Simple Ways to Start Saving for Retirement

Posted on December 23, 2010 by Doug Nordman

Short post today, folks. It’s a straightforward topic and you’re probably busy getting ready for the holidays!

Before we start, here’s another reminder about getting on the road to financial independence:  are you tracking your spending yet? If you’ve been doing that for a few months, then have you put together a budget? Next let’s talk about how much of your spending & budgeting should be devoted to saving and investing.

Make it Automatic with Payroll Deductions

Financial advisers (and our parents) use dozens of sound-bite homilies to get our money out of our hot little hands and into an investment account before we’re subjected to temptation. “Pay yourself first.” “Out of sight, out of mind.” “You can’t spend it if you don’t have it.”

As annoying as that advice may be, it works. Frugality and budgeting help you align your spending with your values. If saving isn’t a top priority then it will never be an important part of your budget, and you won’t save enough to let compounding work its retirement magic.

Every day you’re confronted with spending choices– the $4 latté, buying lunch instead of bringing your own, maybe stopping at the exchange for a six-pack and a new DVD on the way home. But how often do we see our savings choices? Even if you happen to find a way to save money that day, you’re not going to run to the nearest ATM to deposit it into your savings account.

Instead of having to compare every daily spending decision against your savings goals, though, you can set a savings goal and then put it in autopilot. After you build your budget and decide how much you can afford to save, then use your service’s payroll deductions and allotments to make it happen automatically. You have five main choices to decide where to save and invest your money: your Thrift Savings Plan, your IRA(s), your taxable investment accounts, your savings account, and (if you have a civilian job) your employer’s defined-contribution plan (like a 401(k)).

After you set your savings goal, then try to start the investing process by maximizing your contributions to your Thrift Savings Plan. Next consider an allotment to a fund company for your IRA. When the rest of your paycheck arrives in your checking account, have an automatic deduction send some of it to a taxable investment account. Sweep more of it to your money-market or savings account.  Leave only that month’s budget in your checking account.

Whatever savings and investing goals you choose, let technology take care of it for you every payday so that you’re not tempted to “adjust” the priorities every month for a little lifestyle upgrade. When deductions whisk the money away before it’s in our hot little hands, it’s easier to conserve what’s left and make it last until the next payday. You won’t be tempted to rationalize yet another month of spending while feeling that you just can’t seem to save as much as you hoped.

Save the Special Pay and the Pay Raises

A huge opportunity comes with every annual military pay raise, longevity pay raise, special pay, bonus, and promotion.  For example, take a look at the military pay tables and imagine the “wealth effect” of a two-year longevity raise or a promotion.  If you don’t control your expenses to your budget (especially for “entertainment”) then this “extra money” just gets spent without planning for its effect on your financial independence. 

These are the windfalls that you may be able to learn to live without and can send straight to savings. Some pay raises are more permanent (annual raises, promotions) than others (combat pay, hazardous duty pay, bonuses). Inflation will also continue to eat away at a budget and a growing family will always grow more expensive. But instead of raising your spending in anticipation of more pay, try to raise your savings rate.

A good compromise between frugality and deprivation would be to attempt to save at least 80% of every extra pay. You’re giving yourself a little spending treat (10-20%) but the reality is that you’re trying to save almost all of it.  If you try that for a couple of months and it’s causing too much pain then you can reduce the savings percentage. It’s far less painful to ease up on the savings rate than to try to raise it!

The next post will go into more detail on the TSP, IRAs, and taxable investment accounts.  After that we’ll talk about how much to save, and for how long.

Related articles:

Retirement budgeting
Military retirement spending: how much will I need?
Retirement finances: what will I spend?
Military retirement: how much can I really spend?
Retiring on multiple streams of income

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Frugal Living is Not Deprivation – How Living on Less Can Result in a Richer Life

Posted on December 22, 2010 by Doug Nordman

The military teaches everyone how to live an extraordinarily frugal lifestyle. No matter what reputation your service has, at some point you’ve lived in a very small room with a narrow bed and little storage. Maybe you did without a room or even a bathroom for quite a while, let alone a bed, and all your possessions had to be carried on your back in one piece of “luggage”. Food was mass-produced or delivered in a pouch, snacks were hard to come by, and maybe you missed an occasional meal. Entertainment was rudimentary at best — no high-definition satellite TV or Internet access, let alone clubbing downtown!

