Lifestyles in Military Retirement: Learning to Surf in Hawaii

Posted on March 28, 2011 by Doug Nordman

Here’s an amazing statistic: I’ve blogged for over six months on just about every aspect of military financial independence and early retirement. In nearly 80 posts, what’s been the most popular topic for over a week?:  Surfing. Are you people miserable on deployment or what? Just how cold a winter has it been up there? Or are all of those hits coming from my daughter, who tremendously enjoys her Mainland college but terribly misses surfing?

Well, I’ve never had a “real” job, but I know enough about business to recognize when to give the customers what they want. So here’s everything you need to know to start surfing in Hawaii. To all you other surfers reading this (including my daughter): please post a comment if I’ve overlooked something. And if you’re already a surfer then you can skip down to the last paragraph for the next challenge.

If you want to surf then you should start by ignoring all the cool vocabulary and fancy equipment. Everyone had to start with a first lesson, and we were all clumsy. Don’t be intimidated by the challenge, but do be respectful of experienced surfers by giving them plenty of room out there. Stay well to one side of their cluster and don’t compete with them for the same wave. You’ll learn the right-of-way rules and etiquette later.

If you can swim, then you can surf. It’s that easy. (The shameful fact is that a 1990s survey revealed over 30% of Oahu’s surfers still don’t know how to swim well enough to make it back to the beach if they’re separated from their board.) I used to surf while wearing an orthopedic knee brace and I could still get up fast enough to enjoy a good ride.

Surfing with torn ACLs

If you really want to read up on the sport (not necessary but comforting) then I’d recommend a library copy of the Start-Up guide to surfing or the Start-Up guide to longboarding.  Or try a “how to” video like this one.

If you want to surf a lot when you’re in Hawaii, then work on your shoulder muscles before you get here. You don’t need much acceleration but you will need a smooth consistent stroke to get back out to the break after riding one all the way to the beach.

To choose your exercises, stand up and rotate your arms in vertical circles. Feel those shoulder muscles rippling away? Work on them. Do the freestyle crawl in the pool (half a mile would be great) and maybe try 100 yards of the butterfly. Do 25-50 pushups at least 3x week, and add some pullups if you’re feeling the endorphins kick in. Just don’t overdo it, and take a break for the last few days before you travel.

If you’re visiting Hawaii for the first time then you’re probably in Waikiki. To avoid the crowds of local surfers, weekday mornings around 9 AM are best. Look for the statue of Duke Kahanamoku by Kuhio Beach Park (on Kalakaua between Kaiulani and Liliuokalani) and then wander onto the sand looking for any beach concession with a stack of rental surfboards.

If you’re over 100 pounds then you want to rent a board that’s at least nine feet long. (That’s written 9’0″ and pronounced “nine-oh”.) If you’re over 150 pounds then you want to rent at least a 10’0″. If you’re over 200 pounds then consider a 10’6″, but they’re hard to carry around unless your arms are at least 35″ long.

Cheerfully admit to the concessionaire that this is your first surfing experience (they can already tell) and ask for a lesson. Depending on your attitude (humility helps) and their business, expect to spend $40-$75.

If you’re staying at a Kapolei beach condo (or the new Disney resort), and if you’re still carrying a military ID card, then skip Waikiki (you can do the rest of it later) and head straight to White Plains Beach in Kalealoa.  (Some of you old salts may remember when it was the Navy’s Barbers Point Naval Air Station.)

The parking lot is at the end of Tripoli Drive near the Coast Guard Station. (If you get to the USCG station then turn around and go back to the first right.) The lifeguards will be setting up after 10 AM and will be happy to rent you a board (in exchange for your military ID) and give you a lesson for $30.

A rental 10'0" for a first-time surfer. Note the fin is at the back and behind his back so it doesn't bang into anything.

White Plains Beach rental board

Be ready for a lot of sun and for sliding around on slick surfaces. Rent or buy a nylon/polyester rash guard– any style or color or sleeve length will do if it fits a bit loose under the arms and comfortably on your torso. If you don’t get a rash guard then try a t-shirt. Slather on the sunscreen and apply more after the first surfing lesson. Otherwise you’ll be too sunburned & sore to do another session in two days.

You’ll have a board that’s either slick fiberglass (with sticky wax on the deck), or plastic with a deck of foam rubber. It’ll weigh up to 15 pounds and it’ll feel awkward to carry. Take it slow & easy and try not to bang the fin into anything. Yes, everybody is watching you, but they all had to start somewhere too!

