Summary

In this episode, Mike and Amy address listener questions regarding financial planning for military families, focusing on the balance between retirement savings and education funding. In their answer to the second question, they discuss foundational financial steps, the importance of emergency funds, debt management, and life insurance. The conversation emphasizes the need for strategic planning and trade-offs in achieving financial goals while preparing for retirement.

Takeaways

• Balancing retirement and education savings is a common struggle for families.
• It’s important to consider your family’s philosophy on supporting kids.
• You can’t get loans for retirement, but you can for education.
• Make sure you’re contributing enough to get the full match from the government.
• Having an emergency fund is essential for financial stability.
• Pay down high-interest debt to avoid unnecessary costs.
• Life insurance is crucial for families with young children.
• Diversifying across accounts can provide more flexibility.
• You need to start thinking about your post-military life early.
• Living on less than you earn is key to financial success.

Chapters

00:00 Introduction

02:28 Balancing Retirement and College Savings

12:48 Considerations for Military Families

13:19 Foundational Steps for Financial Stability

18:53 Planning for Long-Term Care and Big Purchases

21:06 Living Below Your Means for Financial Success

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Disclaimer: This podcast represents the views of the hosts and any guests. It is for informational purposes only and should not be considered tax, financial, or legal advice. All information is regarded to be from reliable sources. The hosts are not responsible for any losses, damages, or liabilities that may arise from the use of this podcast. This podcast is not intended to replace professional, individualized advice.

TRANSCRIPT

Mike (00:00)
Hey, Amy, how’s it going?

Amy (00:02)
Good Mike, how are you? Awesome.

Mike (00:03)
Doing well. Hey, we’re doing something a little bit different this episode. We’re going to try. We got some questions in from people who are listening and and wanted our thoughts on some things. So we’re to hit those today.

Amy (00:20)
That’s a great idea. anyone who’s listening wants to submit a question of their own, we’d love to do this type of episode on occasion. So if you have a question, please send it to info at operationretirementreadiness .com. We’ll have that link in the show notes for you.

So Mike, we’ve got a good representation of different topics in on the questions. Some folks are still serving in the military. Some others are retired or approaching sort of ultimate retirement. So some of these questions, we might turn them into a full show at some point, but for today, how about if we just get started with a few thoughts on the first question?

Mike (01:33)
Sure. And just so before we kick off, this is probably a little bit less formal than some of our other ones where we are heavily researched into all the finer points of these things. The other thing is, these are good questions, but we don’t have all the details from the folks that submitted them. And so none of this is really personalized advice. It’s just our thoughts in general of that situation.

When we work with clients, we got to get a lot more info to make sure that the advice we’re giving is truly tailored to them. just if you hear us give an answer on something, don’t go out and take action on it. It’s not advice. It’s again, just some general thoughts on how we kind of think about it and approach these. So with that out of the way, know, question number one.

We’re in our mid 40s and are trying to figure out how to balance retirement savings with college savings for our three kids ages 10, 13, and 15. We have the GI Bill, but that will only cover one kid. We put our money in our 401k, TSP, IRAs, or do we put more in 529s? Amy, what are your thoughts on that or initial thoughts?

Amy (02:55)
Yeah, I mean, this is, this is one of the number one questions that I get from all of my clients that are in this age group or sort of dealing with this similar thing where they’re approaching military retirement, maybe even ultimate retirement for some of them. They have young kids that will overlap their retirement plans in some way. So first, you know, let’s, let’s reference some of the material that we’ve already gone over. We’ve, we’ve been through the GI Bill.

and the details of the GI bill. that’s episodes 14 and 15. A little bit episode 11 as well for the 529 plans and then details around IRAs, Roth and traditional accounts are in episodes 12 and 13. So with that kind of background, if you want to go listen to more of it, just my thoughts in general, like I said, this is very common struggle. One thing that I sometimes directly point out to clients is that

you know, we’re financial planners, we’re not counselors, and a lot of this question is driven around your family’s philosophy.

