and today we’re thousands of dollars ahead of the actual costs. There have been a few surprises: my spouse had a cracked tooth and I finally had to replace a worn-out filling. (Our daughter never had a problem.) A few years ago we visited Bangkok for a family vacation, and part of our medical tourism was a visit to the local dentist. X-rays, exams, and cleanings were less than $40 per person.

Over the years our net worth has grown faster than inflation, so today we’re completely self-insured for dental care. I enjoy the freedom to shop around our neighborhood for a dentist who will actually discuss the finer points of brushing and flossing. (Hey, I’m paying for their time now, not the insurance company.) I still try to remember to see a dentist every 2-3 years, and we’ll probably do that as part of slow travel through more of Southeast Asia or Latin America.

Should You Cancel Your Dental Insurance?

Maybe, but it’s an intensely personal decision.

Review the section above to decide whether you really need dental insurance. If you feel more comfortable with it, then keep it in your budget. (And be willing to work longer and save more to afford it.) At a minimum, review your lifestyle and start making changes in a healthier direction. This may be the wrong time to cancel your dental insurance, but in a few years you could take another look at the decision.

If you decide to cancel your dental insurance, then live healthy and floss regularly. It’ll save you a lot of pain and dental procedures, not just money!

Related articles:
Military Dental Care (in 2011, updated in 2020)

Paycheck Chronicles: Should You Enroll In Retiree Dental Coverage?>
Paycheck Chronicles: Tricare Dental Orthodontics Coverage

Posted in Insurance | 8 Comments

What You Need To Know About National Guard Retirement

Posted on July 6, 2016 by Doug Nordman

National Guard Retirement Retiring from the Reserves or National Guard is more flexible than retiring from active duty. In the vast majority of cases, your retirement is based on at least 20 good years of service. (A “good year” requires a certain minimum number of points or days of drill or active duty as well as complying with other readiness requirements.)

You’ll be tracking these years as you complete the minimum annual requirements, and after you reach 20 years, our service will formally notify you with a letter of eligibility.

National Guard Early Retirement

Under the Temporary Early Retirement Authority (TERA), Full-time Guardsmen may become eligible for a retirement earlier than 20 years. In June of 2016, Army Secretary Eric Flannigan signed a directive to expand the TERA program to encompass National Guard Soldiers.

TERA is now available for Guardsmen serving under Title 32. While not an entitlement, early retirement is an option for those officers overlooked for promotion or enlisted personnel being involuntary separated.

TERA allows Guardsmen with at least 15 but fewer than 20 years of active service to receive the same benefits as those who retire with 20 or more years of service. Those who elect the option have their retirement pay reduced accordingly

According to the directive, Army Directive 2016-27, the following soldiers may request TERA in lieu of involuntary separation, involuntary release from active duty, or involuntary release from active service. All affected soldiers must have at least 15 years but less than 20 years of service.

Officers who twice were not selected for promotion and whose names are not on a list of officers recommended for promotion.

Officers who were selected for continuation on active duty by a selection board but were not subsequently promoted or continued on active duty and who are not on a list of officers recommended for continuation or promotion to the next higher grade.

Officers who have been selected for discharge by an Officer Separation Board.

Army National Guard and Army Reserve officers serving in the Active Guard and Reserve Program who were selected for continuation on the reserve active-status list but were not subsequently promoted or continued on the reserve active-status list, and are not on a list of officers recommended for continuation or promotion to the next higher reserve grade.

Army National Guard and Army Reserve officers in the AGR Program who were twice not selected for promotion and whose names are not on a list of officers recommended for promotion.

Army National Guard and Army Reserve officers in the AGR Program who, pursuant to selection by an AGR Release From Active Duty (REFRAD) Board or Active Service Management Board (ASMB), have been selected to be involuntarily released from the AGR Program.

Warrant officers who twice were not selected for promotion to the next higher regular warrant officer grade.

Warrant officers who were selected for continuation on active duty by a selection board but were not subsequently promoted or continued on active duty, and are not on a list of warrant officers recommended for continuation or promotion to the next higher regular grade.

Army National Guard and Army Reserve warrant officers serving in the AGR Program who, pursuant to selection by an AGR REFRAD Board or ASMB, have been selected to be involuntarily released from the AGR Program.

Army Reserve warrant officers in the AGR Program in the grades of CW2 and CW3 who have not been selected for promotion for the second time, and whose names are not on a list of officers recommended for promotion.

