Military Finance Network

Those who served our nation have access to one of the most powerful home loan programs on the planet, the VA loan. That also includes a couple of the most flexible and financially beneficial refinance programs available to consumers.

Cash-out refinancing loans and interest rate reduction refinancing loans (IRRRL or VA streamlines) are two primary, VA-guaranteed options for veterans looking to lower or reorganize their VA loan payments.

Cash-out refinancing loans

Veterans in need of refinancing a lien against their home can pursue a cash-out refinancing loan. Lenders will conduct a full appraisal and credit check, but veterans could receive a loan amount that is 100 percent of the appraised value. Should the loan amount exceed the amount needed to pay off the lien, veterans can take the difference in cash pending the lender’s approval.

Interest Rate Reduction Refinancing Loans (IRRRLs)

While cash-out refinancing requires veterans to take out the loan on their primary residence, IRRRLs only require the borrower prove prior occupancy of the property. The major benefit of IRRRLs is refinancing a VA loan at a lower interest rate. Borrowers can either reduce the original VA loan’s interest rate or convert a VA adjustable rate mortgage (ARM) loan to a fixed rate. Unless borrowers are converting an ARM loan, the monthly principal and interest will decrease.

Lenders may require an appraisal, credit check and underwriting, but the VA does not require these for IRRRLs, thus reducing paperwork for veterans. As an added IRRRL perk, veterans can add up to 10 years to the original loan term, as long as the total does not exceed 30 years and 32 days.

Just like VA loans, these refinancing options offer advantages to veterans that conventional options don’t match.

For more information on VA loan refinancing options, visit www.vamortgagecenter.com.

Military retirees have one of the best pension plans in the US. After only 20 years, military retirees can retire with 50% of their basic pay, full medical coverage, and a slew of other benefits that will stay with them throughout the remainder of their lives. It is not a stretch to say that a military retirement is worth millions over the life of the retiree.

Considering that one can begin receiving retirement benefits around age 40 and potentially receive the benefits for another 40 years or more, this is an extremely good deal. But is it enough to live off for the rest of your life?

Can you live off military retirement?

For most people retiring from the military services after 20 years, the answer is most likely “no.” A military retirement is fairly generous compared to most civilian retirement plans, and can even be worth millions over the life of the retiree. However, the immediate cash flow is probably not enough for most people to retire immediately, especially for many retired enlisted military members who bring in $20,000-$30,000 per year.

Living on military retirement pay becomes even more difficult if you have a mortgage, credit card debt, a car loan, and other regular payments. I many cases, a military pension is a great financial blessing, but it may not be enough to live on.

Making it work – living off military retirement pay

Not everyone can make a living from a military pension, but there are some people who are able to do it. One example is a couple who both retired from the military and had their story featured in CNN Money. They both are military retirees who will receive a combined $58,500 per year in military retirement pay, in addition to other military retiree benefits such as medical care. This is not a bad sum of money for not doing anymore work for the remainder of their lives!

Even with their retirement pay and health benefits, there are some potential roadblocks to their plan not to work anymore. Their retirement pay currently covers their fixed costs including their mortgage and other regular bills. But it won’t give them a lot of freedom if they need to support their children through college, or have many unexpected large expenses arise. Even something like taking a family vacation will need to be carefully planned.

I think it may be possible for them to do it, but I imagine that after awhile they will want to find some source of work to keep them occupied. It may not be a traditional 9-5 job, but it may be a part time job, or a hobby that provides them income.

The most important thing about their situation is this: their military retirement pay and benefits are giving them the option and freedom to decide whether or not they work. The freedom of bringing in $58,500 per year without doing anything else gives them the opportunity to work, or choose more rewarding work if they decide to do that. That is a beautiful thing!

How to stretch your military retirement pay

The key to being able to retire on your military pension is paying off as many loans and credit cards as possible before you officially retire from the military. Debt is the quickest way to enslave yourself and tie up your future pension checks. But eliminating your debt gives you the opportunity to use your money for more important things, such as your regular living expenses, vacations, and other enjoyable activities.

Another important factor in military retirement is the addition of other sources of retirement funds, especially those which will be available to you later, when inflation erodes the relative value of your military retirement pension. That is why it is important to open a Roth IRA, Thrift Savings Plan, or other investments. You can open a TSP account through your military pay unit or you can check out the best IRA brokerages for good places to start your civilian retirement plan.

