Funding Your Retirement on a Military Budget
Funding retirement on a military family budget might seem unfeasible. Families have to budget for an unexpected PCS, clothes for the kids, bills, etc. However, saving for retirement using one income can be done, according to Suze Orman.
Orman addressed this issue in her column "Money Matters" on Yahoo.com. Here are her suggestions for building a comfortable retirement for the military family with one income:
You must save for retirement
Most military families want to save for retirement, but it always turns out that there's just no money left at the end of the month. So many of our savings plans end up as good intentions that go nowhere.
Unfortunately, this lack of resolve is really dangerous. You must save for your retirement. Why' Because, as you've heard many times before, you can get loans for just about anything else, there is not a loan for retirement. You have to pay for it yourself. Meaning, you have to come up with the bulk of the retirement "meal" by other means. Here a couple of ways you can do that:
- Contribute to your 401(k) or TSP — especially if there is a matching program. Matching a contribution is like an annual bonus to you. And, when would it ever make sense to turn down a bonus? You want your annual contribution to be enough to qualify for the maximum company matching contribution. Check with your employee benefits department to make sure you're putting in enough every year to get the maximum company match.
- Fund a Roth IRA. If you are single and your income is less than $95,000, or a married couple filing a joint tax return whose combined income is below $150,000, you are eligible to contribute up to $4,000 this year to a Roth ($4,500 if you are 50 or older). For those of you who qualify, a Roth is simply the best investment option out there. You contribute with after-tax dollars — so it's true there's no initial tax break — but your money won't be taxed while it's invested, and if you meet a few basic rules you will pay no tax when you withdraw the money. What's more, the money you contribute to your Roth can be withdrawn at any time without penalty or tax. In short, this retirement investment can double as an emergency cash fund.
Where to find the money to save
I know many of you are staring at that one paycheck and think there is no way you can afford your everyday living costs and still put away money for your retirement. Sure you can. It just takes discipline, along with some strategizing. Consider some of these paycheck-stretching moves:
- Don't get a tax refund. If you got a refund you made a mistake. In fact, you have loaned money out to Uncle Sam interest-free for the year. Besides a lot of folks tend to go crazy with their refund and spend it on a vacation or some indulgence. It's far smarter to adjust your withholding so you don't have so much siphoned off to the I.R.S. during the year.
- Reduce your credit card interest rate. My best advice is to not have any credit card debt at all, but I know that's not dealing with reality for many of you. So if you carry credit card debt you should at least do everything possible to snag a low rate. First, check your FICO score. If you're in the top range of 720 or higher, you should either be able to talk your current credit card issuer into a rate below 10 percent, or do a balance transfer to a new card that offers you a great introductory rate.
- Don't save (or save less) for your kid's college education. You cannot afford to save for your kid's college Education if it means you will be shortchanging your retirement investing. Your child can get aid and loans for college. No one is going to be ready to help you in retirement. I have recently had the opportunity to talk to thousands of young adults in their late 20s and early 30s, and I can tell you that one of the biggest financial frustrations they voiced to me was that their parents weren't straight with them about the money situation. Mom and Dad thought they were being "Superparents" by paying for a big chunk of school, but now the kids realize that their well-intentioned parents are in horrendous financial shape and basically can't afford to retire. Even worse, many of the parents try to deal with their problem by taking out big home equity lines they can't afford, or charging up frightening balances on their credit cards. Please don't do this to your kid. If it's a question of college fund or retirement fund, the most responsible parenting move is to choose the retirement fund.
- Love your children; don't indulge them. Look, I totally get that kids want to have the same wardrobe and gizmos as their friends. That's just human nature. But this is one of those places where the hard work of parenting needs to be done. Take a look at your credit card statements for the past three or four months. I bet some months there are easily a few hundred dollars spent on indulgences for your kids. Well, that's got to stop. It's never about telling your kid you are poor, or making them feel bad. That's not fair to a child. But you have to start teaching them about being fiscally responsible. A $150 pair of jeans or an iPod is not some monthly birthright; it's something to be reserved for a birthday. And if they really want to keep up with the high school Joneses, then they can get a part-time job. Again, that's not punishment. That's stand-up parenting.
- Watch those self-indulgences too! You and I both know it's not all about the kids. You have a bad day at work and reward yourself with a new pair of fancy shoes. Or you go out to lunch with the gang at work five days a week and instead of maybe a $10 takeout salad you end up spending $20 at a nice restaurant. That's a $40 difference a week, which is more than $150 a month. Cut back and you are looking at an extra $1,800 a year for savings. Bring lunch to work once in a while and you're looking at having even more money to invest in your retirement fund. These kinds of small sacrifices are crucial to the success of any savings plan.
- Get smart with insurance deductibles. If you have a low deductible of just a few hundred dollars, call up your insurance company and see how much your premium will fall if you increase your deductible to either $1,000 or $2,000. I know this one seems counterintuitive, but the reality is that insurance is best used for big-time accidents; you really shouldn't make small claims. It tends to aggravate the insurance company, and in response they will boost your premium or even, in time, deny you coverage altogether. So it makes sense to get a policy with a higher deductible. In return you can see your premium cost drop 10 percent to 20 percent or more. While you're at it, also look into the premium reduction you can get by having your auto insurance and home insurance with the same company. That's typically good for another 10 percent premium reduction.
- Consider making a move. This one is admittedly a very big step, but it can make all the difference for you and your family. If you live in a very expensive region, or one where you feel compelled to enroll your kids in private school, I think it makes a lot of sense to consider moving to a new area. It may even be just a few miles away — somewhere that has a more affordable housing market, or a stronger public school system, or both. Just think of the financial breathing room it could give you.
- Drive your car for five years, not three. If you bought your car with a three- or four-year loan, make yourself a promise to keep driving the car for at least one year after you have finished paying off the loan. And if you can stretch it to two or three years of loan-free driving, you are going to be in even better shape. The strategy here is that you can take the monthly payment that previously had to go to the car lender and now just pay it to yourself each month. For example, let's say your car loan cost $300 a month. Well, once you get the loan paid off you now have an extra $300 a month to put toward your retirement savings. If you do that for two years you'll have $7,200 saved up. If you then keep that $7,200 invested for another 20 years, and earn an average annual 8 percent return, you will have built a nice nest egg of more than $35,000. Now that's putting yourself in the driver's seat when it comes to finding ways to stretch a single paycheck.