Enlisted soldiers who were selected to be involuntarily separated as a result of a Qualitative Service Program.

Enlisted soldiers in the AGR Program who were selected to be involuntarily released from active duty or active service as a result of an AGR REFRAD Board or ASMB.

Reduced Age Retirement

Some members of the Guard may be eligible for a retirement earlier than 20 years. The current legislation (passed in mid-2016) reduces the age 60 retirement requirement by three months for every 90 consecutive days of mobilization for war or national emergency.

In other words, a Reservist volunteering to deploy to the desert for a year would now be eligible to start their Reserve pension at age 59.

A member of the National Guard who deploys with their unit for 24 months of the next five years would be able to draw their pension at age 58. But this law only applies for deployment time served after Jan. 28, 2008. Several amendments have been proposed to retroactively extend this benefit to September 11, 2001, but none of these modifications have yet been approved by Congress.

Visit HRC’s website for more information about Retirement Early Age Drops

When you’re eligible to retire, you may still prefer to stay as long as you can. You may be successfully balancing the military with your civilian career and your family and you might be able to continue your routine for years.

The money may not be much, but it can greatly boost your tax-deferred savings. Military pay offers another stream of income to serve as insurance against civilian layoffs and may also augment necessary skills in a civilian career.

Some Guardsmen will even work in unpaid billets that only offer retirement points, in hopes of later qualifying for a paid billet or earning a promotion. As your family situation permits you may be able to kickstart your military career with advanced schools, special programs, or extended active-duty mobilizations.

In metropolitan areas with a large military presence, it’s not unusual to serve with many Guard members in their late 40s or even mid-50s.

Of course, you’ll have to balance your interest in staying with the prospect of mobilizing and deploying every few years.

Another issue, perhaps a minor one, is time in rank. The service requirement to retire at your current rank is generally three years (since the date of promotion, not selection!). Keep an eye on your service policies, because when the services are trying to cut their end strength it’s not unusual for this requirement to be reduced to two years.

National Guard Retirement

National Guard Retirement is even simpler than an active duty retirement. The twenty-year letter of eligibility has already certified that the member is eligible to retire, and their retirement request sets the date.

If a retiring Guardsmen is actually on active duty (mobilized) at the time of their retirement then separation procedures are executed just as for any demobilization.

If a Guardsmen is not on active duty then there is no DD-214, no medical/dental examination, and no other paperwork. They’re transferred to “retired awaiting pay” status, they’re issued a “gray” ID card, and they wait for age 60. At age 59½ another round of verification paperwork is completed and the pension begins six months later.

National Guard Retired Awaiting Pay

The Department of Defense wants Guardsmen to request retirement instead of resigning. One difference is that personnel “retired awaiting pay” could hypothetically be mobilized, although that has not happened in decades. (It would require a full mobilization for a Congressionally-approved war, which is broader than the Presidential mobilization declared after 9/11.)

Another difference is that requesting retirement keeps Guardsmen on the pay seniority list. At age 60, the years of annual pay raises and longevity increases will be applied to your first pension check, which will be based on the latest pay tables and the maximum longevity at that rank.

A resigning Guard member will not receive any of those increases, so the cost of avoiding mobilization is a retirement frozen at the pay tables in effect at resignation– which by age 60 may be decades old and without any pay raises or longevity increases.

The Reserve Survivor Benefit Plan

The Survivor Benefit Plan is an important consideration for “retired awaiting pay” status. You may be waiting for the pension benefit for over two decades, and if you don’t make it to age 60 then you may want to ensure that some of your pension is still available to your surviving loved ones.

Retirees can elect SBP coverage during the years between retiring and reaching age 60. No premiums are paid during this time, and if you don’t make it to age 60 then at least your survivors will still receive their SBP payments.

However, if you do celebrate your 60th birthday then you’re required to pay the next two years of SBP premiums (deducted from your pension payment) to recover the cost of your insurance during those years between retiring and reaching age 60. After paying two years of premiums the retiree has the option to decline SBP or to continue with it under the same rules as active-duty retirees.

You can determine the amount of your pension using this retirement calculator or this one.

This article also covers how to determine your Guard or Reserves Pension amount.

Health Insurance While Retired Awaiting Pay

You do not have any subsidized military healthcare when you’re retired awaiting pay. Tricare will start at age 60 and Medicare/Tricare For Life will start at age 65, but Reservists/NG awaiting a pension will need to buy other health insurance. Healthcare benefits may be one reason that some Reserves/NG continue to drill well into their 50s, although that should not be the only reason to continue to serve.

