This post is for my fellow veterans – those who have already retired, or are considering a military retirement; and are interested in living a life of financial independence as quickly as possible. We’re in a unique position, we’ll have a steady stream of income starting at a relatively early age (some of us are under 40). Depending on where you choose to hang your hat, maybe this will be all you’ll need – but more than likely you’ll want to keep working, if for no other reason than to keep from being bored.
So let’s say you decide you want a second job/career. First, let’s talk about how to determine your income need. Many of those I’ve spoken to were satisfied to have their employer pay them the difference between what they were making on active duty and their pension; without consideration for skills and/or education. Please be real about what your worth is.
When you enter the workforce, I think it’s best to pretend you do not have any other income; but rather take stock of what skills/talents you have and what those are going for in the “real world”. Glassdoor and Salary.com are two resources I’ve found useful over the years to establish a baseline income level for jobs I was interested in. The only exception I would generally make is if you’re starting a business from scratch – because then using your pension (and VA disability if you qualify) can help significantly.
Once you’ve done your homework and established what the job should pay given your skills and experience, that becomes the minimum base salary I recommend you accept. So what if it’s more than you need because you’re getting a pension – does this mean you can buy a bigger house or a more expensive car?! No – not if you’re goal is what I stated in the beginning; financial independence as early as possible. Instead, I’m proposing you save the entire amount, and not all of it in retirement accounts.
Let’s say your after-tax pension check is $2,000/mth ($24k/year), and you’re not receiving any VA disability. The first thing I would do would be max out your 401(k) contribution – which for those under the age of 50 is $18k/year. Here’s why I like this – it’s going to reduce your taxable income, and it’s not going to feel like you’re saving the full $18k because it’s pre-tax dollars. You can’t put your pension into your 401(k), instead you’re investing the money from your paycheck and using your pension to live. Because you’ll receive your pension on the 1st, and your 401(k) contributions will come out with every paycheck, you’ll want to make sure you’ve set a system in place to pay your bills in the beginning of the month with your pension check.
The remaining $6k I would put into a taxable brokerage account, I like Vanguard and Fidelity because they have low fees, but anywhere it can grow for the next 7 – 10 years taking advantage of the stock market is fine. How and where you invest will depend on your individual risk tolerance. If possible, I recommend making this an automatic withdrawal from your paycheck just like the retirement withdrawals; it’ll help avoid temptation to spend it elsewhere.
If you’re receiving VA disability, I would explore a different option – because it’s coming to you tax-free already. This money I would want to set aside in a Roth, either IRA or 401(k). If you’re income is too high for a Roth IRA and your employer doesn’t offer the Roth option, then talk to your advisor about using a taxable IRA and Roth conversions. My goal is helping you keep this money tax free. This strategy works just as well if you’re active duty and deployed in a combat zone receiving tax free pay – move your contribution to the Roth TSP option and increase it to the highest threshold you can stomach; but nothing less than an additional 2%.
These strategies will build your account values quickly, and the lower you can keep your living expenses the sooner you’ll become financially independent. I’m not against working, quite the opposite – I think I’ll work as long as I’m able to. But I believe we should work on our terms. Speaking for myself, after 10+ deployments and 5 years as a geographical bachelor, I’m done working on any terms other than my own – so it’s critical I do what I need to, to afford myself this freedom (and the same goes for you).