If we all know how to live as cheaply as Tibetan monks, then why don’t we practice that lifestyle and save 80% of our paychecks? We’d all set new records for early retirement! Servicemembers could eat all of their meals in the galley, spend their spare time reading library books or studying for advancement exams, and work out in the (free) base gym. No money would be wasted on gasoline, let alone energy drinks, alcohol, tobacco, or video games. No one would even need to buy civilian clothes. Veterans would have no problem retiring, and they could even return to the same lifestyle– the galley, the library, and the gym.

The irony of this example is that we all actually do know people who live like that. They’re perpetually saving their money, rarely socializing, and hardly ever going out. The problem with this single-minded focus on a Spartan lifestyle (and its extremely high savings rates) is that it’s very difficult to sustain. For the vast majority of us, that life can get boring, unfulfilling, and frustrating. These people seem to be pretty one-dimensional and not much fun. Maybe they have a very good reason for squeezing the most out of every nickel, or maybe they can’t help themselves, but it doesn’t look like a way to enjoy a career or a life. They’ll make their short-term goals, but usually in the long term they’ll drive themselves (and everyone around them) nuts.

There’s a happy compromise that’s short of the extreme. Frugality is just simple living– a lifestyle that avoids waste and suits your values. Extraordinary frugality, however, can be deprivation. Everyone understands how to avoid waste, but everyone also has a standard of living they’re not willing to give up to achieve that level of avoiding waste. Financial independence benefits from frugality, but it does not require extremes. It’s your choice to balance lifestyle (and values) with the time it takes to achieve that financial independence.

The difference between frugality and deprivation is personal and derived from your values. Everyone has a line between the two that they choose not to cross. The difference is that frugality feels good and makes you enthusiastic about reaching your goals.

It’s a challenge, and when you’re doing well at it then you feel like a winner. You might not even miss the consumerism and the materialistic lifestyle that you’re doing without. However, deprivation is always doing without for a higher priority, willingly or not. Frugality matches your values and usually frees up quite a bit of savings that can be applied toward financial independence. You’re living a life that you enjoy and you’re making progress toward your goals– it’s easy to feel good about it.

Deprivation, however, rarely matches your values and feels more like slavery than volunteering. You may be making great progress but it’s definitely not easy and you will not feel good about it. Prolonged deprivation is extremely difficult to voluntarily sustain and it usually leads to unhappiness.

The military teaches frugality (while imposing deprivation), but society does not always value either of them. We even have expectations of the ranks– junior officers are seen driving hot sports cars, senior enlisted have hefty pickup trucks or SUVs, senior officers buy luxury vehicles and nice houses with lots of creature comforts and big yards. Even junior enlisted may stand out among their barracks peers with a nicer laptop or a new smart phone. If you’re one of the few who can’t flash an attention-getting possession, then you may be pitied. And everyone teases the junior officer driving a 10-year-old hatchback– or a bicycle!

Frugality may occasionally put you at odds with the standards of a materialistic society. The more frugal you are, the more you may appear to be “left out”. Again the difference between frugality and deprivation is how you feel about it. If you relish the challenge, enjoy the achievements, and have fun while saving money, then you’re doing great. If you’re amused by the comments of your shipmates then your frugality reflects your values (and probably your net worth). If you’re feeling “left out” or even unhappy about the lifestyle remarks, however, then you’ve probably crossed the line into deprivation. You need a critical short-term goal to endure deprivation, or you need to modify your values.

An interesting aspect of frugality and deprivation is that they can change your values, maybe even permanently. An extreme example of this is the Great Depression. In the 1920s a significant part of society was living very materialistic, even luxurious lives. In the 1930s many suddenly found themselves struggling to find enough food and stay warm, let alone have a job or even luxuries. They didn’t volunteer for deprivation but they quickly became extraordinarily frugal and managed to cope with the trauma.

