Explaining the Military F.I.R.E Movement
1. Maximize your TSP
2. Save in a Roth IRA
3. Have an emergency fund
4. Rental real estate
5. Open a brokerage account
6. Pay down debt
Being enlisted in the military provides a unique benefit to those that want to F.I.R.E. or Financial Independence Retire Early movement. This is one of the few professions where you can potentially get lifetime income and retire at age 40 if eligible for the military pension serving 20 years. However, the unfortunate news is the pension will cover about half of your pay if under the old High-3 and around 40% under the new blended retirement system or BRS. As a result, you need to find our sources of income.
What are some of the other things you can do to maximize your income to get to F.I.R.E?
1. Maximize the TSP contributions. As you know, the military matches 5% in your TSP under the new blended retirement system or BRS. Therefore, you should contribute at least this amount to the TSP, but if under 50, you should max out the TSP to $19,500 in 2021. In addition, it is recommended that you pick an aged-based Lifecycle (L) fund. The lifecycle funds are designed to be more conservative when approaching retirement and more aggressive at your military career savings stage.
2. Save additional money in a Roth IRA. Roth IRAs are an excellent way to put money that grows tax-free and gets you tax-free distributions. You can always pull the principal out of the Roth. The recommendation is to put up to $6,000 in a Roth IRA in 2021, if under age 50. Remember that there are income limits on contributions to a Roth IRA contributions. If you exceed the income limits, do a backdoor, Roth.
3. Have an emergency fund of 3-6 months of living expenses in a high yield savings account. To get the highest interest rate look for online banks that are FDIC insured. They typically offer higher interest rates that you can take advantage of compared to a traditional brick-and-mortar savings account. Not all savings accounts are the same, and many national banks offer very low-interest rates. These online banks can control costs and give you higher interest rates.
4. Get sources of passive income. To generate more income in retirement or financial independence, you can do this with passive income. For example, rental real estate is a popular choice for the military. When you are stationed on a certain base and purchase a home in the community, you can rent out the place to generate passive income when you leave the community. Hire a property management company to collect the rent while you are restationed somewhere else. You can always come back to the community and live in the house.
5. Open an individual brokerage account. With money beyond your emergency fund and retirement savings, it is wise to open a brokerage account and invest the rest of the money. Nowadays, there are many low-cost, easy options such as Robo Advisors. With a Robo Advisor, you fill out an online survey and specify how much you want to contribute, and a portfolio is designed and rebalanced for you.
6. Pay down any debt. It is strongly recommended before you do any investing in brokerage accounts to pay down any outstanding debt. Pay off all credit cards each month in full. The priority should be to pay off the highest interest credit cards or debt first. If you have too much debt to manage, you could consolidate debt and get a lower interest rate by combining the individual loans. Make sure you create a budget and save at least 20% each month from your paycheck. If you want to F.I.R.E., you have to make many sacrifices, which means that savings more know to live in financial independence in the future.
The F.I.R.E. movement is, in my opinion, is about being able to make choices and not having to worry about money. The main point of this blog post, we want our money always moving and generating the best return given our risk tolerance. Having money parked in a low-yield savings account will not enable us to maximize the return and possibly retire early. On the other hand, not having to pay down any debt will not enable financial freedom. Talk to a financial planner to learn more about how to F.I.R.E after your military career. Click on the contact page below to schedule a free 30-minute consultation.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.