Top 3 Moves for Your Career Starter Loan, Enlistment/Reenlistment Bonus, or Continuation Pay

One of the most exciting and challenging events in your military career is receiving a lump sum of cash as an incentive to join, reenlist, or extend. Generally the cash bonuses for joining up or extending a career have been only for enlisted military personnel, but under the new Blended Retirement System everyone in uniform is eligible to take a bonus between 8-12 years of service. Continuation Pay as it's called gives you a percentage of your Base Pay, and will depend on your branch of service as well as your Military Occupational Specialty (MOS). Check out the rates for 2024 HERE.

• Lowest: Navy/Air Force/Coast Guard RESERVE Component: 0.5x monthly Base Pay
• Highest: Marine Corps Active Duty: 5x monthly Base Pay

That bonus range means a reserve Navy E-6 may only receive about $2,200 -- but a Marine Corps major (O-4) with 12 years could walk away with over $45,000!

And you don't have to wait until you hit 8 or more years of service (and agree to serve another 4 years to get the bonus) to receive a large cash payment. In 2024, the various branches are offering cash incentives to enlist:

• Navy: $10,000 paid to any high school graduate to enlist
• Air Force: $8,000 "Quick Ship Bonus" for going to Boot Camp right away
• Marine Corps: Up to $15,000 to enlist in a "critical skill" MOS such as cyber technology
• Army: Up to $50,000 to enlist in "High-demand MOSs" (there are several)

In addition, newly commissioned officers may be eligible for the Career Starter Loan (CSL) offered by Navy Federal and USAA. While these aren't cash bonuses to keep, the lump sum of a cash loan can have the same effect: you feel pretty rich -- and are ready to spend. CSL options in 2024 are:

• Navy Federal: $32,000 repayable over 5 years at 1.25% interest (about $550 per month)
• USAA: Up to $35,000 repayable over 5 years at up to 2.99% (as much as $628 per month)

Lastly, you have the reenlistment (or "Selective Retention Bonus") bonuses that are offered to enlisted personnel at their first, second, or later reenlistment. These bonuses depend on performance, of course, and on your specialty. Because of that depending on your branch and specialty, anywhere from 20% to 80% of enlisted personnel are eligible for the bonus -- but not everyone.

• Navy: Up to $100,000 for Selective Retention Bonus (SRB)
• Air Force: Up to $180,000 for SRB
• Marine Corps: Up to $50,000 for SRB
• Army: $20,000-50,000 for "Ranger Bonus" and other programs

So with all this cash potentially coming your way, and for some of you possibly getting 3 bonuses across your career (Enlistment, Selective Retention Bonus, and Continuation Pay), what should you be paying attention to and planning for? This blog post discusses what to expect with taxes and how to plan to avoid them, as well as the best things to do with the money when you do get it.

What Should I Do with the Cash?

When you get your bonus or CSL, you need to have a plan already in place: without a plan, there's a pretty good chance you'll spend that cash and wake up a few months or a year later and see a big fat $0 in your bank account. On the other hand, with a good plan and a little financial discipline, you can turn your bonus or CSL into not just a financial "safety net" -- you can actually use it to kickstart your wealth. Investing your bonus can multiply it: which would you rather have, more or less money? Here are three smart moves that will set you up for long-term financial success.

1. Strengthen Your Emergency Fund

First priority: establish a solid emergency fund. Depending on your rank, living situation, and whether you have a family, you will need $2,000-10,000 in an Emergency Savings Fund as soon as you join the military and start working for a living. You can learn exactly how to plan your Emergency Savings Fund target by reading our book Service and Wealth available on Amazon, and by reading our blog post HERE. When unexpected expenses hit -- and they will -- you'll be prepared to cover them, and will be able to avoid going into costly debt. Even better, when you create your Emergency Savings Fund in a High Yield Savings Account (HYSA) earning 4.5-5.5% interest, you'll have more money than just what you were paid as a bonus!