Over the years the habits became ingrained and part of their value system. When the Depression and World War II rationing ended, these members of The Greatest Generation didn’t completely revert to their carefree spendthrift ways. We all know people of that era who can whip up a gourmet meal out of leftover cornflakes. They can fix anything in the home and think nothing of (*gasp*) walking to their destination. They even know how to do without!

The other side of their frugality, though, is that many of these people will not spend money. They may still shun mortgages or credit cards, will not invest in the stock market, and won’t buy newer technology or update their skills. They may castigate others for waste and may even have difficulty treating themselves to a luxury without feeling guilty. Their values were significantly changed by earlier trauma and they may struggle with what they see as modern society’s degenerate lifestyle.

Many people see frugality as tedious, time-consuming labor. Once again, it depends on what you value. Cooking a meal from scratch is almost always more effort than dining out or picking up fast food. But you may feel that you get more value from preparing your own healthy, creative, high-quality meals. You might enjoy cooking as a hobby, not endure it as a chore. You may think that restaurant meals lack your talent for nutritious ingredients, proper seasoning, and creative presentation. The crowds, waiting, noise, and traffic might be discouraging. Or perhaps you prefer to save dining out for special occasions, and the experience would be less enjoyable if you did it every day.

But while you’re quite happy to eat at home and save your money instead of dining out, you may draw the line at rinsing and re-using plastic bags. It doesn’t matter to you that others see this labor as keeping waste out of landfills. You’re not willing to spend your time on the same goal.  Do the things that bring value to your life, and keep an open mind for new ideas, but don’t feel obligated to cross the deprivation line.

Frugal zealots may be accused of taking advantage of others. For example, there’s nothing wrong with choosing to drink water during a restaurant meal (instead of sharing a pitcher of another beverage) or to order smaller, cheaper menu items.

However, if you’re sharing with others then it’s wrong to skip your turn to buy the next round of drinks, or to help yourself to food that you’re not paying for, or to skimp on your portion of the tip. That’s not being frugal– that’s being cheap. Frugality means avoiding waste and spending money on the things you value, not tricking others into spending their money on you.

Practicing frugality is not an all-or-nothing lifestyle. Learn about as many techniques as you can and then choose the ones that you feel bring value to your routine. You may enjoy the daily challenge or you might decide to only be extra frugal if you had an emergency expense that month. You may only adopt one or two ideas (like bicycling for short trips) and then expand them (commuting or taking a bicycle trek for your next vacation).

Drying one or two loads of laundry on a clothesline may be no problem when you’re single, but the labor might be a bit much when you’re raising a family of young children who can’t yet do their own laundry. Monitor your spending, decide what’s worth your effort, and change your habits as necessary.

Families can adopt frugality very easily and raise children with strong life skills. If you attempt to impose deprivation on your family, however, then you’ll be facing rebellion in the ranks. People will have to either choose to upgrade their lifestyle or change their values until deprivation eases up to frugality. If you’re imposing deprivation on them then you may not get the cooperation you expect. Be patient and be ready to compromise.

Related articles:

The Dollar Stretcher website & newsletters:  commonsense advice and encouragement.  The weekly newsletter is particularly useful for regular small doses of information and motivation.
Simple Living:  more straightforward lifestyle advice and many reference books.
Early Retirement Extreme.  Caution:  not for the faint of heart.
Amy Dacyczyn and her Tightwad Gazette:  a military familymember and the godmother of frugal living.  You’ll find her book at the public library.
Jeff Yeager and The Ultimate Cheapskate:  More big-picture frugality advice from another early retiree.  He did it on a low income and without any military benefits!

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Posted in Money Management & Personal Finance | 4 Comments

Retiring without a Military Pension – How to Create Your Own Retirement Plan

Posted on December 16, 2010 by Doug Nordman

By now you’ve noticed a trend in the chapters from the “simplest” type of military early retirement (staying on active duty for at least 20 years) to the most difficult (separating as soon as your obligation ends). Financially, the best early retirement choice is staying on active duty until eligible to retire.

