So, you want to be a millionaire? Here’s a surprising answer: Join the military.
A growing number of military millionaires are proving financial independence and the military lifestyle can go hand-and-hand. But like six-pack abs, a bulging net worth doesn’t happen without sacrifice and hard work.
Navy veteran Doug Nordman, author of the “Military Guide to Financial Independence”, has crunched the numbers and determined a 15% contribution rate to the Thrift Savings Plan (TSP) is the golden ticket to a million-dollar retirement nest egg.
“An active-duty E-3 can grow a million dollars in their TSP,” Nordman said, “but they have to start today.”
Using a calculation that includes a 1.6% average annual military pay raise, 6% annual return on investments and typical time-in-grade promotions, Nordman’s super-saver service member would retire from the military as a 40-year-old E-7. By age 59, their TSP account would have grown to more than $1 million, despite zero new contributions after leaving the military.
Military financial experts maintain contributing to the TSP–the military’s version of a 401(k)-retirement account–is step one on the road to building wealth. By contributing a minimum of 5% of base pay to the TSP, young service members maximize the Blended Retirement System’s (BRS) 5% automatic and matching contributions, leaving no “free money” behind.
“Imagine having an extra 5% in tax-free retirement savings every year,” said Navy reservist Carol Pittner, who left active duty in 2019. “That’s exactly what the BRS does for everyone in the program.”
Because wealth-building takes time, starting early is key. A 25-year-old service member who starts saving $100 a month in the TSP or an Individual Retirement Account will end up with nearly twice as much money at age 65 as someone who waited until age 35 to begin contributing an identical amount monthly.
“Every self-made millionaire started with zero,” says Air Force veteran Chris Lehto, author of “Military Millionaire”. “If you don’t understand and appreciate the power of exponential growth, you don’t start saving and instead spend your money on depreciating assets” such as expensive cars, televisions and other lifestyle-enhancing toys.
Lehto suggests service members track their net worth monthly in order to stay motivated and “keep moving your net worth needle forward.” He’s a proponent of contributing at least 10% to a Roth TSP stock or age-based Lifecycle fund, which have low annual fees and allow tax-free withdrawals at civilian retirement age. He also has boosted his own net worth by converting two homes into rental properties.
Active-duty Marine David Pere is the founder of From Military to Millionaire — a blog and podcast that helps service members build wealth through real estate investing, personal finance and entrepreneurship. Pere acknowledges enlisted families have a greater challenge finding “extra” money to invest in the TSP or real estate, but he maintains most people can unearth some additional money that could be earmarked for investing.
“Cut out the unnecessary expenses,” he said. “If you have a Disney+ membership you don’t need, maybe you get rid of that or, more importantly, if you have a $200 a month cable package, but you could spend $70 a month through a Wi-Fi connection on a Smart TV, that’s the way to go.”
While the BRS means almost everyone joining the military will take retirement savings with them whether they serve three years or 30 years, those retiring from active duty with a legacy “High-3” pension have an unprecedented opportunity to achieve financial independence. The Department of Defense’s 2018 Statistical Report on the Military Retirement System estimated the projected value of an E-7’s retired pay at $758,603 while an O-5’s payout reached nearly $1.49 million.
“New [military] retirees currently have the richest retirement system ever,” said financial advisor Merle Jones, who founded Missouri-based Jones Investment Group after retiring from the Army as a command master sergeant. “The variable nobody ever calculates is the VA (Veterans Benefits Administration) disability, and this generation of retirees has been at war for 20 years.”
Jones points out today’s military retiree with a 100% disability rating receives more than $3,100 per month in tax-free income–the equivalent of a $900,000 taxable annuity. Married retirees with dependent children would receive more.
Nordman, however, maintains the biggest benefit of saving and investing early in your military career is the freedom to walk away before reaching the military-retirement age.
“Saving for financial independence gives you choices, and one of those choices is taking your military career one obligation at a time,” he said. “Stay on active duty as long as it’s challenging and fulfilling, but when the fun stops, then it’s time to consider transferring to the Reserves or National Guard. You can achieve financial independence without a military pension…Don’t feel forced to gut it out to 20.”
Where to turn for advice:
- Military One Source: Money Matters Course
- USAA Financial Readiness Advice
- Local base or installation Financial Readiness Programs
- Certified Financial Planner™ Jeff Rose, author of Soldier of Finance
- Ryan Guina, founder and editor of The Military Wallet