How do you plan for retirement when you begin receiving retirement payments in your 20s, 30s or 40s? Military veterans with service-related injuries are sometimes in this situation, in which they’re paid a monthly rating and a corresponding dollar amount that generally increases each year as the cost of living rises.
Many of these veterans are on the PDRL, receiving monthly payments on a permanent basis. They are left virtually unconcerned with the possibility of job loss, demotion, or many other factors that could reduce or eliminate pay. Although this pay provides a stable and secure source of income for these veterans, does this mean that they do not have to plan for retirement like a traditional worker does?
With a veteran receiving only a percentage of base pay and additional payments like housing allowance no longer coming in, that person most likely cannot retire on this pay alone. As of 2014, a service member with the rank of E-5 earns $2,735 in base pay per month. A retired vet with this rank and a 70 percent rating receives around $1,915 per month, or $22,980 per year. For most, this is not enough to cover basic expenses, and during retirement, it will be no different.
Because VA retirement payments are tax-free and are generally not considered earned income, these payments on their own are not an eligible form of income for an IRA. Helga Cuthbert is a certified financial planner and founder and principal of Cuthbert Financial Guidance. She said “many veterans [who] receive benefits also have earned income (work for a company themselves).” When you enter earned income into the picture, this opens up additional opportunities, such as the ability to contribute to an IRA.
Other investment options
Vets can take advantage of other retirement savings options. “One doesn’t need an IRA to save for long-term retirement. It can be done through an individual account in a very efficient manner through indexed mutual funds,” says Cuthbert. Gaining a great deal of popularity over the past several years, mutual funds provide diversification, professional management, and liquidity. Indexed funds mimic the broader market, offering low cost and sometimes offering higher returns than expected.
Veterans may also invest in property and real estate. With the opportunity to receive a VA home loan, a veteran can buy a multiunit or large property, live in one of area of the property, and rent the rest of the property out to tenants for a profit. Although the VA home loan’s stipulations prohibit investment properties, you can earn income from your property as long as you reside within it.
According to Military.com, “the VA home loan can be used to purchase up to a 4-unit house so long as it is owner occupied. These homes are known as multi-family dwellings, and can be referred to as 2, 3, or 4 family houses.” Therefore, if you have a $3,000 per month combined mortgage, insurance, and property tax payment, you can earn substantial profits by renting out three units for $1,500 per month each. This is all income that you can use during retirement.
“Whether the veteran’s household depends entirely on the VA disability income or other members of the household have other income, they should budget ‘fixed’ non discretionary (needs) expenses first,” explains Cuthbert. Housing, vehicle payments and insurance, and utilities are the types of expenses that fall into this category.
“They should also make variable necessities a priority, such as auto repair, home improvements, appliance replacements, medical expenses, etc.,” Cuthbert adds. Itemizing all of these expenses provides an idea of just how much you spend in a given time period. Reviewing past bank statements or utilizing a budgeting software application can help to locate your expenses and organize them into each category.
“After establishing their needs, they can begin to prioritize discretionary “wants,” Cuthbert said. Does going out to dinner every Friday rank higher than going to the movies? This is unique to each individual.
Finally, it’s essential to “consider the possibility that real inflation may outpace any future increases in VA income,” according to Cuthbert. On January 1, veterans received a 1.5 percent cost of living (COLA) adjustment, but the rate of inflation during that same time period was closer to 2 percent, with the CPI on certain items, like energy and medical care, reaching even higher levels. “Budgeting some cash flow surplus to set aside for longer term saving and investments would be important for later years,” said Cuthbert.
The bottom line
Veterans earned the right to receive these monthly income payments. After serving in the military, they should also enjoy the comfort and stability of a solid retirement plan. Retirement income and Tricare for life certainly provide a foundation, but these benefits do not provide the whole package for a veteran and his or her family. Any financial difficulties one has today will not disappear during retirement. Therefore, budgeting for the present while planning for the future as early as possible is the key, just as it is with a traditional worker who is not receiving VA compensation.