In late 2009 Congress authorized “Tricare Retired Reserve”, which began in fall 2010. It’s intended to offer a version of Tricare Standard to retired National Guard who are still under age 60.

The program is not subsidized by the government and fees are quite high compared to other Tricare premiums. $400-$1000 per month may even be higher than some civilian healthcare programs, but this program offers the first “gray area” coverage between retirement and age 60. Here are some health care options after you leave the military.

Keep in mind that no matter what version of Tricare you choose, it does not include dental insurance. Most military retirees pay for their own dental insurance and dental care.

Guard Pension Starts At Age 60

One of the biggest advantages of the Guard is having an inflation-adjusted pension by age 60. It’s paid by one of the world’s most credible financial institutions, or at least one with the power to raise revenue by taxation.

A civilian retiree, if they even have a pension, may not only have to wait years– but they may also have to worry that the company won’t survive to pay the “guaranteed” pension. A military pension is even more highly rated than an insurance company’s annuity, and you don’t have to worry whether the insurance company will be able to make good on its future claim.

The future is never certain, but a military pension is as close as you can get to a guaranteed stream of income at a known date.

The key to retirement as a Guardsmen is planning your retirement finances around multiple streams of income. By the time you request retirement (awaiting pay), you’ll have several different forms of savings. In addition to the pension at age 60, you’ll also have your military Thrift Savings Plan account, as well as personal IRAs and taxable investments.

If you’re in the federal civil service then you’ll have a second TSP account. If you’re employed by a corporation then you’ll probably have another tax-deferred savings account (a 401(k)) as well as other forms of deferred compensation. And if you’re self-employed there are several other ways to save through tax-deferred accounts.

When a Guard pension is in your future, your early-retiree challenge is to live off your savings until the tax-deferred accounts are available and until the pension starts. The advantage of the pension is its known starting date, its inflation adjustment, and its high probability of payment.

Your other savings may only have to bridge the gap between your retirement request and the start of your pension. You won’t have to worry about outliving your personal portfolio– only about making it last until the pension begins.

In addition to spending down your taxable accounts, you can also tap your tax-deferred accounts if necessary, and under some conditions even without penalty. If savings won’t stretch to cover the whole gap between retiring and receiving a pension, then annual income can be augmented from part-time work or a civilian bridge career.

The planning and calculations may seem complicated or even overwhelming, but today’s retirement-planning software is tremendously flexible at projecting multiple streams of income over an entire retirement. We’ll cover more details and a “multiple streams of income” example in a later post.

Posted in Military Retirement | 135 Comments

Four Ways Physical Fitness Impacts Financial Fitness

Posted on June 27, 2016 by Doug Nordman

This article was written by Forrest Baumhover.

The other day, I just finished my last spring physical readiness test (PRT) for the Navy. As I finished my second-to-last fitness test, I celebrated to myself—one more PRT, and I’m done! My entire career, I’d thought of the PRT as paying rent—every six months, you pay up. You don’t get credit for doing any more (not in the Navy, at least). However, the Navy hammers you for not doing the minimum. So, I’d always thought of the PRT as an annoyance. It’s not anything to get nervous about, but an hour that I could have spent doing something productive.

As soon as I celebrated my little milestone, I immediately thought, “This doesn’t end when I retire.” Ever since I turned 40, I noticed all of the aging that I never thought would happen to me. Also, I realized that this will only progress over time. Just because the Navy doesn’t keep tabs on my physical fitness after retirement doesn’t mean that I don’t need to.

Fitness Impacts

Of course, I tried to think of the different ways that our physical fitness impacts us financially as we age. If you think of your financial situation as an enabler to improved quality of life, it’s easier to imagine the relationship between physical fitness and finances. I came up with four ways that physical fitness directly impacts our financial fitness, and thus our quality of life.

1. Health insurance costs

Since the inception of Obamacare and the effort to drive down costs of delivering health care, everyone has been scrambling to figure out how to do exactly one thing: maintain or improve profits while transferring risks to someone else. That’s essentially what insurance is…risk transfer. In the overly complicated field of health care, there have always been plenty of companies, non-profits, and other entities to share the risk.

The difference now is that the government has taken a more active role in trying to decrease the amount of money, and decrease the amount of risk that billpayers (individuals, employers, and the government) have to assume. You will most likely see differences in your health insurance after leaving the military – whether that is in cost, availability, or coverage.

