Please join me in welcoming Spencer for a special guest post today about reaching financial independence while in the Air Force. Spencer writes at the Military Money Manual about achieving financial independence before age 40 using his military pay and benefits. You can find him on Facebook, Twitter, Pinterest and Google+. Let me know if you would like to guest post on RFI.
The dream of financial independence is not just limited to jet-setting, rock-star bloggers who make millions off of their websites, rental properties, and investments. When you serve in the US armed forces, you are in one of the best professions for achieving financial independence or early retirement.
Military service is never easy. There’s the constant deployments, TDYs (temporary duty assignments), separation from family and friends, low pay, long hours, training, and harsh combat conditions. However, you can use your time in the service to save a nest egg, invest, and better yourself through the benefits offered to military servicemembers.
While you could always serve for 20 years to receive your military pension and retirement benefits, less than 15% of military servicemembers make it to that lofty goal. A military retirement is the easiest way of achieving financial independence, but it’s a long, long road to 20 years of service, especially in today’s environment of budget cuts and personnel reductions.
The three best opportunities to reach financial independence while you serve are:
Deployments and TDYs
Saving and investing in unique military investments
Taking advantage of your military education benefits
Military Deployments and TDYs
Deployments can be the greatest boost to your financial situation. At no other time in your life will your expenses be so low and your income so high. While deployed, your housing, food, and entertainment are free. You don’t have to pay to commute to work and you don’t have a cell phone bill to pay.
Your income is tax free, you have additional pays like hardship duty, hostile fire, and family separation allowance. With this extra income and expenses near zero, this is the time to save and invest in a big way.
While you’re deployed, you need to max perform your Roth TSP and Roth IRA contributions. Because your income on deployment is not subject to federal income tax, you can avoid paying taxes on this income for the rest of your life.
By depositing the untaxed, deployment income into any of the Roth investment accounts, the money goes in untaxed, grows untaxed, and then can be withdraw after age 59 ½ untaxed. That’s a powerful investment tool that no one else in the world has access to.
TDYs are an outstanding opportunity to save your excess income. Often times your per diem rate will be higher than your actual expenses. By investing your TDY money when it comes in or investing your regular pay and just living off of your TDY income, you can save much more than normal. When your TDY pay arrives, act like you never got it and put it away where you can’t touch it. You’ll be amazed at how fast those savings can grow.
Unique Military Investments
As a soldier, sailor, airman, or marine, you have access to some unique investment opportunities not available to anyone else in the world. This is especially true on a military deployment.
On deployment you gain access to the SDP, or Savings Deposit Program. This is a special account from the US Treasury available only to deployed personnel. It pays a guaranteed 10% annual return on up to $10,000. How does a free $1000 a year sound? Pretty good to me.
As a servicemember, you are able to deposit up to $17,500 per year into the Thrift Savings Plan, or TSP. This is the government version of a 401k. It’s offered in two flavors, Roth TSP or Traditional TSP. When you contribute to the Roth TSP, you pay your taxes up front, but your investments grow untaxed and can be withdrawn untaxed after retirement age (59 ½). In the Traditional TSP, your pay is untaxed now, but is taxed when withdrawn.
I prefer the Roth TSP, due to the amazing tax free opportunities afforded to deployers. Additionally, tax rates on military pay are already absurdly low, due to much of your income coming in the form of untaxed allowances (BAH, BAS, etc).
The TSP is also the lowest cost investment vehicle available. Many people love Vanguard for their low, low cost mutual funds and ETFs. The TSP offers funds at 1/10th the cost of Vanguard funds. Pretty impressive, and exclusively available to you, the US servicemember.
Military Education Benefits
There are many education benefits offered by the military. Three of the most popular are:
The Montgomery GI Bill or Post-9/11 GI Bill
ROTC, the Military Academies, or Loan Repayment Program
The GI Bills are Veterans Administration (VA) sponsored programs that help veterans achieve their educational goals. Both programs can be applied towards college degrees including bachelors, masters, and PhDs. Technical courses, such as flight training, as also eligible. The GI Bills are designed for servicemembers to use after they separate or retire.
Up to 36 months, or 4 regular school years, of benefits are available under both schemes. Under the Post-9/11 GI Bill, students receive $1000/year in book stipends, a monthly housing stipend, and their tuition and fees paid for, up to the amount for an in-state student at a state school. Many top universities also offer a “Yellow Ribbon” program, where they give veteran students grants to make up the difference in tuition costs.
Tuition assistance is money offered while personnel are on active duty. Up to $4500 per year may be available to you to get your degree. There are almost no ineligible schools or colleges. Most servicemembers find that online courses work the best with their busy schedule.
Free College Degrees from the Military
Finally, a free or heavily discounted university education is available to those who volunteer to enroll in ROTC (Reserve Officer Training Corps), attend one of the military Academies, or commission through the Officer Training Schools (OTS).
ROTC students attend regular civilian colleges and universities and take one extra course every semester. They attend a 30 day field training exercise between their 2nd and 3rd year of college and when they graduate they commission as officers in their particular branch. In exchange for college scholarships, sometimes worth up to $50,000/year, the ROTC students incur a 4-10 year active duty service commitment. The length of commitment is determined by the job they are selected for after commissioning.
The Academies offer free education to all students in exchange for a service commitment, similar to ROTC. The Academies are frequently ranked at the top of many college guides and have strong engineering departments.
The Loan Repayment Program is sometimes offered to those who volunteer to attend Officer Candidate or Officer Training School. These programs usually offer loan repayments up to $20,000 per year served. So if you graduated college with $60,000 in debt, after 3 years of service your student loan burden will be completely paid off, plus you’ll be getting paid as well! This is a huge incentive, especially for medical students, who can accumulate hundreds of thousands of dollars in student loan debt.
Using your education benefits can set you up for a great career either in the military or after you separate/retire. If you have the time and the motivation, don’t let these benefits go to waste!
Military Financial Independence
Becoming financially independent before you reach your 20 year retirement should be doable while still maintaining a rich standard of living. I’m currently on a quest myself to achieving financial independence before I turn 40 years old, all while on active duty status in the US Air Force.
By using my ROTC benefit in college, I was able to graduate college with half the debt I would have otherwise incurred. On my last deployment, I managed to save thousands of the extra tax-free income I received and pay down my USAA Career Starter Loan. I currently have my SDP maxed out and just this year started maximizing my Roth TSP contributions.
You can do all of this and more. Use your time in the service to set yourself up for a lifetime of financial freedom!
This post was featured on the Carnival of Financial Planning, thank you!