How to Create More Financial Security and Peace of Mind for Yourself and Your Family
As an active duty service member, you have dedicated your life to serving your country. With a job like that, we believe you deserve to have peace of mind about your financial future. Here are 6 steps we suggest that can help improve your financial security now and in the years to come.
Build an Emergency Fund
Building an adequate emergency fund is essential to creating a strong financial plan. Without it, your finances can easily be derailed by an unexpected job loss or large out-of-pocket expense. A common suggestion by financial planners is to have 3-6 months’ worth of nondiscretionary expenses saved. This includes things like mortgage payments, rent, utilities, food, and transportation. It’s meant to hold you over in the event of a job loss. Depending on your role in the military, you may be in a highly specialized field that would make finding a new job difficult. If this is case for you, or if your household only has one source of income, you might consider saving on the higher end of this range.
Make Sure Your Will is Updated
Another step in building a strong financial plan is to protect what you already have through thoughtful estate planning. A will may not seem that important, but it is crucial if you want to make sure your loved ones are protected in your absence. It will ensure that the correct people receive your assets after you pass and it’s also where you can name a legal guardian for your minor children if you are a single parent, or if both you and your spouse were to pass away at the same time. Proactive estate planning is especially important for active duty service members who may have increased risks associated with their jobs like combat, flying, or underwater duties.
Create a Power of Attorney
Like a will, a power of attorney (POA) is an important part of protecting yourself and your loved ones. Depending on the type of POA, it will appoint a person to make medical and/or financial decisions on your behalf if you are ever in a situation where you can’t make the decisions yourself. It can be easy to think that emergency situations will never happen to you, but it’s always better to be safe than sorry. A little proactive planning today can save you and your family time, money, and stress in the future.
Assess Your Life Insurance Needs – Is SGLI Enough?
As an active duty servicemember, you have coverage under the Servicemember’s Group Life Insurance program. This is a great starting point, but do you know if it’s enough to cover your family’s long-term needs? Many service members are surprised to learn that the $400,000 coverage maximum is only a fraction of what they actually need. This is particularly true for those active duty service members who have a mortgage or other personal debt, are married, have dependents, or plan to provide education funding for their family in the future.
To learn more about your SGLI coverage and if it is enough for you, check out our previous article here.
Take Advantage of Military-Specific Financial Benefits
Like SGLI, there are several other military-specific financial benefits available to active duty servicemembers. It’s important that you take advantage of as many of these benefits as possible. The last thing we want for you is to leave money on the table by underutilizing the resources available to you. Here are some of the benefits provided to members of the military and how you can make the most of them:
VA Mortgage Benefit & VA IRRRL
Two well-known benefits offered by the military are the VA mortgage benefit and the Interest Rate Reduction Refinance Loan (IRRRL). Whether you are looking to buy a home for the first time, or refinance an existing mortgage, these programs can provide an effective way to buy property and pay off mortgage debt faster than other nonmilitary-specific options.
The VA mortgage benefit offers mortgages to active duty service members with no down payment, reduced interest rates, and no private mortgage insurance requirements. They also have flexible qualification guidelines, and they are backed by the U.S. government.
Keep in mind that the VA does not actually provide the funding for these loans. The VA sets the qualification standards and backs the loan, but the funding is offered through private banks and lenders. Finding a VA-approved lender isn’t difficult, but it does add an extra step as you navigate the home-buying experience. Additionally, all VA borrowers must prove their eligibility for the loan by providing a Certificate of Eligibility to the lender. Despite the extra steps involved, a VA mortgage is usually a much better option than a conventional mortgage for active duty servicemembers.
The VA IRRRL program allows you to refinance an existing VA mortgage to a lower interest rate. Like the VA mortgage benefit, this program has flexible guidelines that are dedicated to helping active duty service members better afford housing.
GI Bill
Another important benefit available to active duty service members is the ability to transfer all or a portion of your higher education benefits to qualified dependents. This can be a great way to way to pay for college education for your spouse or children.
