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Military investment advice I wish I'd had 25 years ago
Old 06-04-2007, 03:58 PM   #1
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Military investment advice I wish I'd had 25 years ago

What would you tell a new military officer to do with his money?

My nephew the Army Ranger is a 25YO shiny new 2LT enjoying his 30 days of free leave before a 12-week leadership course. After that he starts his "real" infantry training followed by Ranger School redux.

Since he's already wearing a CIB I don't think he'll be very challenged during the next three-four months, and he's asked for my investment advice. He's smart enough to eventually learn this stuff on his own but I find myself wanting to pay forward what I wish I'd known a quarter-century ago. Whether he uses it or not is up to him.

His investment profile is essentially "set & forget" and he can handle extreme chaos volatility. He'll be too busy during the next couple years to spend time on finances, and because he won't have many spending opportunities the cash will pile up faster than he can figure out where to put it. He's earning about $2500/month base pay plus another $700/month in tax-free allowances for housing & food. Pay raises will be ~3%/year and he'll promote to O-4 in the next decade, which will loft him to at least ~$80K/year in today's dollars.

His short-term plan is to apply for Special Forces training, serve out his five years, and then take it one tour at a time. If he's enjoying himself then he'll try to stick around for a career. If he's not happy then he'll take his skills to the nearest security-training company for a different career. If he survives then his prospects for future employment are pretty certain and his paychecks aren't likely to be interrupted.

He has some extra cash that he could put into a Roth IRA and he could leave $5K in a money market for rental & utility deposits. He already has a beater car but he's thinking of upgrading to a 4WD pickup so that the other Rangers don't make fun of him. (At least he's planning to buy a used one!) He has good insurance for his car & property with USAA & Armed Forces Insurance.

He's concerned that the housing market will run away from him (not too likely in Forts Benning or Campbell) so he was relieved to hear that he shouldn't buy a house until he knows he'll be keeping it for at least five years. He'll be away so often that a house would just be a liability and he'll probably find it easier to share a rental with roommates.

He's just signed up for the TSP again (West Point cadets weren't eligible) and I suggested that he contribute at least 10% and try to boost it to 25%. The 2007 TSP contribution limit is $15,500 so he won't hit it for a few more years. (I also recommended that at least half of every promotion should go into the TSP.) Since he's young & single I advised splitting his TSP contributions between the small-cap "S" and international "I" funds. No bonds.

His Roth IRA could go with Fidelity or Vanguard in an international or small-cap value index. He'll use his PenFed account to buy their CDs. $5K is overkill for a 2LT's emergency fund but he'll probably be saving up for that truck for the next 12 months.

In a couple years, after he piles up a stash beyond the minimums and if he gets bored with small-cap & international, I'd suggest large-cap dividend or emerging-market index funds. As a young single guy he can stay 100% equity and not worry about bonds for a very long time. (And if he looks like he'll get a military pension then I'd tell him to forget about bonds anyway.) Otherwise I think his main focus would be LBYM (not hard with his lifestyle) & putting away as much as he can.

He already has his copy of "Work Less, Live More." (Thanks, Bob!) If he wanted to read more then I'd suggest "The Bogleheads Guide" or "Four Pillars". The biggest dangers I could see would be day-trading penny-stock buddies or an insurance agent.

Gosh, this seems almost too easy-- there must be a catch. Any other suggestions?
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Old 06-04-2007, 04:18 PM   #2
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Nords is the just a ploy to make us all feel guilty about not passing on good sound financial advice to our nephews and nieces? Well you've suceeded! (Although I did just give me nieces some concrete advice about what do with the money from the sale of their house.)

Honestly, I can't think of any suggestions, other than to reminded him, that places like Hawaii are much better place to live than work, and that requires savings when you are young!
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Old 06-04-2007, 04:27 PM   #3
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Nords -IMHO it is foolhardy to avoid bonds even at a young age. Placing 20%in bonds/fixed income lowers volatility (alot!) and only lowers total returns minimally. With all the small and Int'l exposure you are recommending he needs some fixed so that in the event of a downturn he doesn't lose faith.
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Old 06-04-2007, 04:30 PM   #4
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You forgot beaver-cheese futures...