With that said, insurance companies are exceptionally good at one thing—gathering and analyzing data. As they face pressure to manage more risk, they’re looking at ways to shift that risk to others. Over the next ten to twenty years, that will lead to a trend of shifting risk to people who exhibit bad health behavior. You already see it today: insurance companies document whether you smoke or not, and smokers pay more in life insurance premiums.

Health insurance companies award incentives to people who lose weight or engage in certain physical fitness activities. However, things that are only incentives now will end up being expectations in ten years. Remember when Wi-Fi was only available in certain airports? Now, it’s an expectation because you can go into any Starbucks or McDonalds and get free Wi-Fi. In twenty years, you’ll have to pay health insurance companies for the privilege of being a smoker or being obese. Count on it.

The savings can also extend to life insurance. Life insurance premiums are less expensive when you are in good health. You represent less risk to the underwriters. Being in poor health could mean buying a high-risk life insurance policy, which is generally more expensive than buying a plan when you are in good health.

2. Health care costs

The reason why health insurance costs are going up is because they directly reflect the rising costs of health care. Costs are rising due to longevity, improved technology, and advancements in medicine. They’re also rising because our diseases are more complex. When life expectancies were in the 50s, we didn’t have to worry about elder care, treating Alzheimer’s, or osteoporosis. All of these diseases are associated with the aging process. Also, our quality of life is directly related to how we take care of ourselves as we age.

For example, that bum knee that you never had checked out…you might need a replacement that you could have avoided if you’d gone to the doctor. Maybe not, but a couple of hundred-dollar visits might have been worth postponing or avoiding that $50,000 knee replacement. Perhaps the doctor would have encouraged you to lose 20 pounds so that you could put less stress on that knee. Maybe a simple knee brace during your over-30 pick-up basketball games could have helped you postpone your surgery. Hopefully, your health care insurance will take care of it. However, don’t think that they won’t try to find some sort of bad behavior to pin the risk back on you.

3. Longevity costs

As previously discussed, two generations ago, we didn’t have to worry about Alzheimer’s, elder care or long term care insurance, or joint replacements. 100 years ago, we had polio, measles, and smallpox. Each of those diseases crippled or killed millions of children. Many of those who survived were debilitated or scarred for life (FDR, anyone)? Thanks to vaccine research (and a lot of money back then), scientists have nearly eradicated each of those diseases. However, now that we’ve got more people, and they’re living longer, that means the cost of taking care of them is skyrocketing.

So what’s that got to do with physical fitness? Simple…as we get older, there are certain key functions that are directly related to longevity and quality of life. Two of them are:

Grip strength
Ability to stand up from a seated position

Those are all things that we take for granted in our 30s, 40s, and 50s. However, that hand you always thought was carpal-tunnel syndrome might be the hand that keeps you from falling in the shower when you’re in your 70s. Or, it might slip, and you break your hip. Think it doesn’t happen? It’s a fact that people who are physically active in their retirement live longer, and have a higher quality of life than people who decide not to stay active.

4. Employment opportunity costs

My uncle recently retired. Since he’s almost 65, that makes sense. However, he didn’t retire on his own terms. He was forced to retire due to medical reasons. He’d had a couple of TIAs, and the doctor told him that the next one might be a stress-induced stroke. He’s worried about his finances, because his health forced him to adjust his financial plan.

If you think about it, you can probably find at least one person had to stop working early due to medical reasons. While my uncle’s medical retirement was strictly due to genetic factors (family history of strokes and Alzheimer’s), I know several people who had to retire early due to self-imposed medical issues.

I’ve met plenty of people who were relieved when they no longer had to take the routine physical readiness test (PRT), or worry about being over their service’s bodyfat percentage. However, physical fitness is directly related to other aspects of your well-being, especially your finances. Taking care of your body, even after you leave the military, will help you ensure financial success…as well as the ability to enjoy it.

Posted in Career, Money Management & Personal Finance | Leave a comment

How Do I Plan Our Finances For The Rest Of Our Lives?

Posted on June 2, 2016 by Doug Nordman

I’ve heard from a reader a couple of times over the last few years. Here’s their latest question:

Hi Doug,

I’d like to find a financial planner and see what course correction(s) we have to make based on our current finances.

I will be officially retiring in five years but will supplement my military pension by working part-time. We have a little consumer debt and no home/mortgage. My spouse is an at-home parent and our kids are now 8 and 5. I don’t think there is a calculator smart enough to incorporate my family demographics and identify that we may need to buy a home and support kids until they are college age.

