As we prepare to honor our armed forces on Veterans Day, it's appropriate to address the financial challenges often faced by those who defend our country. Far too often, military families face daunting financial difficulties.
Here are a few considerations – and precautions – for military families to remember when managing their personal finances and planning for their future:
Retirement savings. In addition to supplying pension benefits to wartime veterans and their surviving families under certain circumstances, the government also provides the Thrift Savings Plan (TSP) to military personnel. TSP shares many features of typical 401(k) plans, including tax-deferred savings that can lower taxable income and therefore, yearly income tax.
Although the military TSP generally doesn't match personal contributions as many corporate plans do (except for personnel serving in certain critical specialties who agree to serve on active duty for six years), its annual plan administrative expenses are extremely low – only 0.03 percent. That's considerably lower than fees normally charged for 401(k) plans, which often run 1 percent or more.
Thanks to the 2006 Heroes Earned Retirement Opportunities (HERO) Act, military members serving in combat zones now may contribute to a regular or Roth IRA for additional retirement savings, while at the same time taking advantage of the tax-free status of their combat pay. Previously, federal tax code prohibited service members from doing both at the same time. Retroactive IRA filings dating back to 2004 may be made until May 28, 2009.
Mortgages. Most current and former military personnel are eligible for Veterans Administration-guaranteed home purchase or refinance loans from private lenders. Among their favorable terms: 100 percent financing is available (no down payment required); no private mortgage insurance; loans are assumable by subsequent buyers; and no prepayment penalties.
Life insurance. The government automatically provides a $400,000 life insurance policy to all military personnel for only $29 a month. Inexpensive supplemental insurance to cover spouses and/or dependent children is also available.
Education. One of our veterans' most valuable benefits is the education assistance available through the G.I. Bill. Service members and veterans can apply for monthly, tax-free benefits to be used for a variety of degree and certificate programs, apprenticeships or on-the-job programs.
Precautions to take. Military families may be vulnerable to many financial hardships, including:
- Pay scales are often lower than private-sector jobs.
- Frequent moves to new assignments can result in relocation costs, mortgage or rental deposit expenses, loss of spousal income during transition, etc.
- On-duty reservists potentially face loss of career advancement opportunities and extra costs to maintain their employer's benefits package.
Fortunately, numerous governmental and other resources are available to counsel military families on personal finances. The U.S. Department of Veterans Affairs (www.va.gov) provides detailed information on health care benefits, life insurance, pensions, home loans, survivor benefits, education and much more.
Another good resource is www.military.com, which explains in plain language the many benefits available to active duty personnel, reserves, National Guard, retirees, veterans and their families.
And Practical Money Skills for Life, a free personal financial management site sponsored by Visa Inc., features a comprehensive guide to creating a livable family budget (www.practicalmoneyskills.com/learn/budgeting). As always, consult a financial professional regarding your particular situation.
It's critical that our military men and women fully understand the benefits available to them – as well as the financial pitfalls they may be vulnerable to when rushing off to serve their country.
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