This content is provided courtesy of Savvy Money.
It is important to plan for the future today, including knowing how and where you should invest your money to have a comfortable future. The following simple steps can help make your transition and your future more comfortable.
- Create a Plan: Good futures don’t come by accident -- people plan and work for them. Make sure your investment plan has the essential elements: desired retirement age, your cash needs for retirement, required annual contribution to reach your goal, and the types of investments needed to meet your desired retirement age. You can find good retirement planners online that can do this math for you.
- Build an Emergency Fund: Life is uncertain and at times it can be especially uncertain for people in the military. Redeployment can cost money to get settled in new housing and transitioning to civilian life can be difficult with high rates of unemployment. Most financial experts recommend that you set aside 3-6 months of living expenses.
- Save 10 percent: Although 20 years of military service will qualify you for a pension, you shouldn’t count on this as your entire retirement. First, despite your current intentions, you may later decide not to serve the full 20 years. Second, your monthly pension amount may not be enough to fund the lifestyle you’d like in retirement. Given the uncertainty, build in a cushion by saving 10 percent. Even if you over-save on retirement, you can use this for college costs, etc.
- Pay Yourself First: Have 10 percent of your paycheck automatically transferred into an investment or savings account. The reason this strategy is so successful is that it’s much easier to not spend money that you never had. If you count on meeting your goal with the money you have left over at the end of the month, you likely be disappointed. Below are two types of accounts that we recommend:
a . Thrift Savings Plan: Available to government employees, this low-cost tax-advantaged retirement savings plan is similar to other defined contribution plans like the well-known 401(k). You can contribute up to a limit of approximately $17,000 in 2012 in pre-tax dollars. This money can be invested tax-free in a variety of investment funds and is taxed when the money is withdrawn.
b. Roth IRA: Roth IRAs have more flexibility than a TSP, because the investor can generally choose from a greater variety of stocks and mutual funds. The taxation of money into and out of the Roth IRA is the reverse of the TSP—money is taxed at the taxpayer’s current rate before the contribution, but is not taxed when withdrawn. If your tax rates are the same now and when you retire, there’s really no difference in the impact, but if you think your tax rate will go up in the future, you may wish to pay now rather than later. Contribution limit is $5,000 per year.
- Don’t treat your home as an investment: You’ll need somewhere to live when you retire, so don’t count on using your home to fund your retirement. Most people under-save for retirement, so it’s best to keep your home value out of your calculations. If you need to tap into equity later, you can do so without putting yourself on the street.
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