Seriously, sounds like you have done a pretty thorough job. If he marries, there will be a whole lot more things to tell him, but for now he might as well just let the money pile up in volatile, high return stuff.
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Old 06-04-2007, 04:42 PM   #5
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Originally Posted by clifp View Post
Nords is the just a ploy to make us all feel guilty about not passing on good sound financial advice to our nephews and nieces?
Never happened to me before either! What surprised me the most is that he asked me-- and then he listened. He's doing better than the rest of that branch of the family tree.

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Honestly, I can't think of any suggestions, other than to reminded him, that places like Hawaii are much better place to live than work, and that requires savings when you are young!
I taught him how to surf when he house-sat for us last summer ("Ranger Security Services"). He's totally corrupted and he's bringing the girlfriend back here this Christmas to finish corrupting her too.

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If he marries, there will be a whole lot more things to tell him, but for now he might as well just let the money pile up in volatile, high return stuff.
Yeah, that's a whole 'nother bunch of problems that I'm probably going to delegate to my spouse. At least he's stopped dating sailors but now he's dating a classmate 2LT who's joining the MPs. I think one of the reasons they want to visit (other than "Hawaii during winter" and "surfing") is to eyeball another military marriage. I'd tease them both but he's probably already shown her how to snap my spine like a dry twig...
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Old 06-04-2007, 05:52 PM   #6
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Nords,
Sounds like you'v covered all the bases on this one. Just a couple of suggestions:
1. Stay away from First Command, even if they send a retired 0-6 in to tell him how to invest your money. Not sure if the fee structure is the same but they were charging officers half their contributions the first year. For instance, if you contributed $300 per month to their investment vehicle they would take $150 per month for the first year as a 12b-1, admin fee, etc.

2. If he does marry the LT then advise him to save her check and invest it. That's what we did and it made a BIG difference in the FI department in relatively short order.
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Old 06-04-2007, 06:13 PM   #7
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Nords--A couple of things and a question.

1. Won't he be forced to buy a savings bond a month or doesn't that happen anymore? Not a bad thing really.
2. FIDO and Vanguard only. Per ARIF, none of the multitudes of 06/07's are selling anything worth a damn.
3. Get acquainted with USAA.
4. Regardless of how many years you have in, save like you'll never see the golden retirement.. S**t happens.

The question:: Does uncle provide a match for TSP and if so, how long to vest?
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Old 06-04-2007, 07:33 PM   #8
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The question:: Does uncle provide a match for TSP and if so, how long to vest?
I think I've heard that civilians get the match, but not active duty.
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Old 06-04-2007, 07:52 PM   #9
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I think I've heard that civilians get the match, but not active duty.
Oh I thought Uncle Nords was going to be doing the matching
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Old 06-04-2007, 08:04 PM   #10
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1. Get a no-annual fee credit card, preferably with some cash back or rewards feature. Charge everything he possibly can in the way of ordinary living expenses (gas, grocery, etc) to the card. Pay in full every month. This should help build his credit score as he developes a history of timely payment.

2. Keep the beater car as long as humanly possible. Save the money for the new (used) car. If the financing deal is good enough (and if he does #1 above, it should be), take the financing and invest the cash instead. Learn how to calculate which is better.

3. Resist the temptation to spend big bucks on a wedding. Go on a nice honeymoon instead.

4. To the extent he needs furnishings/housewares for a house or apartment, Craigslist and the Goodwill are great places to start. No need to buy anything new.
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Old 06-05-2007, 12:14 PM   #11
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Nords you've given us all the cliff notes version of the book you're writing for retirement from the Military to permanent retirement. I applaud your insite and advice.
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Old 06-05-2007, 01:48 PM   #12
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Thanks, everyone. I thought I was missing something obvious but this gives us a great list! It's a lot easier to put it together on this board, aided by hundreds of keen-eyed observers, than to do it on the fly during an East River booze cruise with a frosty beverage in my hand...