You’ll begin with the board on the sand and lay on it as if you were paddling. You’ll learn how to push up, get up on your knees, bring one foot forward and then… just stand up. Which foot you bring forward depends on which feels comfortable to you. Most surfers put their left foot forward, but a few (mostly left-handed) bring their right foot forward. You can learn either way.

When you stand up, you’ll have your feet on either side of the board’s centerline for balance. Most of your weight will be on your back foot (especially if you want to turn) and a bit of a crouch always helps. Don’t feel that you have to POP up in a hurry– your first waves won’t be very big and you’ll have plenty of time. Just push up with your hands on either side of the centerline, bring your front knee forward when you feel that you’re in control, and stand up when you’re ready. Or just stay down on your hands and enjoy the ride. Your choice.

Enjoying the ride

After practicing on the beach, you’ll strap a leash on your back ankle. That helps you keep the board from turning into an unguided missile when you fall off it. It also means you don’t have to swim all the way back to the sand to retrieve it afterward.

The instructor will help you get the board into the water. You’ll push into the shallows, lay on top, and use that crawl stroke. Keep the board’s nose an inch or two above the water and try to get a smooth glide going, but there’s no hurry. Paddle straight into the white foam on top of the wave so that the board’s momentum carries you over it.  If a wave washes over you, keep a grip on the edge of the board and start paddling again as soon as the wave passes.

Entering the water

When you’re out to the break, probably with waves 2-3 feet high and well clear of other surfers, the instructor will turn you around and help you figure out when to paddle into one. You’ll usually get a helping push into your first few waves.

You’ll start paddling when the wave is about 20 feet behind you (look over your shoulder to judge that) and you’ll keep paddling until you feel the back of the board rise up and go faster.

When the board accelerates then you can stop paddling, put your hands on the deck in pushup position, and think about standing up. Keep the nose up out of the water as you do so (an occasional splash or two is OK) and take it slowly. Try to get the feel of the wave and enjoy the ride. Keep an eye on where your feet end up so that you can adjust their position on the next ride. Some of you will stand up right away, others will need six or eight tries. You’ll have it within the hour.

When the wave runs out, or you’ve had enough, then just sit down. Don’t jump off or dive off because the water might be shallow. Get down on the board and hold on to it so that it doesn’t shoot away from you and bang into anyone anything.

Then turn the board around, paddle back out, and try it again!

Your first surf session will probably be an hour. If you don’t feel your shoulder muscles grumbling by then, stop anyway. You can do more in 30 minutes (for maybe 30 minutes tops) or wait for the day after tomorrow.

If you’re not happy with laying down and standing up then ask the instructor about a stand-up paddleboard. It’s a little more complicated than paddling a canoe but you’ll figure it out within 30 minutes and get a great torso workout. Stroking your paddle into the waves on your feet is more challenging and you might not get the hang of it for a session or two. Just take it easy and focus on your balance & control.

Paddling out with another great surfer

If you’re already an experienced surfer, then visit Hawaii between November and February when the North Shore is practically guaranteed to be at least 10-15 feet along seven miles of beaches.

Rent a board in Haleiwa or sign up for a school like Progressive Surfing. Champion pro Myles Padaca will elevate your skills and have you looking forward to those 15-footers. My daughter and I got trashed & thrashed more than once, but it was one of the best Christmas presents ever.

Does this post help? Sign up for more free military retirement tips via e-mail, Facebook, or Twitter!

Posted in Travel | 4 Comments

Asset Allocation Considerations for a Military Pension

Posted on March 21, 2011 by Doug Nordman

Here’s my in-depth answer with the nitty-gritty details of the following question:

If you’re receiving a military pension, then how should you invest the rest of your portfolio?

Frankly, to the majority of you readers, this will be a boring technical essay. The big picture of this week’s posts is that emotions will influence our investing no matter how logical we attempt to be, and a military pension lets us feel a lot better about stock-market volatility.

