- Recently, a decorated veteran asked for my help in thinking about his transition to civilian life.
- Here are the eight steps that I recommended in financially planning for civilian life.
- Anyone could take advantage of each of these eight steps.
One of the most impressive people that I've had the honor of interacting with is a US military veteran preparing to transition into the private sector. He is a husband and father looking to his future after decades of service to our country. I, of course, was eager to offer what I could. This is what I told him.
First get out of bad debt. Investing is a topic only for people without bad debt.
It is good that you paid for your cars with cash, have zero debt that rolls over from month to month and pay off your credit card bill. I put that first. If someone has not already gotten to where you have, there is no point in discussing investing. If one of your soldiers has a credit card charging him 20% or - even worse - a payday loan (many payday lending branches are located near bases to take advantage of soldiers), all of their energy that they have to spend on their personal finances needs to be dedicated to getting rid of debt. Revolving credit card debt and payday loans are almost always mistakes. You certainly already know that. I am restating it to let you know how important I think that is because you are well situated to helping others. A lot of people I know in the Armed Forces are intelligent without necessarily being financially savvy, so you might find the opportunity to use this advice. Keep doing what you are doing in terms of avoiding debt and, if you ever get the chance, encourage those beneath you in the chain of command to follow this example.
Cost savings have 100% probability of working and are taxed at 0%.
You don't really have that much control over how much money you earn in a given month, so that makes frugality one of the most important factors in your financial life. Again, you've already made the right decisions here, but just to prioritize: if you waste money or marry someone who does, this whole exercise is pointless anyway. Decide what is important to you - such as travel - and then spend sparingly on everything else. If your wife does not work, make a point of expressing gratitude to her for keeping a tightly budgeted household. It doesn't always feel like an accomplishment to not spend money, but it has a huge impact over time. Keep doing what you're doing here too.
There will be a number of transitions between military and civilian life, for example paying for your food out of pocket. One thing I've found is that you can afford to buy really quite good groceries for less money than it costs to eat out at even fairly inexpensive restaurants. If either you or your wife enjoy cooking, it makes a big impact on the budget over time. I look back on old bills from past years and am aware of how much meals at restaurants add up. Even just shifting one incremental meal per week from a restaurant to your home will add up quite a bit through the years.
As for financial costs, it is important to recognize that the percentage of honorable, worthwhile people in the financial industry is substantially lower than in the Army. Many of the costs don't really benefit you at all (that is why I like index funds so much). Cost is one of the things that you really can control. So, that is something good about the DRIPS that you have done. It is also a good reason to trade sparingly. Every time you buy or sell a stock, the brokerage makes money but it does not necessarily benefit you. There are no natural advocates for passivity in this business. So you need to be your own advocate for not doing something new.
3. Tax-Advantaged Retirement Account
Max out all tax-advantaged accounts. Not doing so is stealing from yourself.
It is excellent that you are currently maxing out your Roth IRA and have been for many years. That is the third most important priority. Roth IRAs are terrific vehicles and not maxing them out is simply stealing from yourself. 100% of your soldiers should be doing the same. Besides the tax advantages, when you pay yourself by funding your Roth IRA, it is easier to be frugal because you lack convenient access to that money. As far as your allocating your Roth IRA, I would not advocate changing this allocation frequently. My first choice would be a passively managed index fund. If you have a good annual income, you can go a long way to being a good steward of that money through tax-advantaged accounts.
4. Emergency Fund
Six months is okay. One year is better.
What are your and your wife's combined annual expenses? This may be difficult to calculate since the Army is paying for so much for now. I think that you should have six months (I like a year but six months is okay) of cash in an emergency account that is not used for anything ever other than funds in an emergency. This should be in a federally insured bank account. The interest rate does not matter. What matters is that it is there if you need it. I think that this is a priority ahead of any taxable investments. Given that you've already checked off dealing with debt, frugality, and tax-advantaged accounts, this appears to me to be the first hole that I see in your planning.
5. Down Payment Account
If you want to own a home and you've already made it, don't risk it again.
After you have funded your emergency fund, you should consider having a federally insured bank account with at least enough money ready to fund a down payment on your retirement home.
6. Taxable Investments
This should be active only if you enjoy it and are good at it. Most people don't and aren't.
Are you interested in investing? Do you like researching stocks? If not, I would stick with passive index funds or ETFs. If you do, I would keep only a modest amount in your brokerage account to fund this hobby. You can keep an amount of money in it to take advantages of investment ideas without putting undue pressure on your overall financial life. I would suggest spending at least four or five years investing an account with about $25,000 in it to get a realistic view of your performance in various markets before putting more of your financial life at risk. This will offer some statistically significant data. But I would not worry about it or take any out if performance is poor. Instead I would just keep that same amount that you have now and get either 1) a profit or 2) a lesson.
Here is one area where you can be looser with the upfront dollars involved.
I believe that all of the time and money that you spend preparing for the marathon is all "free"… the shoes, the travel, and the hours. It will increase your life expectancy and your healthy earning years enough to pay for the whole activity. So if you like to run, then run a lot. Also, in my experience, it doesn't even cost me any time because if I go for a long run, then I have to be that much more disciplined about not wasting time the rest of the day.
For any new complexity that you hire, fire an existing complexity in your life.
You are already going in many different directions with your financial planning and you do not need any more complexity. In fact, you could easily just have a combination of cash and a single index fund and that would be enough complexity. At this point, for every new idea you come up with, I would consider getting rid of one current investment. As people get older, they tend to slowly add complexity. That does not make anything better or safer, just harder to organize and more prone to error.
You are going to have an exciting career in the private sector followed by a great retirement with plenty of travel. You will continue to be an excellent provider for your wife. However, none of that will be due to any of your stock picks. It will be because you eschewed debt, lived frugally, took advantage of tax-advantaged accounts, and minimized complexity, taxation, and costs in your taxable accounts. That is about all your financial life can offer in terms of its role in supporting a happy, healthy life.
I would be happy to talk about any specific stock ideas only if it is a topic that you authentically enjoy. It won't do you any good otherwise. Whether you buy five hundred shares of this or sell five hundred shares of that won't make the crucial difference between long-term success and failure. Read my articles about investing only if you like that sort of thing. Under no circumstance let any particular stock give you any anxiety. If it gets the least bit frustrating or emotional, then quit. The second you stop enjoying the process, simply liquidate your brokerage account and put the whole thing into a mutual fund (ideally an index fund).
This is an important topic to get right, but I don't have much to add to what you've already done because you've already made so many good choices. Had you made more mistakes, I would have much more advice. At the same time, it is only so important. Whenever we have an extremely good or bad day at work, I remember the following: if everything goes according to plan and I make a fortune in the markets, then I would head up to Maine, load my own rounds, hunt the woods, fish the lakes, split wood for the fire, go for runs in the mountains, and spend time with my wife and kids. On the other hand, if everything goes horribly wrong in the markets and I lose a fortune in the markets, then I would head up to Maine, load my own rounds, hunt the woods, fish the lakes, split wood for the fire, go for runs in the mountains, and spend time with my wife and kids. As my wife occasionally points out, I don't spend any of the money anyways, so it is just a number on a piece of paper with some varying number of zeroes.
I hope that this makes sense and is helpful in some small way. I'll send you my bill after you send me yours for defending our country for three decades.
Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.