Let me know if you are available. Thanks!

Good to hear from you again! I’m not a financial planner but I answer a lot of reader questions. There’s no need to pay me for my advice– I give that away for free.

I don’t offer a number-crunching analysis service, although I can refer you to people who do. At the end of this post I’ll recommended a couple of fee-only CFPs who are military retirees. They’ll ask you to gather some data before they can do the analysis, and they can help you check anything that you think you might have overlooked.

Financial independence calculators

Don’t contact a professional just yet. There are several (free) calculators that will handle your questions, and every year they get better. You’ll essentially break the problem into four parts:

you and your spouse’s spending for the rest of your lives,
the annual cost of raising the kids,
how much you want to spend on college (the total cost is your kids’ problem), and
your down payment fund for your house.

Most calculators will do a great job of projecting the first two parts and they’ll treat the second two as lump-sum expenses. They handle mortgages as well.

Everyone approaches their planning in a different way, with different types of analysis and detail. Everyone prefers a different user interface. No single calculator is good for everyone, and you should probably try out two or three to compare the results. My good friend (and experienced retiree) Darrow Kirkpatrick has done an exhaustive review of financial-independence calculators on his site.

Part of the rest of this e-mail tells you what numbers you’ll need. When you’re ready to plug those into a calculator, I recommend that you start with the crowdsourced FIRE simulator cFIRESim. (FIRE stands for “Financial Independence / Retire Early”.) For a second choice, USAA members have one of the world’s most user-friendly calculators. (It hides a lot of the details from your view & control but it’s extremely easy to run, with a very high user completion rate.) Otherwise, browse Darrow’s link and decide which calculator(s) you want to run.

Advantages of a military pension

The good news is that a military pension is one of the world’s best inflation-fighting annuities. No matter what you overlook in your analysis, your pension will provide you with a basic standard of living. Your spouse will probably want the full Survivor Benefits Plan coverage, too, unless they have their own assets or prospective pension.

Another advantage of the military pension is that you can safely handle a 30-year fixed-rate mortgage. You should still save up (at least) a 20% down payment to get the best deal, but you can have the world’s most reliable inflation-adjusted income helping you to make payments on a fixed amount of principal and interest. The payments will seem like a big number for the first decade but your pension will gradually rise with cost-of-living adjustments. As your pension goes up, the mortgage will become a smaller percentage of your income.

Now back to the calculators. You’ll need two sets of numbers for input.

Running the data

First, whether you do your own analysis or pay a financial advisor to do it for you, you’ll need to know your current expenses. That drives all of the other numbers. The more details you track on your expenses, the more you’ll be able to decide what brings value to you– and where you want to stop “wasting” your money.

The next piece of data is your asset allocation. Right now you have a military income and later you’ll have a military pension. You’re planning on a bridge career as well, so those three factors mean that you can afford to invest aggressively. I’d suggest allocating at least 80% equities and the rest to CDs or cash. You could even go 95%/5%, especially during your bridge career. You don’t need to invest in bonds because your military pension is the equivalent of a portfolio of I bonds.

From those two sets of numbers, then the more you can save and invest (the more you earn and the less you spend) then the faster your assets will grow. Your analysis will track your assets versus your net expenses. (Net expenses are your annual expenses minus your annual pension.) When your assets are 25x your annual net expenses then you’re financially independent and can spend 4%-5% of your assets each year. The reason we can be so confident about this is because you have a military pension that rises with inflation, and a couple of decades after you retire you’ll start receiving Social Security. When most retirees use the 4% Safe Withdrawal Rate system, they end up with more money than they need for the rest of their lives. When you include a military pension as part of that asset allocation, you’re almost certain to have a 100% success rate. No matter what happens to your investments, you’ll be able to survive off your pension and Social Security.

Staying with the plan

Click to login and check your asset allocation.

The key for you (and your spouse) is having enough confidence in that asset allocation to sleep comfortably at night. As much as possible, the investments should be in your Roth Thrift Savings Plan (L2050 fund or C, S, and I funds) with their world’s lowest expense ratios (0.03%). More of your investments should go to passively-managed equity index funds (also with low expenses of less than 0.20%) in your Roth IRAs for you and your spouse. You’ll have a pension and a bridge career, so you won’t need to tap those funds until age 59.5. Even before that age there are several tax-free and penalty-free ways to tap the funds if needed.