But if you plan to invest your savings in more than just Vanguard’s total stock market & total bond market index funds, then here we go:

How You Can Invest Your Retirement Portfolio

There are two aspects to every financial decision– the logical and the emotional. Both aspects are equally important, and investors who make their decisions from just one aspect will find it very difficult to stick with their commitments. Investor psychology research into “loss aversion“ has shown that losing money causes far more pain than gaining it. Even if an asset-allocation plan is chosen with the most rigorous criteria and extensive analysis, the inevitable high volatility or unexpected losses will cause far more pain than the benefit of any gains. That emotion can overcome rational thinking. Investors eventually decide that the most logical and well-researched asset-allocation plan is useless if they’re not also emotionally comfortable with the results. When the markets do badly, even for a short period, distress can cause investors to sell out (and lock in their losses) at the worst possible time. This path to retirement is long and painful.

One distress-free option would be to invest in assets that have no volatility and never lose money. Treasuries, TIPS, and I bonds all attempt to offer this solution. One drawback is that these “risk-free” investments pay a very low rate of return (sometimes no return at all) and Treasuries can actually lose value to inflation.  Their low yield means that it also takes longer to save enough to support even a frugal lifestyle. When this type of a portfolio is big enough to for its returns to support retirement, it will only keep up with the Consumer Price Index (CPI).  If a retiree’s rise in personal spending exceeds the CPI then they risk outliving their assets as their personal inflation erodes their value.

A high-stress option would be to embrace volatility. Many investors spend months researching the mathematics and histories of asset allocations. They become experts on the correlated performance among different classes of stocks, bonds, real estate, commodities, and cash. The idea is that when one asset class is performing poorly, another asset class will be rising at least as quickly to offset the overall portfolio. Nobel-winning researchers have been able to “prove” that a diversified portfolio built from uncorrelated asset classes is actually less volatile than the individual assets in that portfolio.

Regrettably, the diversification “proof” only works most of the time– not all the time. As the recession of 2008-09 showed, the markets are still not efficient. Low-correlated asset classes can still drop together for days or even weeks before investors stop their panicked selling and are tempted to buy. “Portfolio insurance” methods can reduce the impact of these rare episodes, but their expense reduces the portfolio’s overall return. Spending hundreds or even thousands of dollars a year on hedging (for stock options that expire worthless) seems like wasted money during a hot bull market.

Another option, dividend investing, is a variation on a diversified portfolio of volatile assets. Investors own shares of diversified yet high-yielding stocks. They plan to receive enough dividends to live off the portfolio’s yield without ever selling any shares. This plan works well in a bull market because companies generally strive to please their shareholders by raising dividends even when their shares are growing in value. In bear markets, a company will avoid cutting its dividend when possible to keep shareholder faith (and its share price). Long-term investors can look forward to years of dividends that hopefully meet or exceed inflation while never having to worry about volatility or selling shares in a bear market.

A minor drawback to dividend stocks is that their share price tends to grow more slowly than the rest of the market because their yield is a larger part of their total return. Another issue is that it takes a larger portfolio of dividend stocks to support retirement expenses. Instead of spending principal, a dividend portfolio can only support a withdrawal rate of its total dividends– usually 2-3.5%. The portfolio never runs out of money since principal is never consumed, but it takes longer to save enough to support retirement.

Unfortunately the last recession also showed that companies will cut their dividends to avoid bankruptcy. The stocks of banks and investment firms were hit particularly hard, with some even cutting their dividends to a token penny a share. Dividend-paying stocks are an important part of a diversified portfolio, but dividend stocks should not be the only asset of a portfolio.

A final option would be to sidestep volatility and render it irrelevant. It requires having enough in cash (money markets and CDs) to support living expenses during a bear market. Retirees live off their pension and their cash while they wait for the bear market to end and their assets to recover. A two-year cash buffer (as much as 10% of a portfolio) works well for all but the longest bear markets. Although investors can ignore downward volatility for months or even years while they’re spending the cash, the emotional impact can still be severe enough to make them question the wisdom of this asset allocation.

Most investors choose a middle ground among the various investing options. They invest in assets paying dividends as well as those whose returns are expected to beat inflation. Diversified portfolios assume risk with volatile assets, but the assets are split among several classes to (hopefully) reduce overall volatility.  Part of the portfolio is also kept in cash to support living expenses during bear markets. The asset allocation allows investors (and their spouses!) to enjoy a good night’s sleep.