That’s a bold headline, especially if you a retired enlisted military member only bringing in a little over a thousand dollars a month in retirement pay. But it’s true. A military retirement is worth well over a million bucks. In some cases it is worth millions of dollars.

Before we get too deep into this, I want to define what I am talking about. I’m talking about two factors – the long term value in regard to how much you will receive in direct pension over the lifetime of your retirement benefits and the value of the retirement benefits including healthcare coverage, and other benefits. Combined, these benefits are easily worth over a million dollars, even if you don’t have the spending power of a million dollars right now.

How Much is Military Retirement Really Worth?

Let’s look at an example of retirement pay for an average military career. Since military members are eligible for retirement benefits at 20 years, we will use a reasonable rank and service time for our examples.

It is reasonable to assume that the average enlisted member will be able to retire at 20 years having achieved the rank of E-7, and the average officer should be able to retire at 20 years at the rank of O-5. Of course there will be outliers based on when you served, your career field and other factors, but these ranks and service times should apply to the majority of careers (if anything I am aiming on the conservative side because many people choose to serve longer than the 20 year mark, earning an extra 2.5%-3.5% on their retirement pay per additional service year, depending on whether they take the high 3 retirement plan or the Redux retirement plan).

Example Monthly and Annual Military Retirement Pay

As we mentioned, we will look at a military retiree with 20 years service at the ranks of E-7 for enlisted and O-5 for officers. The base pay for these ranks in 2009 is:

• E-7 Monthly: $3,995.40
• E-7 Annually: $47,944.80
• O-5 Monthly: $7,697.40
• O-5 Annually: $92,368.80

Most retirees at 20 years will receive 50% of their base pay, which would equal the following amounts:

• E-7 Monthly: $1,997.20
• E-7 Annually: $23,972.40
• O-5 Monthly: $3,848.70
• O-5 Annually: $46,184.40

How much is Military Retirement Pay Worth Over a Lifetime?

The next factor to consider is that military retirement pay will be there day in and day out. There are few places in the world that someone can receive a lifetime pension starting at or around age 40. Many military retirees will receive a monthly cash payment for over 40 years. When you add in cost of living adjustments and inflation adjustments, we’re talking about some serious cash!

Using the numbers above from a recently retired E-7 or O-5, we get the following lifetime payments (note: these military retirement pay numbers are not adjusted for inflation and do not include any COLA increases; this is not a planning tool, but for illustration purposes only. Your specific retirement benefits will vary based on your situation):

• E-7 retirement pay for 20 years: $479,448.00
• E-7 retirement pay for 30 years: $719,172.00
• E-7 retirement pay for 40 years: $958,896.00
• O-5 retirement pay for 20 years: $923,688.00
• O-5 retirement pay for 30 years: $1,385,532.00
• O-5 retirement pay for 40 years: $1,847,376.00

Even without COLA or other inflation adjustments, we can see that we are reaching some serious numbers. Each additional year you serve before you retire can add another 2.5% to your monthly and annual pay, and each higher pay grade you achieve can add hundreds, or even thousands of dollars per year. As previously mentioned, the numbers used in this article are meant to be a conservative estimate.

Value of Military Retirement Medical  Benefits

OK, there is a minimal TriCare payment, but compared to what civilians pay, it is basically a non-issue. Benefits for retired military members are also guaranteed – they won’t drop you after you have required expensive procedures or for pre-existing conditions. Guaranteed medical coverage is a huge blessing in today’s American society. Here is a little more information about kinds of insurance available to civilians: comparing individual and group health insurance. Hopefully that will hep you better understand the value of military retiree medical benefits!

Military sponsored medical benefits are incredibly valuable, especially as you get older and when they cover your spouse. There are very few civilian plans that are similar to this. Most people spend several thousand dollars per year for basic medical coverage, and this doesn’t include out of pocket expenses for doctors visits, medical procedures, prescription medication and other associated costs. It would not be unreasonable to place a value of $10,000 per year on military retiree medical benefits, even for a healthy individual. Add a spouse to the benefits, guaranteed coverage, little to no out of pocket expenses for complex medical procedures, and other factors, and the medical benefits alone can be worth hundreds of thousands of dollars or more over the course of a lifetime (and in some instances, into the millions of dollars for people who receive complex medical care over a long term period).