Example:
$5,000 in an emergency fund earning 5% APY = $5,250 after one year
$5,000 spent on non-essentials = $0 after one year

An Emergency Savings Fund (ESF) is one of the two non-negotiable savings funds you have (the other is your retirement savings), and being able to top-off your ESF all at once instead of trying to save a couple hundred bucks a month will immediately check that box.

2. Save for Cash Purchases

Next, allocate funds for future large purchases. This strategy helps you avoid financing and the associated interest costs. Whether it's a car, furniture, or other significant expenses, paying cash puts you in a stronger financial position. Not only will you save $1,000s in interest payments on a loan, money that you can immediately start saving for your next goal since you aren't making those payments, you can usually negotiate a lower price for things like cars and houses when you pay cash.

Comparison:
Financing a $20,000 car at 6% APR for 5 years = Total cost of $23,200 ($3,200 in interest lost!)
Paying $20,000 with cash = Total cost of $20,000, monthly savings of $386

By using your bonus to pay with cash, you save $3,200 in interest -- but what's more is that if you save the $386 each month that you otherwise would have paid to the bank for your auto loan, you will rapidly build your wealth. After 1 year you'll save $4,632, after just 26 months you'll have $10,000, and after 5 years instead of the bank having your $23,200, you'll have all that in the bank! Using part of your bonus or CSL in this way not only gets you the car you need and avoids bad debt, it also provides a clear pathway to home ownership in the next five years.

3. Invest in Non-Retirement Accounts

While retirement savings are crucial, don't overlook the importance of non-retirement investments. The Thrift Savings Plan (TSP) uses "payroll deductions" to fund your retirement, and you can make up to $23,000 a year in 2024 in those contributions. Few of you in the military will ever reach that dollar amount, so there's no reason to dump cash from your bonus or Career Starter Loan into a retirement savings account. Besides, your payroll deductions qualify you for the 5% matching contribution from your branch, and you need to make that 5% every month to get the bonus every month. So your retirement savings priority is always to make monthly contributions and avoid any large deposits from a bonus or incentive pay. Those could max you out for the year, which means you would lose the free money of the 5% match for all the months you can't contribute.

But you can and should still invest your bonus or CSL if there's money leftover after reinforcing your Emergency Savings Fund. This is a way to get a massive head-start on your savings goals for the future, as a bonus invested in low-cost mutual funds could double in value in 8-9 years, while cash used to buy real estate can achieve the same growth while also providing extra income now.

Investment Example:
$5,000 invested in an S&P 500 index fund with an average annual return of 8% (after inflation):
After 5 years: $7,449
After 10 years: $11,098

This growth occurs while maintaining liquidity, which means that when you're ready you can cash out the investment and use it for whatever you like. So long as you invest it for at least 12 months, you may not have to pay tax on the gains up to $47,026. On the other hand if you put your bonus or Career Starter Loan in a retirement account, you need to leave it there until you're 59 1/2. It doesn't make a lot of sense to take a cash bonus that you can invest now to create life-changing wealth, and just stash it away from yourself for 30-40 years!

Tax Implications and Strategies

Be aware: nothing in life is free, and if it sounds too good to be true, it probably is. Enlistment and reenlistment bonuses, as well as your Continuation Pay bonus, are taxable. DFAS will automatically withhold the federal tax owed on the bonus, which will be 12-22% for almost everyone in uniform. As it is automatically withheld, you won't actually get your entire bonus deposited in your bank account. In addition to feeling pretty shady, this makes planning in advance of your bonus extra important. It can be tempting to run out and buy something you want like a car for the amount of your full bonus, only to realize you can't actually afford the full amount because of taxes withheld!

Even more risky is that the bonus amount is added to your Base Pay for the year to calculate your total taxable income. That means for especially large bonuses and Continuation Pay, accepting the bonus could push you into a higher tax bracket. An O-4 in the Marine Corps accepting Continuation Pay could be looking at owing $10,000 or more in Federal Income Tax on their bonus!