Even with this accumulated wisdom, investors are still trying to put stock-market meltdowns in perspective. It’s painful to watch equity portfolios go into free fall and temporarily lose 50% of their value, even if diversification minimizes the paper losses. It’s a great opportunity to rebalance by buying more shares at a discount. The portfolio’s cash allocation provides the spending money to ride out a bear market while waiting for the rest of the assets to recover. But the emotional depths of a bear market can still make even the most dedicated investors question their logic and their discipline.

Next post: “human capital” and the asset-allocation value of a military pension.

Part Two – Your Human Capital is More Valuable Than You Think

Here’s the second part of a three-part post to answer the nitty-gritty details of the following question:

If you’re receiving a military pension, then how should you invest the rest of your portfolio?

One noted economist compares an investor’s portfolio against their lifetime income.   Moshe Milevsky’s book “Are You A Stock or A Bond?” describes the “human capital” of lifetime earnings and pensions. Although savings are important to retirement, the size of an investment portfolio may be a minority of a retiree’s net worth when compared to their lifetime earnings power and their pension income.

Servicemembers and retired veterans, with their stable incomes and high-quality inflation-fighting pensions, have a particularly high human capital.

“Human capital” is also a good perspective on a military career. Veterans tend to be paid less than their civilian counterparts (while getting shot at more often), but their likelihood of continued employment is much higher. Milevsky’s book uses the examples of university professors and Wall Street stockbrokers.

Professors make far less each year but (with tenure) can look forward to a lifetime of paychecks. Stockbrokers may earn millions in one year but could be unemployed the very next morning. Their high-dollar earnings power has no guarantee of continued employment. The challenge for both occupations is to manage their assets to be supported by their lifetime earnings, no matter how low or uneven their income may be.

Human capital is a relatively new concept and not yet widely accepted. Most financial analysts and website calculators ignore human capital by treating salaries and pensions as “just” a stream of income. Human capital’s impact is not considered on a portfolio’s overall asset allocation.

Military retention is another impact of human capital. At some point every one of 1.4 million veterans (and their 1.9 million family members) has to decide whether to stay on active duty or to continue drilling in the Reserves/National Guard. Only 15% of the military’s members reach 20 years.

A pension is not the only reason to stay on active duty, but it would certainly help people endure long, dangerous deployments or stressful midwatches. The military may be a familiar lifestyle with a guaranteed paycheck, but is it worth the pain? If “human capital” could compare the earnings of active duty to the Reserves/NG, or assess the impact of completely quitting the military, then the analysis could bring financial logic to an intimidating lifestyle decision.

“Net worth” doesn’t account for cash flows like pensions or Social Security, so their income has to be included as their lump-sum equivalent. A convenient assumption about inflation-adjusted pensions is that their payout is constant in today’s dollars– they maintain their buying power for the rest of the retiree’s life.

Reserve/National Guard pensions and Social Security are more complicated because their payouts start later. However, Congress and the Department of Defense attempt to improve retention by raising military pay at least as fast as inflation, while promotions and longevity pay keep servicemembers ahead of inflation.

It’s conservative to assume that future pay dollars will have the same buying power as today’s dollars. The Social Security website’s benefits calculator also produces its results in today’s dollars, and benefits are adjusted for inflation. That means Reserve/NG pensions and Social Security are paid in inflation-adjusted “today” dollars through the rest of a life expectancy.

The lump-sum discounting math is more complicated for military pensions with survivor benefits and for civilian defined-benefit pensions without inflation adjustments. Military retirement calculators can give an estimate of the lump-sum value of survivor benefits. Civilian corporations estimate their pension calculations on an actuarial analysis of lump-sum value, and labor unions offer their own analyses.

Once projected pensions and Social Security benefits have been converted from income streams to lump sums, they should be included in a veteran’s net worth. Investment portfolios would be added at their current value, as well as homes or rental real estate. Personal property (such as vehicles, furniture, recreational equipment, and clothing) can also be included. Mortgages, vehicle loans, and other debts are subtracted to get the total net worth.

The results can be startling.

Part Three – Your Pension and Social Security Allow You To Take More Investment Risk

Here’s the conclusion to the nitty-gritty details of the following question:

If you’re receiving a military pension, then how should you invest the rest of your portfolio?