But active duty is certainly not the easiest choice. When you’re two years into that 20 with 18 to go, the “bolting” option seems much more desirable. And if you feed a few frosty beverages to the typical military retiree, you’ll eventually hear that the final two years were in many ways even harder than the first two. It’s far easier to talk about making it to military retirement than it is to actually do it.

Just how hard could it be to stay for 20? If it’s the surest and even simplest path to early retirement, then shouldn’t everyone aspire to that goal? Yet after a few years in the ranks, you realize that there seem to be a lot more people separating from the military (even for the Reserves and National Guard) than retiring from it.

Statistics confirm that impression. If you’re ready to get out of the military– and not even stay in the Reserves or National Guard– then you have plenty of company. The vast majority of veterans don’t even stay for 10 years, let alone a career. Only 15% of all veterans qualify for a pension (that includes Reserves/NG as well as active duty) and some services have an even lower retirement population. The military’s retention experts succeed by persuading only a minority of the recruits (both enlisted and officer ranks) to serve past their first obligation.

So while resigning seems to be the most difficult path to retirement, it’s by far the most common one. Retention is much more highly correlated to career satisfaction and quality of life, although salary and bonuses can help. However, only you and your family can decide what’s best for you, and at the end of the discussion you may find yourself saying “Well, it’s only money.”

The first chapter of “The Military Guide” describes the most powerful tools of a military retirement: cheap healthcare and an inflation-adjusted pension. How in the world can a veteran reach early retirement without either of them? It’s not as easy, but it can be done.

Civilians may not have these military options, but there are solutions. Some companies still pay fixed pensions and many offer subsidized healthcare. Other retirees accumulate a larger investment portfolio (perhaps boosted by a lump-sum retirement account) and buy their own healthcare insurance until they’re old enough for Medicare. A few retirees depend on the “multiple streams of income” approach. Still others bridge the gaps with part-time employment or extraordinary frugality.

The Safe Withdrawal Rate (SWR)

Regardless of their retirement benefits, all retirees have to manage their assets and their spending. The essential financial tool for assessing a retirement portfolio is the safe withdrawal rate: the rate at which withdrawals can be made without running out of money. The “Recommend reading” section lists many references and planning systems, but here’s a brief summary of the four most popular financial options:

The 4% rule.

Research by William Bengen and another project known as the Trinity Study were the first to show that a retiree’s portfolio would almost always last for 30 years if retirees started their first year by spending no more than 4% of that portfolio, and then raising each subsequent year’s withdrawals by the rate of inflation. Some principal is consumed nearly every year, and by the end of 30 years the portfolio may run out under extremely adverse conditions.

These studies spawned controversy and an entire industry of SWR analysis. What exactly is “almost always”? What about having enough assets to survive for 35 years, 40 years, or even 50 years of ER? Is it really 4% or lower? Higher? How much can inflation change from one year to the next, and how bad can it get? What if we decide to consume less principal, or try to have some portfolio left after 30 years? If we have better data and more powerful analysis techniques, what else can we squeeze out of this?

Almost all retirees use 4% as a starting point or a spending tripwire. The “Recommended reading” section lists many other references and approaches to determining your own SWR, from simple to extremely complex. While other retirees will spend the rest of their lives exploring all the subtleties of this approach, let’s move on to the other options.

The dividend rule.

Many retirees take great comfort in only spending what their portfolios earn. Their portfolios use various combinations of dividend-paying stocks, high-quality bonds, rental real estate, and CDs instead of depending on growth equities or commodities. Each year’s budget may be limited by last year’s dividend income, or CDs might be spent during a recession while stock and bond dividends recover.

To preserve the portfolio’s purchasing power, dividends will have to rise at least as fast as inflation. The SWR is less than the portfolio’s total dividend rate and almost always less than 4% per year. Spending may fluctuate with the economy or inflation but the portfolio never runs out of money because principal is never consumed. However, the lower SWR requires a larger portfolio than the 4% rule, which usually means saving more or working longer.

Multiple streams of income.