around how you want to support your kids and that’s kind of across the board. So it’s not just a parenting question necessarily, but how do you want to support your kids as they become young adults and go out into life? Some parents really don’t want their kids to have any debt. They want to take on all the debt. They want their kids to start out with a fresh slate. Other parents feel like they want their kids to have

skin in the game if you will so they’re going to help their kids but they’re not going to pay for all of it. And then there’s the other parents that you know hey when you’re 18 you need to plan for your own life so when you’re 18 off you go you know we’re here for emotional support that sort of thing but you need to you need to plan your own.

financial life. So that’s one question of this. And then, you know, the other part of it is what kind of retirement lifestyle you want, whether or not you’re willing to work longer in order to support some of these other goals for your kids. know, Mike, that’s not a very, that’s a very squishy answer. But honestly, it’s a squishy question because, you know, you first have to decide how you think about this. Because if, you know, every most financial planners can tell you

Mike (05:13)
Ha ha!

Amy (05:25)
exactly how much you need to save for your kids’ education. And then you get to decide whether or not you’re willing to give that up out of your current budget. And then you have to decide whether or not you’re willing to accept the impacts to your retirement. So the very direct question of how much to save, that’s easy. It’s so much more squishy to think about, do you put more money here or more money there or so on? So that’s the squishy part. Maybe you can make it a little less squishy

first, Mike.

Mike (05:57)
You know, one of the kind of old tropes is you can’t get loans for retirement versus what you can do for school. So assuming that, you know, the money isn’t unlimited and you can fully fund both goals, like you said, it’s about tradeoffs. And the one thing that I like to point out to folks is, OK, let’s let’s just say

You’ve got the GI bill for one, you got two other children, $100 ,000 each that you’d need for school. It’s $200 ,000. Well, how much are you making a year if you were planning to retire at 65 and your income’s $200 ,000? Okay, that’s one more year of working to pay for that education piece.

So that can be a useful framing just to understand how much does it change my retirement trajectory based on how much those costs might be. So that’s one way I do like to think about. The other piece is with some of the accounts you reference, specifically IRAs, especially if you’re contributing to the raw side.

Any of those Roth contributions can get pulled out at any time for any reason. So if you’re, you know, and this can help with folks who aren’t sure their kids are going to college. You know, maybe you err and make the contributions first to the Roth IRA where you still have access to those and you could use them in the future for education planning.

if it was needed. those are a couple of things I’d hit. But like you said, it is a personal preference. You can get into thinking about what kind of student aid they might get, whether you need to fully fund the 529s to make up the full cost of that school.

Again, that will tie into the family’s income, which we talked about in the GI Bill episodes where you need to understand what the aid might be like that you’re going to get. If you’re still on active duty, you might qualify for some more aid because you’ve got some tax -free income that’s coming in. Whereas after retirement, you’ve got your

pension coming in, you’ve got probably a second career if both members of the family are working because the kids are older now. You know, you could be looking at, you’re going to pay almost full sticker price at most schools unless, you know, they’re going to the really, really top schools that will meet, you know, whatever portion of need is left over. But

Yeah, so those are all some things you really need to factor in when you’re thinking about where do I put that money? you know, guess, looking back to the IRA piece, know, contributions come out of even 401ks and TSPs, you know, without penalty if you need them, as long as the plan allows it. Now, the TSP doesn’t.

can’t pull that money out. So, you know, after retirement, if you did a rollover, you know, you could still get back to those contributions, but make sure you understand if that is part of your plan, you know, where you’ll be when you’ll need that money and is it going to be accessible? So the IRAs, you control that. It’s an individual account. So you could have that for you and your spouse and count on that, those contributions being able to be used.

But yeah, other than that, you need to make sure you understand that. So Amy, any thoughts there?