Investors are always admonished to have a diversified portfolio of stocks, bonds, cash, and perhaps real estate or commodities. Investment companies offer “balanced” funds, and the TSP offers “lifestyle retirement” funds that adjust their stock/bond asset allocation to a target retirement date. However, these methods ignore an investor’s human capital of their pensions and Social Security. An earlier post showed that the lump-sum value of a $3000/month military pension is at least $1 million. This inflation-adjusted pension is paid by the federal government using Treasury securities that have zero risk, so it’s the equivalent of an extremely high-quality bond portfolio. An investor with a $250,000 investment portfolio split between stocks and bonds may think that their stock/bond asset allocation is 50/50. But adding in the $1 million lump-sum value of a military pension shifts the actual stock/bond allocation to 10/90! *  Even if the investment portfolio loses half its value, the loss of overall net worth is not 50% but rather 10%.

Other researchers have found similar imbalances for retirees whose Social Security benefits have skewed their asset allocation almost as heavily toward bonds.

How should military members use this information? How does it affect their decision to stay in the military? How can the lump-sum value of their pension and Social Security benefits affect their asset allocations?

First, servicemembers have to consider their human capital in their decision whether to leave the service or stay until retirement. During a 20-year career it’s possible for enlisted to earn over $1 million in pay and benefits, and officers to earn twice as much.  Money should not be the most important factor in a retention decision– but it’s significant. “It’s only money” is a tough choice to follow through on!

Second, military veterans can assume more risk (returns and volatility) in their investment portfolios. Their likelihood of continued employment is higher than most civilian occupations and their human capital is distributed more evenly during their careers. Their asset allocation could be more conservative if they leave active duty for the Reserves/NG or quit the military entirely, but during active duty they can invest more aggressively.

Third, a military pension is probably a veteran’s most valuable asset. As a high-quality bond, it allows investors to move the rest of their investment portfolio heavily into stocks or other assets. If loss aversion causes emotional distress during a bear market, the paper losses in a stock portfolio can be considered a small percentage of the retiree’s net worth. Their pension and Social Security are inflation-adjusted assets that are far more significant, even if a stock portfolio loses half its value. Veterans (and financial advisers) have to consider the lump-sum value of these benefits in designing investment plans and asset allocations.

*[ End note: A $250,000 portfolio split 50/50 between stocks and bonds has $125,000 in each asset class. A $1 million pension value adds $1 million of bonds for a total of $1,250,000 split between $125,000 in stocks (10%) and $1,125,000 ($1 million + $125,000) in bonds (90%).]

Related articles:
“Present value” estimate of a military pension
Saving base pay and promotion raises
Military pension inflation protection
Tailor your investments to your military pay and your pension
Where to put your savings while you’re in the military

Posted in Investing & TSP, Military Retirement | Leave a comment

Military Pension Inflation Protection – How and Inflation Indexed Pension Keeps Up with Cost of Living

Posted on March 10, 2011 by Doug Nordman

Let’s consider some of the details behind a military pension and its COLA.

First, just like active duty pay or drill pay, the pension is paid in arrears. In this case it doesn’t show up until the first of the month and it’s only paid once a month. The first payment may even be delayed a week or two if the computer network at the Defense Finance and Accounting System had a delay or an error in processing that month’s new retirement data. In case of a rare delay, new retirees should have enough cash on hand for the first two months of retirement. The system will eventually catch up.

Next, except for extremely unusual circumstances requiring individual DFAS processing, the pension will be paid by electronic direct deposit to the account of your choice. (The federal government does not want to mail paper checks.) If it’s the same account you’ve always used for your pay then there’s no change and no problem. If you’re planning to use a different bank or credit union because you’re moving to a new area then you might consider delaying that shift until you’re moved in and settled. DFAS’ pension-processing system requires a week or two to change to the new financial institution, and you don’t want to compound a relocation with bank problems.

Finally, keep an eye on your service’s electronic pay system for the first few months of retirement. New (or corrected) pay statements may be posted as your service closes your pay accounts and formally transfers your records to the Department of Defense. In addition to your last pay statements, make sure any new pension deductions and allotments are correct and promptly notify DFAS of any problems.

Retirees are not required to have federal (or state) income tax deducted from their pension, and you can adjust your withholding as necessary. The more complicated you make your pension distribution, though, the more chances for problems. It may be easier to have the entire pension payment deposited to your financial institution and then set up your automatic deductions from that account. It’s probably a lot easier to reach your local credit union on the phone or by e-mail, too.