This option has almost as many variations as the 4% rule. Some retirees work part-time at their avocations (or develop new ones) for the rest of their lives. Others take great comfort in a more structured corporate environment with part-time employment, and the money certainly doesn’t hurt. Some have planned to work a few mornings a week (or to qualify for healthcare benefits) as long as they’re able. A few will only work seasonally, to earn extra for special spending occasions, or when their portfolio falls below a warning line.

Rental real estate is a popular way to create a stream of reliable income with fewer working hours. Finally, many veterans combine a military pension with civil-service or civilian pensions and their savings to bridge the gap to Social Security.  For more details, read the previous post on “multiple streams of income“.

Frugality.

These retirees focus on expenses, not assets or income. They’ll start with a bare-bones survival budget and add in various “luxuries” that depend on their portfolio’s performance or their willingness to work for extra income. Before they’ll go back to work, however, they’ll happily devote a majority of their time to cutting waste or reducing expenses.

They’re more focused on the challenges of their lifestyle than its luxuries (or lack thereof). While a very few frugal early retirees may occasionally cross the line into outright deprivation, nearly every ER practices some aspect of this technique. It’s also a very handy survival tool for a harsh economy, which we’ll discuss more in an upcoming post.

Early retirement finances will almost always be split among all four options. Many retirees still fondly recall the day in their working years when they updated their net worth spreadsheet and realized that they had enough to meet the 4% rule. Others had a lifestyle epiphany and began aggressively cutting expenses, saving every spare penny, and carefully tracking their progress.

A few have saved enough to pursue their avocation and happily take whatever payments come their way. A very few will spend years or decades traveling the world’s bargain countries or living a bare-bones lifestyle before settling down to a more traditional retirement in their dream location.

Chapter 6 of “The Military Guide” profiles two early retirees who represent both ends of the bell curve of military-transition experiences, and in two different centuries, but they share many common aspects. Both started their military careers intending to go all the way to a pension, but both became progressively disillusioned with the military and more focused on their families.

Unlike many civilian careers, both of them were forced into a transition decision by an impending transfer. They used the final months of their service to make their plans and then executed them. Once they’d made the transition they continued to control their expenses, save as much as they could, and grow their wealth.

One ER’s retirement is still based on the 4% rule, although he appreciates the value of dividends during a recession.  The other ER may use those systems someday, but for now he’s living on multiple streams of income and a frugal lifestyle. If both continue to grow their portfolios then they could attempt to live only on dividend income, but both have already won the game. Neither has any need to try to run up the score by taking on more risk to pursue greater wealth. Instead, they can continue to enjoy their lives amid the security of knowing that they have enough.

Their examples can help you tailor your own transition to your preferences and circumstances. Finishing 20 years of active duty may seem like the simplest financial option for a COLA pension and cheap healthcare, but lifestyle and priorities may dictate otherwise.

The Reserves and National Guard offer a wide variety of options for work-life balance, but success depends on having complementary military and civilian careers that allow switching between the two for mobilizations or for lengthy, complicated projects. Completely quitting the military is another option. It offers transition benefits and the GI Bill to build on years of training and practical experience that is valued by all employers.

There are many paths to retirement. They involve different career choices, different investment assets, different budgets and lifestyles, and even different withdrawal methods during retirement. You will find your own path. And when you do, you can share your wisdom with the future retirees who read this blog!

Related articles:

The biggest benefits of a military retirement
When should you stop working?
Military retirement spending: how much will I need?
Don’t Gut It Out To 20: Leave Active Duty For The Reserves Or National Guard
How Much Is A Military Retirement Worth? Over One Million Dollars – How to Calculate the Present Value of a Military Retirement Pension
3 Steps to Retire Early on a Military Salary

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

Retiring on Multiple Streams of Income

Posted on December 15, 2010 by Doug Nordman

This topic isn’t tied to “The Military Guide” chapter on the Reserve/National Guard, but those military retirees frequently confront a retirement consisting of multiple sources of income. Veterans who retire from active duty will go straight to a pension, but Reservists/NG have to find some other source of cash flow between the time they apply for “retired awaiting pay” and their 60th birthday.

Here’s an example of a Reserve retiree who figures out how long to work and how to tap into the various sources of spending money.  For simplicity (and stable links to the reference websites) we’ll base these numbers on the military’s 2009 pay tables.