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Originally Posted by JPatrick View Post
Nords--A couple of things and a question.
1. Won't he be forced to buy a savings bond a month or doesn't that happen anymore? Not a bad thing really.
2. FIDO and Vanguard only. Per ARIF, none of the multitudes of 06/07's are selling anything worth a damn.
3. Get acquainted with USAA.
4. Regardless of how many years you have in, save like you'll never see the golden retirement.. S**t happens.
The question:: Does uncle provide a match for TSP and if so, how long to vest?
The savings bond program's still around, along with the relentless Combined Federal Campaign drive, but you're not supposed to coerce people into signing up for either one. No matter how important it becomes to your evaluations...

He's with USAA for auto insurance, and he may go with them someday for a mortgage. Or PenFed may give him a good deal. He put most of his graduation gifts straight into one of their CDs. He also has a $30K "cadet car loan" at 1% interest from some fan club (insurance company?) that's not due for a few years, and instead of replacing his beater he put the money in the PenFed 6.25% CDs that they offered a while back.

The TSP legislation was written with an option for military matches but DoD hasn't picked that up yet. There's also talk of allowing bonuses to be deposited into the TSP (up to the IRS limit which IIRC is $45K/year) but that hasn't come to pass either. Considering that DoD paid out over $1B in retention bonuses last year, including $25K/year multi-year contracts for both submariners and SF, matches may start looking pretty cheap.

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Oh I thought Uncle Nords was going to be doing the matching
I may feel a bit guilty that he didn't get to join the submarine force and do 20 years without combat pay, but I don't feel that guilty!

OTOH if he was a publicly-listed corporation I'd be buying IPO shares...

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1. Get a no-annual fee credit card, preferably with some cash back or rewards feature. Charge everything he possibly can in the way of ordinary living expenses (gas, grocery, etc) to the card. Pay in full every month. This should help build his credit score as he developes a history of timely payment.
2. Keep the beater car as long as humanly possible. Save the money for the new (used) car. If the financing deal is good enough (and if he does #1 above, it should be), take the financing and invest the cash instead. Learn how to calculate which is better.
3. Resist the temptation to spend big bucks on a wedding. Go on a nice honeymoon instead.
4. To the extent he needs furnishings/housewares for a house or apartment, Craigslist and the Goodwill are great places to start. No need to buy anything new.
Good, I forgot that aspect of LBYM. He had three years enlisted service before USMA so he's seen a lot of people with credit problems. That raises a good point-- Fidelity's 1.5% rebate card is another point in their favor. I think he'll call them & Vanguard and go with whoever gives him a better experience.

I think he has everything else figured out. His Saturn is at least 10 years old and missing most of its headliner (to say nothing of a few other internal trim components) but the engine runs well. I like his current GF a lot, she seems pretty sensible about LBYM, and a dual-military income will be a huge boost to their futures. After four years at USMA their personal living standards are pretty low. And I think he'll do fine at finding a cheap truck-- his real vices are Garmin gear & fighting knives.

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Nords you've given us all the cliff notes version of the book you're writing for retirement from the Military to permanent retirement.
Thanks, the writing is actually pretty easy. Paring it all down to its essentials is the hard part!

BTW I saw a great USCG bumper sticker at the beach yesterday: "You sink 'em, we save 'em"...
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Old 06-09-2007, 09:17 AM   #13
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I think they should issue your upcoming book to folks in bootcamp and OCS (what exactly is knife and fork school officially called? ) Basically as an addendum to the Bluejackets manual! (and equivalent to each branch of service)
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Old 06-09-2007, 09:53 AM   #14
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The only advice I wish I would have taken when I was a young man in the military was to put away a regular amount into mutual funds and leave it there until I retired.

But you hit all the right areas. Would only add that if he is planning a career, he can afford to be a bit more aggressive with his long term money because he will have some form of military retired pay and medical.