Keep saving and invest even more in your taxable accounts. Your taxable investments should be in a passively-managed equity index fund with low expense ratios. (Just like your Roth IRAs.) That would be a total stock market index fund or an S&P500 fund. The key is buying funds with expense ratios below 0.20%… maybe even below 0.10%. Don’t waste your time chasing active managers or “smart beta” or other buzzwords. Use the index funds to get 99.8% of the market’s return with about 1% of your personal effort so that you can focus on other important financial decisions.

The more of this analysis you can do on your own, the more you’ll understand it and feel committed to it. Even better, you’ll be more alert to lifestyle events which could affect your retirement. A fee-only CFP will give you a great plan, and some of them will add in quarterly or annual reviews (for a fee), but you’ll be the first to notice signs of trouble. You’re the one who cares the most about the success of your plan.

Most people build a spreadsheet to project their annual, including the lump-sum expenses like college, down payments, replacement roofs, and replacement vehicles. (Some of the calculators enable you to input this level of detail.) When your asset allocation is at least 80% equities (in the TSP and passively-managed index funds) then you can reasonably assume long-term annual average returns of 5%. The more you save and compound, the faster you’ll get to the point where your assets are 25x your annual net expenses.

Fee-only CFPs can help

If you decide to have your financial analysis done by a fee-only CFP then I’d recommend Rob Aeschbach of The Military Financial Planner or Forrest Baumhover of Westchase Financial Planning. Rob’s in Norfolk and Forrest is in Tampa but they both work by Skype and e-mail. Both are extremely familiar with all of the aspect of the transition and military benefits. They can also help with questions like “SBP or term insurance?“, “What states are tax-friendly for military retirees?“, “Buy a home or rent?“, and “How much should we save for college?”

I also recommend that you read at least one personal-finance Internet forum or Facebook group. It’s a great place for ideas and even ask questions to help with your analysis. (cFIRESim was developed by a poster on one of the forums.) I’d suggest the Mr. Money Mustache forum, the Early-Retirement.org forum, the Facebook group “Personal Finance For Military Service Members And Families“, or “Military in Transition“. I regularly read all of them, and Rob and Forrest post to those FB groups.

Our reader responded:

Funny that you mention the USAA Retirement calculator, but it stated that I met the goal at 100%! I am a little skeptical because my gut feeling is that even with a pension, a bridge income, stay-at-home spouse, no home (no home equity) and with not all kids college costs covered that I really felt I was behind the 8-ball. I will try that cFIRESim to see where I stand.

Quick question: when you stated the ideal asset value to be 25X annual expenses, does asset value include the cumulative value of my military pension?

Your asset value for the 25x expenses does not include your pension. Instead, you start with your total retirement expenses (including SBP premiums, Tricare Prime premiums, applicable federal/state taxes, and all of your other spending). You’ll assume that those expenses will rise with inflation. This simplifies the spreadsheet math while also building in a little safety factor: research shows that retiree expenses actually tend to drift down with age, especially past age 75.

Once you’ve determined your complete retirement expenses, you subtract your pension from that amount. The net “expense gap” is what you’ll pay for from your invested assets, and you’ll need investments of 25x that expense gap.

For example, if your projected retirement expenses are $82K per year and your pension is $42K/year, your expense gap is $82K-$42K = $40K. You’ll need 25x that amount or $1M.

Note that the 4% Safe Withdrawal Rate (4% = 1/25) is based on a lot of research and probability analysis, but there are no guarantees. The factors that work in your favor are (1) choosing mutual funds (or ETFs) with low expense ratios and (2) investing in an asset allocation that’s heavy in equities (at least 60%-80%). What really gives you a big boost in your retirement success projections is your inflation-fighting pension. (From 2002-2016, despite two recessions and several annual COLAs of 0%, my pension grew over 34%.) Another factor in your favor is Social Security, which is not part of the SWR studies. You’ll probably delay taking Social Security as long as possible, but if your retirement expenses abruptly go up (or your investments hit a worst-case global depression) then you could start Social Security payments as early as age 62.

You can read more details on your financial independence estimates in the blog’s archives from October 2010-March 2011. Those posts are mostly excerpts from the book.

Here’s your reader “call to action” for this post:

Or, if you’re already contributing to your TSP account, then log in and check your asset allocation (or the L2050 fund)

Related articles:

The blog’s archives from September 2010-March 2011 on retirement assets

Posted in Investing & TSP, USAA | 6 Comments

What’s The Next Step To Financial Independence?