CWO2 Jane, age 40, has just completed her 20th “good year” of Reserve service.

She also has a civilian job, but she tentatively plans to retire from the Reserves at age 42. She’s going to continue working in her civilian career (for now) but she’s eager to retire from that, too– as soon as she can comfortably live off her assets and her pension(s).

She realizes that she’ll be able to completely retire somewhere between age 42 and age 65. Her confidence is boosted by knowing that at age 60 she’ll have the Reserve pension adjusted every year for inflation, plus very affordable Tricare. She currently has good health insurance through her civilian job, but she knows that Tricare Retired Reserve is also available (at a price) if she needs it.

Jane has spent many hours on her detailed retirement budget. It includes her living expenses and premiums for high-deductible catastrophic health insurance before age 60, as well as the replacement costs of vehicles and major appliances. She’s even added in a couple of fantasy vacations and a new roof. She’s estimated her property taxes and state/federal income taxes in her 15% bracket, although her military pension is free of state tax. She projects a basic budget of $35,000/year (including taxes) but she’d prefer to have at least $40,000/year to support travel and other entertainment.

She just received her official Reserve verification that she’s served 20 good years with a total of 3800 points. The maximum longevity pay at her rank is W-2>24 or $4935/month.

Her pension will be based on the military pay scale in effect at age 60, 18 years from her retirement date. Assuming that military pay keeps pace with the Employment Cost Index and the Consumer Price Index (admittedly a big leap of faith), in 2009 dollars she’ll get a pension (with a COLA) of 2.5% x (3800/360) x $4935 = $1302/month or $15,627/year.

Jane has no idea what future inflation will be but she knows that 20th century inflation averaged about 3.5% per year.

She estimates that her Reserve pension’s COLA will be the same as the CPI. To be conservative, she’ll estimate that her spending will rise at the same rate as the CPI. (For the purposes of this example, it keeps the results in equivalent inflation-adjusted 2009 dollars. A retirement calculator or a spreadsheet will be able to handle different rates of COLAs and inflation.) She knows that if necessary she could always cut her spending to her basic budget.

In addition to her Reserve pension, Jane also has $250,000 in taxable accounts. Her conservative mix of stocks, bonds, and cash pays a long-term average of 5% per year, although that fluctuates. Since inflation is rising at 3.5% per year, she knows that her taxable account’s after-inflation “real” return is only 1.5% per year, and she still has to pay taxes on its gains when she withdraws the money. These taxes are part of her basic budget.

Jane’s civilian employer does not offer a defined-benefit pension plan– only her defined-contribution savings. She has $75,000 in tax-deferred accounts such as a 401(k), a 403(b), and the military’s Thrift Savings Plan. These accounts can generally be tapped without penalty after she turns 59½ years old, and she must begin required minimum distributions shortly after age 70. She can also make penalty-free withdrawals using the Internal Revenue Service’s rule 72(t) system of “substantially equal periodic payments”.

Because she doesn’t have to pay taxes on these accounts until she withdraws from them, she’s hoping to let them compound their tax-deferred earnings as long as possible. She’s invested these accounts in higher-return more volatile assets such as equity indexes in small-cap value and international stocks. She expects to receive a long-term result of 7% per year, or 3.5% per year after inflation (and before taxes).

Jane has another $100,000 in her Roth IRA. $50,000 of it comes from her 20 years of after-tax contributions. She can withdraw her contributions anytime without penalty, and she can withdraw the earnings without penalty after she turns 59½. Again she’s hoping to let her Roth IRA compound its tax-free earnings as long as possible because it’s also invested in volatile assets and will hypothetically reach a higher value.

Jane is entitled to Social Security as early as age 62.  If she starts distributions before age 67, though, they’ll be permanently reduced by as much as 25%. She plans to delay SS to at least age 67 and, if possible, age 70. Based on her current earnings record and the Social Security online benefits estimator, at age 62 she’ll receive $1050/month ($12,600/year), at age 67 she’ll receive $1400/month ($16,800/year), and if she can wait until age 70 she’ll earn $1700/month ($20,400/year).

