Investment Strategies for Military & Veterans

Investing is one of the most important cornerstones of wealth creation, which is why we offer our clients a choice to get investment advice on all of their assets wherever they might be. Whether you have a TSP account, 401(k), IRA or something else we can help you select the best investment choices for you. 

The hard truth is that despite the many benefits that come with serving our country, you will probably still need to work to create your own savings and investing strategy. Simply put, a military pension alone is not usually enough to retire on.

A typical military pension, provided through the Military Retirement System, generally replaces around 50% of a service member's base pay after 20 years of service. This percentage increases by 2.5% for each additional year of service, up to a maximum of 75% for 30 years or more under the High-3 and Final Pay retirement plans.

For retirees under the Blended Retirement System (BRS) (introduced in 2018), the pension covers 40% of base pay at 20 years but includes Thrift Savings Plan (TSP) contributions with government matching, making up for some of the difference.

How Much of a Retiree's Income Needs Does It Cover?

• Higher ranks (O-5, O-6, E-9, etc.): Can replace a significant portion of pre-retirement income but may still need supplemental income.

• Lower ranks (E-6, E-7, etc.): May need additional income sources, especially for healthcare, housing, and inflation adjustments.

Most retirees need additional income sources (e.g., VA disability, civilian job, investments) to fully maintain their pre-retirement lifestyle.

The TSP is part of the Military's Blended Retirement System (BRS) and is an integral part of any strategy to ensure you are prepared for retirement as member of the military & veteran community. If you retired under the  BRS or contributed to the TSP, your savings can provide a much needed additional income stream in retirement. 

• TSP Fund Options: The TSP has a number of different low-cost investment funds and lifecycle funds to meet your investment objectives. 
• TSP Matching: Under the BRS the TSP can match your contributions up to 5% of your base pay, if you contribute up to 5% yourself.
• TSP Withdrawals: Start penalty-free withdrawals at age 59½, or earlier via the Rule of 55 if retiring from federal service.

This is a primer on what you need to know about the TSP but it is important to recognize that at a minimum you should be thinking about how you can leverage the TSP as part of your investment strategy.

Taxable Brokerage Accounts & IRA's

The TSP is great investment vehicle but it does have limitations on how much you can save and what investment options are available to you. Many military members and veterans supercharge their savings and investing by leveraging other investment accounts like taxable brokerage accounts and IRA's to supplement their TSP. 

• Taxable Brokerage Accounts: These accounts are wonderful for wealth generation because they allow you to save as much money as you want into them. There are no limitations here and you have access to a very wide array of investment options that are not available in traditional retirement accounts. Most investment strategies are bolstered by the inclusion of a taxable brokerage account.
• IRA's: Opening an IRA can give you access to more tax sheltered retirement savings than you can get through the TSP alone. While IRA's have income phase-out limitations, most military families do not earn enough money to be limited by these phase-outs. An IRA account will also provide you a much greater set of investment options than you have access to through the TSP. 

Beyond investment selection and asset allocation, you may also need to consider the implications of tax location & tax treatment. As a military member, veteran or family member you may have much more taxable income than a typical retiree. Military pensions are typically taxable at the federal level and in many states you may find that your state tax burden is relatively high too. We help our clients plan ahead for the tax implications of their military and veteran benefits and help them implement strategies to reduce their lifetime taxes.

For many military service members and veterans a taxable brokerage and Roth retirement account can go a long way to expanding your flexibility in controlling your lifetime taxes. You should have a strategy and plan for how you build those assets, when and how. 

Here is a breakdown of how some accounts and retirement plans are typically taxed:

• Military Pension: Your military pension is typically considered taxable income, but not always. In certain scenarios people who are on the Permanently Disabled Retirement List (PDRL) may receive their pension tax free at the federal level. You also want to consider what the tax treatment is for your military pension at the state level. The laws governing the taxation of military pensions at the state level vary widely.
• Social Security Pension: Like the military pension, the money you receive from Social Security during retirement may or may not be taxable based on a variety of factors that determine your "combined income". However, for most retirees Social Security will ultimately be taxable. Understanding how your income from other sources affects the taxability of your social security income is critically important. Also, like the military pension,  not all states tax social security income and how they choose to tax it when they do varries from state to state.
• TSP: When you withdrawal money from your TSP during retirement, it may be completely taxable to partially taxable based on a number of factors. Di you contribute to your TSP on a tax deferred basis or Roth basis? Did your contribute to your TSP while deployed to a combat zone with a tax exemption? How much of your TSP came from the TSP match? All of these factors contribute to the taxability of your TSP.
• Taxable Brokerage Accounts: As the name suggests, taxable brokerage accounts are taxable, but did you know they are typically taxed at a different rate than earned income? Income received on dividends and capital gains are usually taxed at a more favorable rate than earned income. Also, any principal that you originally contributed to a taxable brokerage account may be withdrawn without having to pay taxes on that portion at all. 

As you can see, understanding the tax treatment of your various investment accounts and pensions income is an integral part of your investment plan. Understanding how to create a strategy that works for you and your particular situation is critical for achieving your financial goals.

Any comprehensive investment plan ought to include an analysis of the cost of the investments and how well those investments might perform going forward. While nobody can say for certain how any one investment may perform over the long-term we can make well-informed projections so that we can optimize your saving and investing strategy.

Too often people ignore what they are being asked to pay to invest in certain investment vehicles and these expenses can have a detrimental impact to the long-term performance of their portfolio. That is why we have an emphasis on investing in low cost index funds so our clients get the most bang for their buck.

Asset allocation and performance go hand-in-hand. When it comes to investing we are always weighting the balance of risk and reward with our client's risk tolerance and risk capacity. As we approach retirement and the likelihood we will need to rely our investments for income become a greater certainty we will need to adjust our portfolio to reflect that reality. This means we need to make sure that our clients are saving enough early on to ensure they are not taking undue investment risk at later stages in their careers. That is why it is so important to get an early start with your saving and investing plan. The earlier start planning the better chance you have of being prepared.

In short, we help our clients develop a strategy and a plan for their entire investing lifetime. How you save and invest during your 20's and 30's can and will affect how you should save and invest during your 40's and 50's. That is why it is important to have a plan for how to invest at every stage of life and be prepared to take advantage of unique opportunities when they arise. During our investment lifetime we only get so many opportunities and it is wise to make the most of them.

Due to our intimate knowledge of military and veteran benefits and how they interplay with civilian pay and benefits we can provide a unique and curated investment strategy to our clients which help them achieve their financial goals.

You wouldn't deploy without being sure your kit was right, don't let your investing life pass you by without knowing if your investment strategy is right.