In December or January after your retirement, DFAS will distribute tax forms. These can be mailed if requested but usually default to online display on your service’s pay website. The W-2 should reflect your active-duty or drill pay as well as any leave (base pay) that was sold back during retirement. If the W-2 doesn’t appear to have the right amount then contact DFAS or your local pay office to check the calculation. If there was a processing error (especially with retirement leave) then DFAS’ computer systems will eventually catch up– and issue a corrected W-2. Murphy’s Law means that will happen the week after you file your tax returns.

Estimated taxes are another issue for your retirement year. You not only refer to your W-2 but also to your 1099-R pension distribution statement. Military retirement pay is subject to federal tax and is still taxed in some states. If you sold back leave as part of your retirement then that (base pay) is also subject to tax and estimated taxes may not have been withheld. Check your estimated taxes using the IRS worksheet and make sure that enough estimated tax is withheld (or paid by you) by the January deadline. Late tax payments are not only fined– you also pay interest on the balance.

After the first year, your pension payments and withholding should settle down to a routine. You’ll download your 1099-R each year and perhaps adjust your tax withholding as necessary. Ideally, it’ll be dull and boring and you’ll have trouble remembering your login and password.

Military retirees have two other issues to consider in their pension COLAs.

In January of the first full year of retirement, High Three retirees will not receive the full COLA. The High-Three pension system pro-rates the official COLA to a smaller amount for your pension depending on the month of your retirement. This reduced COLA only occurs during the first full year of retirement and the full COLA will be received in subsequent years.

If you’re one of the very few retirees who chose REDUX then you have a different challenge. Not only will your first full year’s COLA be pro-rated, but all of your pension COLAs will be reduced by 1% below the CPI until you turn age 62. A special “catch-up” adjustment is applied to the REDUX pension at that age, but you have to have faith that no legislative changes will occur to the system before then. After age 62, though, the COLA returns to its cap of 1% less than the CPI. If you retire at age 37 on 40% of your base pay (instead of High Three’s 50%) and give back 1% of your COLA for the next 25 years, then by age 62 your pension will only have 62% of the purchasing power of its High-Three equivalent. Your REDUX pension will receive its projected catch-up adjustment but will then resume losing ground on its inflation protection for the rest of your life.

The next post will go into greater detail on REDUX pensions and show a graphical comparison between REDUX and High Three pensions.

Related articles:
COLA calculations
Living with inflation
Effect of inflation on a dollar
Will Congress change military retirement?

Does this post help? Sign up for more free military retirement tips via e-mail, Facebook, or Twitter!

Posted in Military Retirement | Leave a comment

Living with Inflation – How to Handle Inflation in Your Investment Portfolio

Posted on March 3, 2011 by Doug Nordman

The last post described the long-term effects of inflation and explained how a COLA pension (plus a portfolio of equities) can stay ahead.

One of the issues with the COLA system is its reference: the Consumer Price Index, or CPI. Critics claim that the government manipulates the CPI to make each COLA as small as possible. Conspiracy or fact? Well, a little of both.

First, the CPI is made up of a number of smaller indexes, each with their own basket of goods and services. It can also be broken down into smaller portions like the “core CPI” for more detailed comparisons. The idea is to be able to compare effects consistently across the years while updating the index for changes in consumer choices and spending.

Next, although the CPI no longer includes the early 20th-century cost of whalebone corsets, it also may not include some of technology’s latest “necessities” like smart phones or late-model gaming systems. The Bureau of Labor and Standards periodically updates the goods and services that make up the CPI to ensure that they reflect broad consumer behavior.

Third, over the years the BLS has noted a number of consumer behaviors that affect the CPI. One of these is the “hedonic adjustment” caused by recessions or periods of high inflation. A family may usually enjoy a weekly steak dinner, but if the family wage-earner is unemployed or if the price of beef soars, then they may switch to a cheaper cut of meat– or even hot dogs. Another change in consumer behavior is known as the “Wal-Mart effect”. As Wal-Mart stores spread throughout the nation, their relentless focus on price-cutting is estimated to reduce inflation by as much as 15% of the annual rate. In other words, if inflation was rising at a historical 3%, the Wal-Mart effect can knock the price trends down to less than 2.6%.

These effects seesaw back and forth across the nation, from urban to rural regions, and from one year to the next. Their cumulative effects are subject to seasonal adjustments (like holiday shopping) and national phenomena like election years or the price of gasoline. As the BLS attempts to update the index or to accommodate the various effects, cynics and skeptics claim that the index is being mercilessly manipulated to reduce next year’s COLA– or even to raise it to pander to voter blocs.