Obviously this means you have to plan for taxes. At the simplest level that could be just taking your bonus and multiplying it by 0.8 so you know about what to actually expect from DFAS. For example, a Navy poolee who signed up to receive the $10,000 bonus should only count on $8,000 added to their first paycheck. When they file their tax return next year there's a good chance they'll get it refunded, but it's important to not commit to spending money now that you won't get for several months.

A better strategy is to plan for an investment or purchase that you can "deduct" from your taxes. When you create deductions, those will balance out the bonus and can even totally eliminate any taxes you would owe on your bonus. While you still would have to wait until you file your taxes to get back that money, having all of your $45,000 Continuation pay is way better than keeping only $35,000, no matter how long you have to wait!

• Tax Mitigation Strategy: Real Estate Investment
  The best option for most of us in uniform is to use all or part of your bonus as a down payment on a rental property. You will be able to deduct closing costs, mortgage interest, property taxes, repair costs, and more. Additionally, you are able to tap into a thing called "depreciation" that allows you to deduct even more on your investment. The goal is to get enough deductions to match your bonus amount.

Example:
$20,000 bonus used as 10% down payment on a $200,000 rental property
Potential tax deductions:
- Depreciation: $7,272/year
- Deductible Closing Costs: $4,000 (taxes, points, insurance, etc.)

- Mortgage interest: $10,115 in Year 1 (at 6.75% interest rate)
Total potential deductions: $21,387

These deductions could significantly reduce your taxable income depending on your filing status and the ability to itemize. Also pay attention to the requirement that you rent out this house to take advantage of all the deductions. If it is your primary home (where you live), you don't get depreciation and other deductions unique to investment properties.

Case Study: Career Starter Loan Allocation

Let's examine how an officer might allocate a $35,000 Career Starter Loan:

• Emergency Savings Fund (in HYSA): $8,000
• Cash Purchase of a Starter Car: $8,000
• Cash Savings for Future Home Purchase (in HYSA): $10,000
• Non-Retirement Investment Account: $5,000
• Cash in a Checking Account to Use Now: $4,000

This leaves the young officer with only the CSL payment (about $600) for debt. In 2024 the average monthly payment for a car loan is $610, and economic car loan payments are around $400. So the cash flow situation is significantly better avoiding debt. And the investments build wealth. By the time the CSL is paid off, they are likely homeowners and will have:

• Emergency Savings Fund: $10,267 (earning 5% in HYSA, no additional deposits)
• Paid-off Car Resale Value: $5,000 (using standard depreciation rate)
• Cash Savings (in HYSA): $12,834 (or in equity in a home if used for a down payment) 
• Non-Retirement Investment Account: $7,449 (using average of 8% returns)

In this case, the young officer after five years has paid off their loan, leaving them debt-free -- but also has preserved $35,000 in wealth by investing in assets and avoiding more debt. They also built into their plan an "allowance" to spend and enjoy: some, just not all of the loan (or bonus). Having a little discipline to spend some now but save most for later is the main difference between a life of financial stress, and starting to build wealth. Compare this to spending the entire loan on immediate purchases and having $0 to show for it after 5 years, and you can see the advantages of planning.

Conclusion

Driving a $10,000 Toyota and saving your cash instead of blowing a few grand on clothes, video games, vacations, and unnecessary housing costs may not match up to the picture of what most service members do with their bonus. But becoming wealthy is also not typical in the military, despite being super accessible and relatively easy to do with the benefits and bonuses of a military career. All it takes is a little knowledge, a solid plan, and some discipline to execute. But you've already got the discipline -- and now you've got the knowledge.

The next step is to make a plan in time to put it in action when your first (or next) bonus, loan, or lump sum is deposited into your bank account. By focusing on building your emergency fund, saving for cash purchases, and investing wisely, you're setting yourself up for long-term financial stability. Remember, smart financial decisions now lead to greater freedom and opportunities in the future. If you're ready to start making your own custom plan, sign up for a free consultation with me at www.militarywealthcoach.com, or DM us on Instagram, Facebook, LinkedIn, and other socials.