Jane begins by estimating her lifetime annual income if she retires at age 42:

Age Income Shortfall Comments
42 $0 $40,000
60 $15,627 $24,373 Reserve pension only

At this point she’d need $40,000/year to maintain her ideal lifestyle. Although her $250K taxable account may continue to grow at 5%, $40K/year is an unsustainable withdrawal rate. If it continues to grow at a steady 5% per year then it might last seven or perhaps eight years. However, a bear market could cut her to less than five years, even if she drastically reduces her spending.

If she depleted her taxable investments by age 48 then she’d turn to her Roth IRA and her tax-deferred accounts. Her Roth’s contributions would give her another year of penalty-free withdrawals to make up her shortfall, but then she’d have to start withdrawing the rest of the accounts (through a 72(t) SEPP plan). The tax-deferred accounts would have grown during the years that she was spending down her taxable assets and her Roth contributions, but she’ll almost certainly deplete her Roth IRA and her 401(k)/TSP before her Reserve pension begins. That’s not going to work.

She realizes that her retirement is in jeopardy between ages 42 and 60. But when her pension starts, will she have enough for the rest of her life? Conventional wisdom (from the Trinity Study) claims that she can begin withdrawing up to 4% annually of her remaining assets (and raise that amount every year for inflation) for 30 years.

Age Income Shortfall Comments
60 $15,627 $24,373 Reserve pension only
62 $28,227 $11,773 Reserve pension + 25% reduction in SS.
67 $32,427 $7573 Reserve pension + full SS.
70 $36,027 $3973 Reserve pension + maximum SS.

A shortfall of $24,373 at age 60 requires a portfolio of $610,000 to support a 4% withdrawal rate ($24,373 divided by .04, or multiplied by 25). However, by age 62 she only needs a $295K portfolio to support that shortfall on a 4% withdrawal rate, and by age 67 it’s under $200K.

At age 42 Jane will only have $425K in assets, but she can see that by age 62 she’ll have more than enough to retire even if she doesn’t save any more in her taxable or tax-deferred accounts. If she continues working (and saving) for the next 18 years then she’ll be able to retire no later than age 60, when her Reserve pension starts.

There’s a safe haven between the two extremes: (1) retiring from both the Reserves and her civilian job at age 42 and consuming her investment portfolio, or (2) working until age 60 and retiring on several streams of income.

The simplest option would be to:
– continue serving in the Reserves and her civilian career until her portfolio is big enough to bridge the gap. Even another five years of Reserve drills would add at least 375 points to her total and 10% to her pension.

Another option might be to:
– invest a portion of her portfolio in rental real estate to generate additional cash flow, although landlording involves additional risks.

A conservative option might be to:
– continue her full-time civilian career and Reserve drilling for another 5-10 years before retiring from one, and then consume her portfolio until her Reserve pension starts (with employment income and enough portfolio left to make up the shortfall).

A fourth option would be:
– working part-time, or on a series of temporary jobs, to allow her to semi-retire and enjoy some extended travel before age 60.

Jane can fine-tune her retirement date by running spreadsheets and retirement calculators. (See the Recommended Reading section for websites and other products.) The biggest factor under her control is maximizing the amount she saves in her tax-deferred and taxable accounts. Another factor is gradually reducing the equity risk of her taxable account when she gets ready to spend it– she doesn’t want to have to cash out in the middle of a bear market. Finally, staying healthy is a big incentive to reduce the cost of health insurance. She can’t do anything about her genes or catastrophes but she can maintain healthy habits and avoid “lifestyle” syndromes like tobacco or weight gain.

In this example, Jane could afford to retire in her mid-50s and perhaps even in her late 40s. Her situation is a simplified version of real life. Real-life planning becomes much more complicated when raising a family, paying a mortgage, and saving for a kid’s college education. It becomes even more difficult if a divorce, a stock-market meltdown, or prolonged unemployment derails the plan. The key to success is deciding what brings value to life– spending money or saving it for retirement. There’s a balance between the two, just as there’s a balance between a Reserve/National Guard career and a civilian career. We’ll revisit that work-life balance concept in a later post about saving for early retirement.