Amy (10:21)
Yeah, I I like, I like how you highlighted sort of this idea of diversification across accounts. because just because it goes into a retirement account doesn’t mean that it can’t ever be used for anything else. There are ways to tap into that without getting a penalty. And likewise for the 529 account in this particular situation where there’s multiple children, you know, there’s a good chance one of those kids is going to go to school. There’s a, there’s a good chance that maybe even two of them are going to go to school. So if you, you know, one of the things

that I often will look at is whether or not your seat allows a tax deduction for contributions to 529. And then maybe you take at least take advantage of if not all of it then part of that tax deduction if it makes sense because you know

starting now, starting in this year, as long as your 529 account meets certain requirements, you actually can move that money into a retirement account for yourself. You can just change the 529 to you as the beneficiary and then once you meet the requirements for all the requirements that are associated with making a 529 to Roth conversion, you could do that. So, you know, it’s…

The idea sometimes that ends up being palatable for families is this idea of diversifying across different types of accounts. So maybe you’re not fully funding every single goal, but you’re funding it in a way that gives you a little bit more flexibility and you’re still able to accept the trade -offs that you’re giving up. Because it’s rare to not need a trade -off when you’re dealing with education for three kids and full retirement.

Mike (11:57)
Yeah, exactly. So anything else to add? think we’ve, you know, I think we gave them some definitely good things to think about going forward.

Amy (12:07)
Yeah, yeah, I I think that’s about as far as we can go. You know, this is one of those questions where you really have to dig into the details, but I think in general, those are the key things that folks need to think about when they’re facing this. And I know there’s a lot of people out there facing these choices.

Mike (12:26)
All right. So what’s question number two, Amy?

Amy (12:28)
Cool,

Okay, so next up, I’m 34, my spouse is 35, we’re planning to stay in the military until retirement, we have two young kids, what are the most important things a military family should be doing and when?

Mike (12:48)
All right. Yeah, that’s a that’s a wide open question. You know, there are a lot of things. So I’ll hit some of the kind of what I call getting started things that, know, everybody should think about and work through. And then maybe I mean, I’ll kick it to you for their comments or, you know, kind of go in deeper to that. What I’ll say second level once you got the, you know, good foundation in place that you can that they could consider. So

One of the first things is having an emergency fund. It’s that couple months of salary or spending at least that you have available. So when the car breaks, the washing machine breaks, whatever it is, you don’t have to go into debt or you’re not wondering how you’re going to pay for that. that can be…

Couple thousand dollars, you know, probably up to tens of thousands of dollars, depending on, again, how much you spend. And, you know, the one interesting thing for most military, the job is pretty stable. And so you don’t have to worry about, I’m going lose my job next week. you know, so maybe you need a little bit smaller cushion than somebody on the civilian side. But

Again, if you’re planning to get out in a short amount of time or at the end of this enlistment, consider starting to raise that so that you’re ready for that drop off in income, should the job not be there. The second thing is making sure you’re paying down high interest rate debt. So this is things like credit cards, maybe some auto loans.

If they’re charging more than, you know, eight percent or something like that, you really want to start tackling those because that’s just money that’s going to a bank or an institution that loaned you that money. you know, third thing, you know, if you’re under the new blended retirement system, make sure you’re contributing enough to get the full match from the government. That’s you just free money.

100 % return on every invested dollar that you’re putting into retirement. So you want to make sure that that is that is fully done. And then, you know, so you have two young kids,

make sure you’ve got life insurance in place, which is, you know, you should have SGLI. Probably need the family SGLI or at least should consider it and then kind of do it.

deeper look and see maybe you need even a little more term inference with two young kids. Really estimate what would happen if one of you died. And it could even be if it’s a non -working spouse that’s staying home with the kids, you’re going to need extra money even if the military member isn’t the one who dies.

you know, to pay for childcare and things like that when you’re now a single parent. So those are kind of the four foundational things, I’d say. And again, not really in other than probably the emergency fund, not really in an order. Just make sure those things are all, you know, non as a foundation for for, you know, financial success.

Amy (16:37)
Yeah, those are, that’s a.

Mike (16:38)
Anything I missed on the kind of foundation level that you’d add, Amy?