Would also counsel him to increase his life insurance above what the military offers, because of the unfortunate but realistic increase in mortality risk. He should figure out how much he would want to live on when retired, and get a term policy from USAA that provides that for his future family.
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Old 06-09-2007, 12:15 PM   #15
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I think they should issue your upcoming book to folks in bootcamp and OCS (what exactly is knife and fork school officially called? ) Basically as an addendum to the Bluejackets manual! (and equivalent to each branch of service)
I've seen PROCEEDINGS ads for the "$avvy $ailor's Guide" and the "$avvy Officer's Guide" but I haven't found them in a library or gotten around to purchasing them yet. I think those are available at the commands, even if they're not necessarily distributed to each student. Heck, I'd donate a couple copies to every transition class just so that certain restless students would settle down and read them instead of pestering the instructors with inconvenient questions. Not, of course, that I ever participated in such activities.

OCS is "Officer Candidate School", but "knife & fork school" usually refers to OIS ("Officer Indoctrination School")-- a shorter course with more leadership and less of the basic "welcome to the military" curriculum. It's mentioned on page 93 of this handy 174-page summary of enlisted commissioning programs (OPNAVINST 1420.1A CH-3).

You are really gonna miss the heck outta this stuff when you retire!
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Old 06-11-2007, 12:54 AM   #16
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Originally posted by Nords: You are really gonna miss the heck outta this stuff when you retire!
Nords, Thank goodness I'll still have TAP/Mini TAP to instruct

Your nephew definitely respects your word! Honor in the best sense.
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Old 06-11-2007, 05:50 PM   #17
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Since he's young & single I advised splitting his TSP contributions between the small-cap "S" and international "I" funds. No bonds.
Probably too late for this suggestion, but anything wrong with the L funds? I would think L2040 would be just about perfect for him, unless maybe this is a taxable account. (I don't know how TSP taxation works.)
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Old 06-12-2007, 11:03 AM   #18
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Probably too late for this suggestion, but anything wrong with the L funds? I would think L2040 would be just about perfect for him, unless maybe this is a taxable account. (I don't know how TSP taxation works.)
The TSP is tax-deferred so that's not an issue.

There's nothing "wrong" with the L funds, but he can afford to take a more aggressive (high volatility but higher returns) risk profile for the next decade or longer. After 20 years I can't tell you which one will be ahead, but the odds are more tilted toward the S & I funds than toward the L funds-- especially in regards to the small-cap value premium and a declining dollar. And his probability of future employment is pretty high right now so I wouldn't invest in any bonds.

I'd hate to recommend that anyone jump into an S&P500 index fund right now, in which the 2040 fund is starting out fairly heavily. If he wanted large-caps I'd go with dividend payers.

Splitting among I & S is also a little more exciting than the boring ol' L fund, which will hopefully satisfy his testosterone-driven urge to liven up the process. It also personalized his upcoming lifestyle where he'll be spending quite a few years among international small-cap enterprises... hopefully in a constructive manner.
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Old 06-12-2007, 02:38 PM   #19
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1. Won't he be forced to buy a savings bond a month or doesn't that happen anymore? Not a bad thing really.
When I was a 2Lt in 1967, one of my duties as Savings Bond officer was to make sure that everyone in the company was signed up to save. Those that had not taken advantage of the opportunity had to come visit me and receive counseling as to why they should consider the bond plan. I think that the minimum was $6.25/month, but and an E1 was only making about $100/month.

I well can recall one private that staunchly refused to sign up because he and his family were big believers in investing in the stock market and he believed that all of his excess funds (no matter how small) should be saved and invested in the market, not a 5% savings bond.

I tried everything I could on him to get him to at least sign up for the minimum. I wanted 100% participation and he was holding us back. He finally caved and said OK. I was so impressed by his reasoned approach and enthusiasm for the stock market that I told him to forget it and continue to invest as he saw fit. We both walked away with big smiles.

I wonder whatever happened to that young man? Probably a Wall Street genus now who could buy me 5 times over!
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Old 06-14-2007, 02:05 AM   #20
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I used my time in the Marines as a enlisted man to save save save. I lived on base, which as you know is pretty much a free ride, and always ate on base. I pretty much saved around 90% of my salary every month, and even more if I was floating around on ship. Wearing the same kinda clothes everyday was great too. Even when I did party sometimes, overseas I could get a case of natural light for $2.50 at the time hehe.

Of course I was single during all this with no bills whatsoever also.
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