Related articles:

Military retirement spending: how much will I need?
Retirement finances: what will I spend?
Retirement budgeting

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Posted in Military Retirement | 6 Comments

Mobilizing with the Reserves and National Guard

Posted on December 2, 2010 by Doug Nordman

When you’re trying to balance the Reserves/NG with a civilian career, an extended deployment can be a crippling drawback– or a unique opportunity. For active-duty servicemembers, deployments are just another part of the lifestyle that includes extensive support and assistance for both the deployer and their families. During the Cold War, Reserves/NG rarely deployed and family support (if any) was arranged by their unit instead of being a part of the active-duty system. Since 9/11, however, the Reserve and National Guard have been heavily mobilized to support worldwide operations. It’s now expected that the old system of “one weekend a month and two weeks a year” will also include “deployments every five years”.

12-15 months away from family and civilian career can be managed– or it can wreak havoc on the unready.  Families may not be aware of the support offered by the military, or they may not understand the best way to tap into the resources. Civilian medical insurance may be disrupted by shifting to military healthcare. Employers are required by federal law to protect Reserve/NG pay and seniority, but a prolonged absence may still affect their working conditions and career opportunities. Servicemember’s skills can decline while projects move on without them and clients find other support. It’s particularly difficult for entrepreneurs to keep their customers.

A relatively new benefit encourages Reserve/NG deployments with an earlier pension. (Note that veteran’s groups and some members of Congress are lobbying to backdate this benefit to 9/11 or even earlier.) With a year or two of deployment for every decade of service, the result is that a Reserve/NG member could start their pension (and their healthcare benefits!) in their late 50s.

Avoid these other civilian-military pitfalls

You can balance a civilian career with the military commitment, but both sides have to make accommodations. Sometimes the arrangement is harmonious, especially if your career is in federal/state civil service or a military-support field. Other times you’ll be tugged in different directions– particularly if you’re a small business owner or a self-employed entrepreneur. Federal laws (and many states) protect your veteran’s rights to employment and job status but there are subtle variations of cooperation, compliance, and enforcement. When your upcoming National Guard deployment may impact your civilian career’s opportunity to manage a special project, it’s important to let your coworkers know. You don’t want your occasional absence to cause a disruption and leave behind feelings of confusion or betrayal. If an adversarial relationship develops, everyone is on the losing side.

The most important aspect of balancing the two lifestyles is a detailed knowledge of your civilian-military leave policies. Your military chain of command will know what you rate but your civilian boss will probably need your constant support and education. You may be able to take a leave of absence from your civilian job, or meet your military requirements on weekends and holidays. You may also be required to use vacation days to complete your Reserve duties. It’s an awkward compromise and it won’t always seem fair.

You and the Reserves/NG can also support your employer. Schedules and deployments are usually set months in advance and can help you coordinate with your civilian staff. If your employer is particularly supportive of your Reserve commitments, then put them in for an award! Advertise every win-win situation. Show off your military skills whenever they can be applied to your civilian job, and look for opportunities to use your civilian skills in your military leadership and management. Your experience in each world may help you get promoted in the other.

Family life is another challenge. If you’re drilling then you’ll miss a family weekend every month, perhaps with travel, and you’ll be working at least two weeks a year in uniform– perhaps with more travel. National Guard units occasionally go on travel to train for weeks and then deploy for months. If you’re raising young children or spending extra time with aging parents, then you may have to transfer to inactive status for a few years until you can be flexible and mobile again. While you’re deployed, spouses may have to deal with the military and healthcare bureaucracies on their own. It’s important to make sure you both know how to find the information, assistance, and benefits that you’ve earned.

The good news about the higher deployment tempo of the Reserves and National Guard is that the active-duty military units have learned how to integrate more closely than ever with their counterparts. The military’s active-duty family support system is also much more attuned to bringing the Reserve/NG families onboard for the deployment, and showing them how to optimize their military benefits. In addition to your service’s websites, Military.com also maintains a large archive of benefits guides, recommended links, and discussion forums.

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