Amy (16:44)
Yeah, no, I mean, those are spot on. Those are the things that everyone should be doing around this age. Military, not military, but it’s a great place to start. Launching into sort of the next.

your sort of the next considerations. Once those things are done, I think those are essential. But once those things are done, then going full circle back to our first question. So investing more for retirement and.

for education for your kids. reviewing all the things that we just talked about, how you decide between those kinds of things. And then, you are going to leave the military at some point. Whether you leave at 20 years or you leave at 25 or 30, you’re going to leave the military. And it’s really not too soon to start thinking about what you want that to look like for your family and start talking about, because there’s two spouses, so there’s gonna be two visions.

to settle on one vision or some blend of the two. So thinking about what’s next and then preparing for that. emergency fund, that’s for the here and now, but then you need the transition fund. if you’re gonna, if one spouse is gonna retire at 20 and then wants to stay at home while the other spouse continues on, for example, there’s going to be a decrease in income. Do you need some sort of bridge while the kids are in college or while the kids are still at home and doing expensive activity?

things like that. Do you both want to get out at the exact same time? So now there’s, you know, you’re gonna have a decrease in income, a little bit of uncertainty around what comes next for employment, things like that. And then figuring out where you want to live and whether or not that involves purchasing a home and starting to save for that home if you don’t already own one in particular.

So those are just some other things that I’d be thinking about after the basics are taken care of. Mike, what else? I mean, there’s a million things, but what else do you think this family should be thinking of?

Mike (18:53)
Yeah, I’d also say, you you hit on some of the long term, the retirement, the college and even some of the middle term. You know, the other thing is just other besides the home, you know, big, big purchases like replacing the car every few years and, you know, thinking about and setting aside money for that. So my kind of rule of thumb is if you’re going to need the money in the next three to five years,

or sooner, you know, that should be in safe type investments really more like along the lines of savings versus if it’s a five year or more goal, you know, out there further. That’s when you start getting into the investments and, you know, just managing that because, you know, the last thing you want is to have the, you know, thinking you’re going to buy a car next year.

and having that money in the stock market versus in, you know, something safe like a high yield savings account. And the stock market hits an air pocket and goes down 25 percent. That eight thousand dollars you saved for the down payment is now at six thousand dollars. You know, that can be that can be heartbreaking. So making sure you’re matching the risk.

with the duration of the asset that you’re thinking you’re going to use. So that’s definitely one of the things I would make sure you’re thinking about as you’re planning all this out.

Amy (20:32)
Yeah, that’s a good point. knowing, you know, it’s not enough to know that you need the money, but making sure that it’s in the right type of account. And that account might be an investment account. If it is, then is it invested for the correct term and your risk tolerance?

Mike (20:48)
And I guess one more thing I’d finally throw in there is,

spending less than you’re earning. You need to have that margin that can go to the savings and go to pay down debt and those type of things. So you want to you want to look at what all is coming in.

and you want to live on, you know, a good portion less than that. And, you know, the guidance typically is save 10, 15, 20 percent somewhere in that ballpark will, you know, long term savings at that rate will make sure you’ve got a successful retirement. Now, you might be able to adjust that with military retirement eventually, because, you know, you’ll have that income for life.

But that’s definitely something you want to think about as you’re starting out is, again, you get the pay raises semi -regularly in the military, which is very nice as you hit ranks every couple of years for longevity and then yearly cost of living. So those are great opportunities to just rank up the savings just a little bit more. pretty soon, you’re

well into that, you know, 15, 20 percent of your income being saved. So that that’s definitely a key for for somebody starting out and looking for for guidance.

Amy (22:16)
Yeah, agree, agree. I think that’s a good start for these folks.

Mike (22:23)
All right. Well, again, we definitely appreciate the questions coming in. If you’ve got questions you’d like Amy and I to talk about, please send them to us at info and operation retirement readiness. I guess, Amy, anything else before we wrap up?

Amy (22:45)
No, I think that’s a good start.

Mike (22:47)
All right. Well, we look forward to doing these somewhere regularly as long as you guys are sending in questions. We’ll probably do these again in the future. So thanks and hope you guys all enjoyed it.

Amy (23:03)
Have a good day everyone.