Zero to Hero: Mastering Financial and Retirement Planning Basics

When you're just starting out in your military career, you are at a place in your life where the money decisions you make will shape your future more than any future decisions. That's a huge opportunity -- but retirement and financial planning aren't just complex, they're like a foreign language! The good news? By following some simple, time-tested rules and strategies, you can transform your financial outlook into a goal-oriented, values-based plan that takes you from Zero to Hero.

There are two main problems with financial planning for the military: civilian budgets don't apply and generic monthly savings plans won't work. We discuss the first problem at length elsewhere on our blog. As to the second, that's where we're focusing today. To explain it more, you shouldn't just pick a number for a monthly savings plan, because you don't know if it will get you where you want to be. You need to use a little structure and make sure you pick the right number.

What Rate of Return Should I Use?

Depending on your investing strategy, you won't get the same return as others. For example, if you only invest in stocks, you should net 10.8% per year investing for 10+ years; if you for some reason only invest in bonds, your number will be 5.5% or so. If you're "all-in" on real estate, you might be looking at 14% or more per year.

When you start planning and investing, the most accessible (aka affordable) path in is investing in the stock market using a brokerage account. This is not an Individual Retirement Account (IRA) or your Thrift Savings Plan (TSP)! So long as you are investing in the U.S. stock market -- specifically the S&P 500 -- you can count on 10.8%. But is that really what you'll earn? You will also need to take into account inflation, fees, and dividends, which are small shares of company profits paid out to the shareholders that own stocks.

You also need to take into account that some of your money is not invested and is sitting in a High Yield Savings Fund (HYSA), Certificate of Deposit (CD), or maybe invested in some bonds. As a result, you also want to factor in these dollars so you can find the average return you're earning across all of your accounts. When you do all this, you'll find 8% is the right return for planning. Understanding the assumptions behind the 8% return is crucial. Here's why it's realistic and effective:

1. Inflation Reality: While the Federal Reserve targets 2% inflation, actual inflation in the U.S. has averaged 3.1% per year for 114 years. Don't count on that changing anytime soon.
2. Asset Mix: Your investment portfolio should always be mostly stocks because you'll need at least 70% of your wealth to always be in stocks. So long as 70% of your money is earning 10.8% per year over the long run, you will still average out to about 9.2-9.5% across all your wealth when you factor in bonds, HYSA, CDs, etc. You need at least 9.2% so that you can still get 8% "real" return after accounting for inflation.

"Real" returns are what you earn after inflation. This is really important because you want to make sure your buying power grows, not just your account balances. If you have a $1,000 CD paying 3.1% interest, after one year you'll have about $1,031. You might be tempted to feel good about that. But thanks to inflation, the cost of everything goes up 3.1% and your $1,031 is only worth $1,000 in terms of what you can buy.

Fortunately, when we include inflation up front in our returns, we don't have to worry about losing that buying power. In fact, the numbers you will calculate for your future savings goals and income will be in today's dollars -- so in fact the actual amount you one day have will be even more! The next section shows how this works.

Understanding the Rule of 72

The Rule of 72 is a quick and easy way to estimate how long it will take for your investments to grow -- specifically to double in value. Given a steady annual rate of return, you simply divide 72 by your return to get the number of years for your wealth to double.

Example: With an 8% annual return, your investment will double approximately every 9 years (72 / 8 = 9). For a young NCO or Officer at age 24, this means that by age 60 (in 36 years), your initial investments should double FOUR times. $1,000 today will be $16,000 in time for your retirement!

This is really useful because we're talking about buying power. In reality, your investments are growing much faster: this portfolio will be worth about $24,000 because the "pre-inflation" rate of return is 9.2% -- but by adjusting for inflation and using 8%, you can plan for and measure the buying power and not the account balance. In other words, a thousand dollars saved today will provide you with sixteen times more wealth in retirement.

The 4 Percent Rule for Retirement

The 4 Percent Rule is a popular rule for determining how much you can withdraw from your retirement savings each year without running out of money. Essentially, if you withdraw 4% of your portfolio annually, you have basically a 0% chance of running out of money in 30 years -- and a 98% chance that after 30 years you'll be even richer. It's the most conservative planning rule for how much you can spend in (and need to save for) retirement, so it's also called the Safe Withdrawal Rate (SWR).

Example: If you want to generate $40,000 per year in retirement income, you'll need a portfolio of approximately $1 million (4% of $1,000,000 is $40,000, or $40,000 / 4% = $1,000,000).

The 4 Percent Rule has come under fire recently, with calls to use only 3%. This is not necessary. The main reason is that those who criticize the 4 Percent Rule include two disastrous decisions in their financial plan: (1) they rebalance into 60-80% bonds by retirement, driving down their return to 6%, and (2) they use a professional Financial Advisor who charges a 1% fee, further reducing their returns to a measly 5%. If you make those two mistakes then, yes, you cannot use the 4 Percent Rule. But fortunately you are part of the MWC community, and won't!

The 75 Percent Rule

The 75 Percent Rule suggests that in retirement, you'll generally need about 75% of your pre-retirement income to maintain your current lifestyle. This accounts for reduced expenses in retirement, such as commuting costs and work-related expenses, and takes into account that you will pay off your home mortgage before or just at the beginning of retirement, eliminating your #1 expense. It also takes into account eligibility for Medicare from age 65, which helps reduce health care costs.

Example: A typical middle class lifestyle costs $100,000 per year today, so you can plan for needing about $75,000 per year in retirement to maintain your lifestyle. 

