Dear Lieutenant, We Have Met
You might be thinking, “Hey, you’re some old geezer washed-up fighter pilot, and unless you still hang out at the club playing crud, we have not met.”
OK, I’ll give you that, but here’s the thing. I work with your parents and your grandparents, and they were you. I work with my own money, and I was you, so I have a pretty good sense of what your flight path looks like based on money habits when you’re a lieutenant versus outcomes when you’re a silverback.
Student Loan Lieutenant
There are a couple of different avatars when you’re a lieutenant that turn in different avatars when you’re a geezer like me. If you started as a lieutenant with student loan debt, there’s a really good chance you will not accumulate wealth and have lifestyle options as fast as your peers.
You can’t change the fact that you have student loan debt, and I wouldn’t wish it on anyone. And I do hope that it results in you having opportunities that you wouldn’t have had if you didn’t get to go to college, but if you aren’t looking at that student loan debt as an existential threat to your future, you should.
Every penny you pay to a student loan is a penny that cannot go to saving for houses, cars, your kids’ college, your own retirement, making memories, and your other goals. Yes, you may qualify for student loan forgiveness, and I’m a supporter of that program for low to medium-income households that truly engage in public service. Still, the program is also a political hot button, and so it’s always going to be at risk. It’s not a bad idea to create a side fund to pay off your loans if student loan forgiveness doesn’t pan out.
Don’t plan to keep them around and play interest-arbitrage games because the lack of free cash flow will have you taking on other debts to afford the same lifestyle as your peers. Get rid of your student loans fast.
If you are 25 and have a 25-year loan payment, you will be 50 and still paying on your student loans. Except that when you’re 50, I promise you, you’ll be thinking about retirement without a having significant retirement nest egg. You’ll be hoping to pay off a house one day, and you’ll have a big mortgage, and you’ll want to send your own kids to college debt-free, but you couldn’t save for that because you were paying off your own debt.
Lieutenant-Mobiles
American Society has a love affair with new cars and new car tech, and I’m part of the problem because I love new car smell too. Cars are a thief of wealth, especially if we rationalize the need for a new car versus a slightly used car.
Buying a car with debt today is easy, but sucking it up and saving for a car is hard. Unless the interest rate on a car loan is lower than what your crystal ball says is the return on cash over the life of the loan, you can’t plan to out-earn the interest you’re paying. (And you don’t have a crystal ball for interest rates anyway.)
An insatiable desire for keeping up with the car-Joneses, whether they live next door or in your head, will keep you in the cycle of paying car payments to the bank rather than to your own car savings fund. Spending too much on cars means you’re going to have less money for the things “future you” wants. Cars go down in value. Things like houses and investment accounts that pay for retirement and college generally don’t. Be ware the lieutenant-mobile.
Lieutenant Investing
Hopefully, you’ve heard that you should put money into the TSP and an IRA for you and your spouse. If you don’t put 5% into your blended retirement system TSP account, you are accepting a pay cut because you’re missing out on the match. That should be table stakes for investing, but it’s also not enough.
Investment wisdom says you should be saving somewhere between 10% and 25% of your income, and generally, I’d like to see at least 15 to 20% until you reach high key, which is probably not happening for most people until their late 50s or beyond. So, even if you’re counting on a military pension and some VA disability compensation and Social Security, you still need to be saving.
Some lieutenants get it. They start their military career on an income from which TSP and hopefully IRA contributions have already been taken, i.e., they learn to live on far less than they make.
Then some lieutenants say they’ll get to it later. I’ve met you. You won’t. Or if you do, later is too late. You need to get the compounding started ASAP. This reality can be packaged up as pay yourself first.
When you’re starting, 15% to 20% of your income will fill up the first 5% of the TSP and a good chunk of IRAs for you and your spouse. You may even have some leftover to go beyond 5% in the TSP.
It’s probably not the time to be saving for kids’ college if you don’t have them, and if you do have kids, I would still get 15% to 20% of your income going into retirement savings before funding college. Put your own mask on before helping others.
Consumption, Shopping, and Toys
Military officers make pretty good money, and it’s even better as you climb the ranks. Our marketplace rewards energy, talent, risk, experience, and maturity. Career progression and income start out slowly at the beginning.
One of the problems of becoming financially independent from your parents is that you lived their lifestyle before college. You grew accustomed to that lifestyle, but your parents took 30 or 40 years to reach that point. Living like a poor college student for as long as possible as a lieutenant helps you avoid the lifestyle creep that will affect future choices.
Just because everyone else has the brand-name stuff doesn’t mean they can afford it. It usually means they don’t save, they have a lot of debt, and they’re very stressed about money. The antidote is to choose contentment. Contentment turns what you have into enough. Learn to practice contentment, and you will be wealthy regardless of your circumstances.
20 Years Later
If characteristics like student loan debt, expensive cars, under-saving, and lifestyle creep create a lieutenant’s financial beginning, what do those characteristics look like when lieutenants become retiring military officers? There are a shocking number of millionaires retiring as 0-5s and 0-6s. Many of them reached that seven-figure net worth long before their 20-year retirement eligibility, meaning that they either won the lottery (which they didn’t), received an early inheritance (which they didn’t), or started saving and compounding their savings as a lieutenant (which they did).
Frequently, those families also found a way to put money into 529 savings plans for their kids’ college while saving for retirement. Those retiring military officers will have choices about what kind of work they must take on, how long they work, and whether they can help their kids with college. They can choose whether to leave a legacy to the kids and grandkids, and whether their spouse can stay at home or work outside the home.
Another version of the retiring military officer that I see is one who understood the assignment, but was a bit late. They now fund their TSP, but maybe not to the maximum. If their spouse works, the spouse funds a 401(k), but maybe not to the maximum. They’re starting to look at the requirement to use the Backdoor Roth IRA process to make sure they can save enough.
Because they need to fund cars for their kids, and they’ve learned to tame their inner new car smell addict, and they keep cars ten years or more. They will probably still work into their 60s, but they will have a secure retirement.
Finally, I occasionally come upon retiring military officers whose series of unusual months became a series of unusual years, and there was always a reason to delay… getting out of debt and saving for retirement, and potentially their kids’ college. It’s always possible an inheritance will bail them out, but an inheritance usually doesn’t show up until your 60s. That’s a big gamble.
The extra income from a post-military job, a military pension, and some VA disability will finally get them on the savings train, but compounding is not their friend. They will still need to restrict their spending. They will need to work well into their sixties, and they probably need to hope that Congress does its job by shoring up Social Security.
Retired lieutenant colonels and colonels who started saving late often feel trapped by their past choices and their lack of current choices. There are only so many dollars for making memories, providing for lifestyle basics, funding retirement, and helping kids get their start.
Cleared to Rejoin
If you’ve read this far, I’m hoping you’re a young lieutenant who’s open to the message. Save first, pay off student loans, don’t let cars eat your future, and don’t try to keep up with the Joneses—you’ll just invent new Joneses if you catch one. If you’re closer to that retiring officer whose lieutenant self may have diverted some of your current savings along the way, despair not. The best time to start saving may have been 20 years ago. The second-best time is today!
Fight’s On!
Winged Wealth Management and Financial Planning LLC (WWMFP) is a registered investment advisor offering advisory services in the States of Florida, Texas, Virginia, Arizona and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Winged Wealth Management and Financial Planning (referred to as “WWMFP”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute WWMFP’s judgment as of the date of this communication and are subject to change without notice. WWMFP does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall WWMFP be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if WWMFP or a WWMFP authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.