Posted on May 19, 2016 by Doug Nordman

A reader writes:

Hi Nords,

I have a few questions I’m hoping you can help me with. I trust your expertise in these matters. I am currently an E-8 with seven years to go until retirement. I am hoping I make it to 20 years active and can retire an E-9. I’ll be 48 years old at that point and don’t really want to work a “job-job” after that. My spouse is 10 years younger and cutting back the work hours to stay home with our two young kids. Here are my particulars:

I just boosted my TSP contribution to the max. (I was only putting in about $5K/year.) My account balance is around $55K. We have an emergency fund. We have a $14K vehicle loan, which is our only consumer debt. We have an additional $30K in savings that we could use to pay off the loan or for a home down payment.

We have a mortgage on our primary residence of $268K ith about $40K in equity.I am upside down on a rental condo (owe $96K but only worth $90K). I’m an accidental landlord and it was not bought to be a rental property. Tenants cover the mortgage. With tax breaks and depreciation we come out slightly ahead. We have 24 years left on that mortgage.

The issue: my spouse and I want to move closer to town for a better school district. (Moving won’t improve our commute.) Our spending is reasonable yet could be better. I’m reading a lot of early retirement blogs and I can see ways we can cut back without impacting our lifestyle dramatically. However, the town we want to go to is pretty expensive and our property tax will rise by $2500/year.

Our questions:

1. Is moving worth it? We will probably end up with a house in the $250-$300K range and hopefully put about $50K down. That would leave a mortgage of $200-$250K. In a perfect world I’d like to pay that off before I retire. Then again, I don’t know that we’d stay there for much longer than the kids are in school so would it even make sense to try and pay it off early or try to do a 15 year mortgage? Would it make sense to reduce my TSP contributions and put that money towards the mortgage regardless of whether we move or stay put?

2. Am I better off investing in an after-tax account considering I might have to start taking withdrawals before age 59.5, or should I stick with TSP?

I think we can live on my retirement income if the house was paid off (or close to it).

Just by asking these questions (and doing the analysis) you’ll be on track. When you retire, your pension will probably cover most of your expenses and you’ll withdraw about 4% of your portfolio each year to cover the rest.

The “worst case” is that in seven years you’ll be handling the childcare if your spouse wants to boost their work hours. As the kids grow older, you’ll have more hours to devote to your own part-time work or even (if you’re interested) a bridge career. You have the knowledge & experience to turn your skills & interests into employment income (if you want to) or to keep your spending in line with your assets. The key is having the time (and energy) to make it happen.

Maximize your retirement contributions

Click here to learn more.

For the next 6-7 years, keep maximizing your Roth TSP contributions. Much of your military compensation is untaxed, so right now you’re in what may be the lowest tax bracket of your life. (Especially if you retire to a military pension and you two boost your employment income with part-time jobs or bridge careers.) The next seven years are your last chance to contribute to the Roth TSP for the world’s biggest passive index funds with the world’s lowest expense ratios. After the six-year point you can decide whether to boost your savings for a transition fund or whether to keep contributing to the Roth TSP.

The next priority would be your two Roth IRAs— and again you’d try to maximize your contributions.

While you’re earning a military paycheck you can take a 10-year view of the stock market. I’d stick to the C, S, & I funds or just put it all in the L2050 fund. Your Roth IRAs and your after-tax account could be invested in similar funds or just the financial company’s total stock market fund.

If the interest rate on your vehicle loan is below 3% then I wouldn’t be in a rush to pay it off. You’d want to drive the vehicle into the ground, of course, but you already have an emergency fund and (if needed) a replacement vehicle fund. That $30K should handle any repair surprises on the rental condo or a tenant vacancy, too.

If the interest rate on your home mortgage is below 5%, and if you guys can sleep comfortably at night, then I’d keep it. If you’re thinking of moving then there’s no reason to put money against a loan that might be paid off during the sale.

If you’re a happy landlord then keep the rental for as long as you’re motivated. If you screen for good tenants (and occasionally raise the rent) then property values may eventually float you back above the mortgage balance. Keep in mind when you sell a rental property that, along with all the other sale and closing costs, you’ll owe a depreciation recapture tax at 25% of the amount you’ve depreciated. The IRS assumes you’ve been depreciating it anyway, so that’s just the payback for the tax break.

Rental property tends to appreciate at about the rate of inflation, so the only way to boost your cash flow is to reduce the expenses or raise the rent. Sell the rental property as soon as you’ve had enough.

