By Lee Sherman
Financial planning is important for every family but if you’re in a military family you must deal with a number of unusual challenges such as deployments, moves, and family separations that affect your finances. While there are many benefits, tax exemptions, and savings plans available to you for help, financial planners emphasize the need to use them to get your finances on a solid footing for the future. This isn’t the time to be thinking about spending. For example, the extra cash earned from combat pay could be stashed away in an emergency fund or invested.
You’re putting your life on the line for your country so one of the first considerations should be life insurance. Servicemembers have access to government-sponsored low-cost life insurance, Servicemembers Group Life Insurance costs just $24 a month for the maximum $400,000 regardless of your age, health or likelihood of being deployed. You’ll be automatically enrolled if you meet the coverage criteria.
For many, the military can provide a long and satisfying career. While it might seem a bit early to start thinking about retirement, especially if you’ve just joined the military, financial planners would tell you otherwise. If you expect to stay in the military long enough to earn a pension (20 years) you’ll want to start saving now.
Fortunately, servicemembers have access to a low-cost retirement-savings plan, the Thrift Savings Plan (TSP) that works in much the same way as private sector 401(k) and Roth 401(k) plans complete with matching funds. It charges around just 25 cents a year for every $1,000 invested, and you can choose from one of five index mutual funds (one dealing with government bonds, while the others track specific market indices) or another five target-date funds (referred to as “lifecycle” funds or “L Funds”) because they adjust the allocation mix of investments as you near retirement.
Contributing to a traditional TSP lowers your taxable income and any growth is tax-deferred for retirement. The Roth TSP works like a traditional Roth IRA. It won’t help with your current taxable income but you’ll be able to withdraw the money (with earnings) tax-free in retirement.
It sounds too good to be true but it definitely is and you shouldn’t sleep on it if you’re eligible. The military’s Savings Deposit Program gives you a guaranteed 10% annual interest on investments up to a limit of $100,000, compounded quarterly for up to three months after your return from active duty.
The Post-9/11 GI Bill can cover the full cost of in-state tuition and fees for a public college for up to 36 months (four academic years) or up to $17,500 per year for a private college of foreign school. If you’ve served for at least 36 months since Sept 11, 2001 you can either take advantage of this benefit yourself or transfer it to your children.
Other Tax Breaks
If you’re stationed in a tax-free state such as Florida or Texas but are transferred to a state such as California with high taxes, you can maintain legal residence in the former state and avoid having to pay state income taxes entirely. This also applies to your spouse even if he or she is not in the military.
There are many financial benefits of being in the military and using a financial planner that specializes in military clients may be helpful when reviewing your financial situation and planning for the future.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.