How can an individual consumer adjust their portfolio savings and their spending to handle this fluctuation? It turns out that an individual’s spending doesn’t really have much to do with the CPI. If you’ve been tracking your spending for a few years then you may notice that certain restaurants have raised their prices or a pound of ground beef costs more at the grocery store. However, you may also have changed your own behavior: you’re eating at different restaurants or trying different types of beef. Your own spending varies from one year to the next just as the CPI varies across the nation and different demographics.

The best answer for a retirement portfolio is to keep an eye on inflation trends and choose an asset allocation that will keep up with (or even exceed) the rate of inflation. That’s usually an allocation high in equities, which have been the only asset class to consistently beat inflation over the span of a retirement. The best answer for consumer spending is to continue to put your money where it matches your values, and to be ready to “pay the price” for your values. You may decide that you’d rather have a higher savings rate and achieve financial independence more quickly, or you may choose to extend your career for a few months to enjoy a higher standard of living.

How did Groucho Marx handle inflation?

He was once asked what he invested his earnings in, and he responded “Treasuries!”
The journalist commented, “You can’t retire on just a portfolio of Treasuries.”
Groucho’s riposte: “You can if you have enough of them.”

Next post: How the military pension COLA is calculated, and why TIPS or I bonds aren’t such a good idea in a military retirement portfolio.

Related articles:
Effect of inflation on a dollar
Will Congress change military retirement?
Financial myths of retirement (part 1 of 2)
Financial myths of retirement (part 2 of 2)
The biggest benefits of a military retirement

Does this post help? Sign up for more free military retirement tips via e-mail, Facebook, or Twitter!

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

During retirement: Paying it forward

Posted on February 21, 2011 by Doug Nordman


There’s nothing wrong with seeking your avocation by trying different types of work or volunteering. But you can simply enjoy “not working” for the rest of your life! You’ve earned your retirement, and you have no further obligation to society beyond living a fulfilling life that does no harm. Working and volunteering are just two aspects of life, even if they’re part of a perpetual search for your avocation.

As we get older and reflect on our accomplishments, our attention begins to shift to the next generation and our legacy of “paying it forward”. You had many mentors and benefactors who looked out for you when you were younger. You may have been able to pay them back with more than your sincere thanks, but in most cases we feel obligated to those who helped us– even at those times when we didn’t think they were helping. Now that you have plenty of retirement flexibility, it may be time for you to consider how you’ll repay the largesse of those who helped you. One of the best ways to do that is to pay it forward to the next generation by mentoring someone who needs it as much as you did. Whether you do that through teaching at a college or volunteering at a local school or just spending time with family, you may be able to pass your life skills on to the next generation.

Another way to pay it forward is to talk about retirement. Join an Internet discussion board or start your own website or blog. You may not find many retirement fans among your relatives or in your neighborhood, but there are plenty of attentive readers on the Internet. “The Military Guide” grew from several of those websites, and dozens of Early-Retirement.org readers helped bring it to print. The book is full of their stories and personal examples.

But if you don’t feel the motivation then you don’t have to work, or volunteer, or even mentor. Financial independence and retirement give you the right to enjoy your life as you see fit! Live your life as the example that you’d like others to emulate– you’ll be both mentoring and paying it forward.

Enjoy the journey

There are many paths to retirement, and there are many paths to explore during retirement. You worked hard at your military career, and you had to work even harder to build your assets. You endured frugal sacrifices that may not have been supported by friends, let alone relatives and family. Simply choosing your retirement lifestyle may have exposed you to society’s criticism and even jealousy.

Once again, you’ve earned it. Harvest the fruits of your labors and enjoy the journey through whatever paths this book helps you choose. If retirement leads you to your avocation then pursue it just as enthusiastically as you pursued financial independence and retirement. If retirement turns out to be your true avocation, then keep looking forward to exploring each new day.

Don’t just get through life. Now that you’re financially independent you should fully experience your life and enjoy it!

Related articles:
Forget about who you were and discover who you are
Retirement: don’t recreate your old environment
Retirement: relax, reconnect and re-engage

Does this post help? Sign up for more free military retirement tips via e-mail, Facebook, or Twitter!

Posted in Military Retirement | Leave a comment