Answers to your questions:

1. If moving to a better neighborhood (school district) makes you happier then you should move, but there will be a financial cost to your happiness. Research shows that moving to a neighborhood with better friends for your kids can generally improve their school performance and life skills. However, the downside is that you’ll end up working longer to pay for it.

On the financial side, I’d look at getting a low-interest fixed-rate 30-year mortgage under 5% and making the minimum principal & interest payments. Keep investing in the TSP and your Roth IRAs, preferably in equities for higher returns. Again I wouldn’t accelerate a mortgage payoff if you’re not sure that you’re staying there after your kids finish high school. Your TSP and Roth IRA returns will probably be at least 5% APY, which will grow your wealth faster than you could pay down the mortgage or build equity.

However, you could also take a good hard look at “improving” your current neighborhood. For example, does your current school have gifted/talented programs or advanced math/reading tracks? Does the high school offer AP classes for college prep? Could you get a geographic exception to attend school in a different district (for a specific course or extracurricular activity) while living in your current neighborhood? Could you fill in the school’s educational gaps with tutoring services like Kumon or homeschool curriculum or Khan Academy videos? Could you influence your kids’ choices in friends by getting them involved in sports leagues or Scouting or YMCA? Even if you drove to more activities, it might still be cheaper than higher property taxes.

I think involved parents can have a greater impact on student performance (and friend choices) than the school. Although the other school may look better on paper, it’s difficult to tell whether the grass is really greener or if you’ll simply trade one set of problems for another.

The important factor is that you, your spouse, and your kids all support the decision. If your kids (or your spouse) are fighting you on the school choice then the money doesn’t matter.

By the way, if you’re pretty confident that you’ll be spending seven more years on active duty then you should make a decision on transferring your GI Bill benefits to your spouse or your kids. College is their problem, not yours, but if you’re going to stay on active duty anyway then that’s a nice benefit.

2. Keep maximizing your contributions to the Roth TSP, then your Roth IRAs (passive index funds), and then your taxable accounts. Between ages 48-59.5 you’ll be able to withdraw the contributions from your Roth IRAs (if necessary)– no taxes or penalties. After retirement you’ll also be able to roll your Roth TSP into a Roth IRA, and then five years after that rollover you can start withdrawing the amount that you rolled over– free of penalties and taxes.

Everybody worries about this issue before retirement, and they pile up their savings in taxable accounts or even cash instead of the Roth TSP and Roth IRAs. But the reality is that they retire to a pension and/or a bridge career and don’t need the money which could have compounded tax-free. There are plenty of tax-free and penalty-free ways to tap TSP and IRA funds during that 11.5 years after you retire, but it’s not likely that you’ll need to do more than an occasional withdrawal of a Roth IRA contribution.

I’d save the real estate investing until you’re retired and have the landlording time. For the next seven years, you could read up on the subject and decide whether you want to pursue it, but you’d hate to acquire a half-dozen rental properties in your local area and then move to a different part of the country.

In the long term (over 10 years) I think it’s better to keep a 30-year mortgage below 5% and keep investing in a high-equity portfolio (which will earn at least 5% APY). The key to this strategy is reliable retirement income (your military pension) which guarantees that you’ll be able to pay the mortgage. Meanwhile, your investments will continue to grow through the volatility of both bear & bull markets. (Personally, I’ll be making mortgage payments on our home & rental property until I’m 80 years old.) However, it’s also critical that you and your spouse be able to sleep well at night. That type of emotional comfort comes at a financial price.

By the way, your spouse’s gender and age difference can make a compelling financial case to purchase the full amount of Survivor Benefit Plan at retirement. You’ll pay a premium of 6.5%/month of your pension for 30 years but the mortality statistics say that the survivor will receive far more after you’re gone. Between the 55% of your pension and Social Security, you may not want any other insurance on your spouse or your minor kids.

If you’re seeking more resources, I’d recommend Early-Retirement.org and the MrMoneyMustache forums. The latter group is extremely good at challenging wasteful spending and there are quite a few landlords posting to the property threads. You might also want to join the Facebook group “Personal Finance For Military Service Members And Families”. These questions come up all the time there, and at least two of the members are military retirees with fee-only CFP practices.

A few days later I received this note:

I just wanted to say thank you. This was way more in-depth than I expected and was exactly what I was looking for. Everyone’s situation is unique, and I appreciate that you took the time to really read my situation and questions. Dave Ramsey’s advice wasn’t quite ringing true with me :).

I’m happy to help!

Readers: any other suggestions?

Posted in Financial Independence, Investing & TSP | 5 Comments