There are several stipulations that come with this transfer, including:
- You must complete at least 6 years of service on the date your request is approved; and
- You agree to 4 more years of service; and
- The person receiving the benefits is enrolled in the Defense Enrollment Eligibility Reporting System (DEERS)
Generally, GI Bill benefits cover the cost of tuition, housing, books, and supplies for up to 36 months. However, there are certain restrictions involved depending on who receives the transferred benefits. It’s important to thoroughly assess your options before submitting the transfer request.
Savings Deposit Program
This is a great benefit for active duty service members who are serving in a designated combat zone and receiving Hostile Fire Pay. It entitles you to deposit up to $10,000 per year into an account with the Department of Defense that will earn 10% interest annually. You must be deployed for at least 30 consecutive days or 1 day in each of 3 consecutive months in order to participate. The earnings on this program are entirely tax-free which makes it an effective way to save for the future.
Thrift Savings Plan
The Thrift Savings Plan (TSP) program was set up in 1986 to act as a type of retirement plan for military personnel, like a 401(k) for private citizens. It is a tax-deferred savings program that allows contributions from active duty service members and even matching contributions in some cases. The annual contribution limit for a TSP is $20,500 with additional catch-up contributions of $6,500 allowed if you are 50 or older. Maxing out your annual contribution amount is an effective way to build a retirement nest egg for the future.
Deciding which type of TSP account to utilize is a common question many active duty service members ask. A traditional account allows you to contribute funds pre-tax, meaning it will not be considered part of your taxable income in the year of the contribution. When you withdraw the money in retirement, however, you will have to pay tax on both your contributions and any earnings. If you think you will be in a higher tax bracket in retirement than you are right now, a Roth account may be a better option. With a Roth TSP, you contribute after-tax funds. There are no tax benefits in the year of contribution, but when you take withdrawals in retirement both the contributions and earnings on the account will be received tax-free.
Though TSP accounts offer limited investment options, with only 5 individual funds and 10 lifecycle funds to choose from, the expense ratio is so low that it’s often worth it. Overall, utilizing this retirement savings plan is one of the best things you can do to plan for your financial future.
Partner with a Professional
Working with a financial professional is another important step when building a financial life plan. At Aviance Capital Partners, we are dedicated to serving our clients’ unique financial needs and that includes those who have served or are currently serving in the military. No matter which branch you’re in, we can help you plan for the future through proactive wealth management. To learn more about our process and how we can help you, reach out to us at wealthrelations@aviancepartners.com or (239) 598-4747.
Disclosures: Aviance Capital Partners, LLC (“ACP”) is an SEC registered investment adviser located in Naples, Florida. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that ACP has attained a certain level of skill, training, or ability. While information presented is believed to be factual and up-to-date, ACP does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of ACP as of the date of publication and are subject to change. Not all services will be appropriate or necessary for all clients, and the potential value and benefit of the ACP’s services will vary based upon the client’s individual investment, financial, and tax circumstances. The effectiveness and potential success of a tax strategy, investment strategy, and financial plan depends on a variety of factors, including but not limited to the manner and timing of implementation, coordination with the client and the client’s other engaged professionals, and market conditions. This should not be construed as specific investment, financial planning or tax advice tailored to an individual reader. ACP suggests that readers consult a financial professional, attorney or tax advisory professional about their specific financial, legal or tax situation. Past performance does not guarantee future results. All investment strategies have the potential for profit or loss, and different investments and types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment or investment strategy, including those undertaken or recommended by ACP, will be profitable or equal any historical performance level. Additional information about ACP, including its Form ADV Part 2A describing its services, fees, and applicable conflicts of interest and its Form CRS is available upon request and at https://adviserinfo.sec.gov/firm/summary/146597. For current ACP clients, please advise us promptly in writing, if there are ever any changes in your financial situation or investment objectives, if you wish to impose any reasonable restrictions to our management of your account, or if you have not been receiving at least quarterly account statements from your account custodian.