If you plan to retire to an expensive area, on the other hand, such as Hawai'i, Alaska, SoCal, or New York City, it would be wise to stick to 100% of your current cost of living.

A Practical Savings Scenario - Part 1

Let’s take a look at how we can combine the Rule of 72, 4 Percent Rule, and 75 Percent Rule. In this case we'll use a young E-5 who is currently single, earning about $50,000 per year, and budget using the Military 40:40:20 Rule. Monthly they spend about $1,650 and save about $1,650. Their goal is to achieve an Upper-Middle Class Lifestyle, which in today's dollars starts at about $150,000 a year in terms of cost-of-living. How much do they need to save for retirement?

1. 75 Percent Rule: We first adjust for their retired cost of living, or $150,000 x 75% = $112,500.
2. 4 Percent Rule: Next, determine how much they need in savings at the start of retirement to live on 4% of their savings each year: $112,500 / 4% = $2,812,500.
3. Rule of 72: Then find intermediate "check points" along their savings "flight path" to ensure they have $2.8 million by retirement. We plan for both "early" (age 59 1/2) and "full" (age 67). This assumes an 8% Real Return, doubling every 9 years, which means once you hit a "check point" at the right age, your money will grow to your goal by itself -- you can stop saving: 

This table has several important lessons in it:

• The younger you start, the more money you'll have, and sooner;
• Once you reach a "check point" you can stop saving for this goal, giving you more cash now;
• Becoming a multi-millionaire is relatively affordable, especially on a steady military paycheck;
• It is never necessary to "max-out" your TSP contributions (the max in 2024 is $23,000).

Now we just have to find the monthly savings plan to take us there. In this case, if this E-5 had not saved at all and just allowed the automatic 5% deposit under the Blended Retirement System (BRS), they'd already have $11,000 in their TSP. To reach the $175,000 check point in 7 years, they would save $1,400 a month. Thanks to the BRS 5% matching, they'll get $150-200 each month from the government, so they only need to save $1,250 per month, within their $1,650 monthly savings budget.

If this E-5 keeps it up for 18 years, they will have over $700,000 at age 42. This has moved them from the Flight Path of retiring at age 67 onto the "early" plan retiring at age 60. On the other hand, if they're happy with the plan to retire at 67, they can also slow down their savings to hit the 40-year check point of $350,000 by saving just $875 per month. With the BRS match of $150-200 per month, they will be a multimillionaire retiree for a cost of just about $700 per month (and for only the next 16 years!).

The cheapest option still would be a monthly savings plan from age 24 all the way up to age 67. In this case of saving the least per month, but for the longest, they would only need to save $555 per month for the next 43 years. If they have a 5% employer match that entire time, that means saving less than $400 per month for retirement. Someone who can afford to save $1,650 per month can now invest over $1,000 each month, or nearly $15,000 every year, towards other non-retirement goals.

A Practical Savings Scenario - Part 2

Assuming you've already set aside your Emergency Savings Fund, using these rules helps you to avoid the mistake of "maxing-out" your TSP (and IRA) to save only for retirement. If our young E-5 has chosen the optimal path of reaching $700,000 by age 42 and is saving $700 per month (which when combined with the 5% matching contribution in BRS will always be more than the $875 monthly savings amount required), right now in Month One they have an extra $950 to save elsewhere. So what to do with it? Two common long-term savings goals for service members are:

1. Major Purchase (Home or Investment Property):

• Goal: Save $50,000 in 6-8 years for a VA Loan home purchase with 5% down.
• Strategy: Invest $400/month for 8 years OR $550/month for 6 years.
• Result: $50,000-55,000 purchasing power in 6-8 years (net of inflation).

2. Major Life Change (Business/College/Transition):

• Goal: Save $150,000 in 14 years for starting a business or as a financial cushion.
• Strategy: Invest $550/month for 14 years.
• Result: $170,000 purchasing power in 14 years (net of inflation).

If you're keeping track, this E-5 could save $1,650 per month starting right now. They have saved $700 per month for their TSP, $550 per month for career transition, and $400 per month for a future home purchase. This is $1,650, meaning all these dreams are affordable. Better still, as they get promoted and receive pay raises -- and soon also their Basic Allowance for Housing (BAH) -- their budget will expand. They'll be able to spend more now AND save more for the future.  

The Path to Early Retirement

Imagine reaching age 50 with $1 million in your brokerage account. By drawing down from this account and letting your retirement savings continue to grow, you could delay retirement account withdrawals until age 67, maximizing your retirement income. You don't need any of that $1 million to be left by the time you are in your 60s and can start withdrawing from your TSP.

When you max-out your TSP savings, you lose this opportunity; if you don't create a numbers-based strategy with different savings goals and save for them each month, you miss the chance. We're not just talking about saving dollars -- you're looking at a smart budget actually buying you ten years of freedom to retire at age 50 instead of 60. Check out our upcoming book, The Ultimate (Military) Retirement Plan, available to preorder on Amazon from September 1st. Opt-in here to receive updates on publication, and to be eligible for a free copy at release!

Conclusion

Financial success isn’t just about earning money—it’s about making your money work for you. With a good strategy, all your goals are within reach. But don't just grasp in the dark with random savings rates or dollar amounts copied from your buddies. Apply simple and easy-to-use rules in your planning to make sure you not only choose the right savings goal, but also save enough today to reach it.

If the math seems too complicated to figure out, or too much to do by yourself, book a FREE consultation today to speak with a coach who can help you take control of your financial future.