Commissary, Base Exchange, and other Base Benefits

I won’t even try to assign a value to these benefits because they don’t apply to all military retirees equally. Some people may practically live on base, visiting the base clubs, shopping at the exchanges, using the gyms, auto hobby shops, etc. and other people may not live near a base and may not be able to take advantage of any of these benefits. So this category falls in the “good deal if you can get it” benefit, but not a core part of the equation. But it is still worth mentioning because many retirees save a lot of money each year by shopping on base.

Your military retirement is worth millions

Thousands of dollars coming in on a regular basis quickly add up over the years. Add in increases for inflation, essentially free health care, and other benefits and you can see how the value of a military retirement can quickly be worth millions of dollars over a lifetime.

I didn’t stay in long enough to qualify for military retirement benefits – I separated from the USAF with an Honorable discharge after 6.5 years of service. Part of me looks at the military retirement system with a bit of longing. It is a great system for those who qualify and I would love to be able to receive military retirement benefits for the rest of my life. However, separating from the military was the best move for me at the time and I have no regrets regarding my separation or my military service. I am proud to have served and the military is a large part of who I am today.

*disclaimer about this article: The calculations are for illustrative purposes only and do not reflect the exact retirement benefits you will receive. This is a simplified look at military retirement benefits and does not take many factors into consideration, including taxes, disability benefits, inflation, COLA, and other factors.

If you look closely, you will notice that Military Finance Network has a new author listed for all of the articles. What’s going on, you might ask? Well, we’re having an unofficial change of command ceremony. It’s unofficial because the author is actually the same person that has been here all along. For the last few years I have been using my middle name as an online pseudonym for my blogging endeavors.

Blogging under a pseudonym

Lot’s of folks use a pseudonym online. I started it when I began writing my other personal finance blog, Cash Money Life. When I started blogging I was new to online communities. I primarily used the internet for e-mail, shopping, and online banking. I was unsure about creating a website that deals with financial topics and using my real name. I thought it might make me a target for identity theft or give friends and coworkers too much information about my financial situation. There were also many other bloggers who were anonymous when I started blogging, so I thought that even if it wasn’t what everyone did, it was acceptable. And it was, and still is acceptable to be anonymous online. But I have reached the point where I prefer to use my real name.

Why I chose to use my real name

The main reason I am now using my real name online is for transparency. I want people to know the information they are reading is coming from a real person and not an anonymous “internet writer.” There are other reasons for the change as well – juggling two identities was cumbersome. I had to use my real name when dealing with advertisers and other professional interests, then use my middle name for writing, answering comments, and other issues. Explaining the use of two names was tiresome for me and confusing to some people I dealt with.

What changes?

Nothing. I am still drawing on my military and personal finance background to offer you information that will be helpful to your financial situation. The focus will be core financial concepts and military and veteran benefits programs to help you maximize the money in your wallet.

Should you blog anonymously?

This is a broad question with a lot of ramifications. Before jumping in, look at your situation, what you will be blogging about, your goals, and other factors such as your work arrangements, policies at work, intended audience, etc. I wrote more in depth about the topic at Cash Money Life, and you can read my thoughts on blogging anonymously for more information.

As always, feel free to reach out with questions or comments and I will get back to you as quickly as is reasonable. Thanks for reading, and thanks for your service!

My first experience building credit was with a credit card that I opened while I was attending college. Thankfully, I avoided the classic college mistake of maxing out the card in the first month of ownership, then living with debt for the next 10 years. My goal was to apply for the credit card, make a several hundred dollar purchase, then pay off the loan over a couple months to prove I was capable of making regular payments. I paid a few dollars in interest charges over the time I made those payments, but in my opinion, a few dollars in finance charges was well worth building my credit history and credit score.

It has been well over ten years since I opened my first credit card and I haven’t made a finance charge on a credit card since then. That experience and several other successful loans since then have helped me build a high credit score and a favorable credit history.

Using credit cards to build credit history and credit score

Credit cards aren’t the only way to establish your credit history, but they are usually the easiest way to create a credit history because it is usually easier to open a credit card than other forms of credit such as a car loan or mortgage (lenders are less likely to lend that much money to someone who doesn’t have any credit history).

Once you have established a line of credit, your actions are reported to the credit bureaus which begin recording your credit history on  your credit report. Over time, your actions will be used to determine your credit score. Here is more information about the difference between credit report and credit score.

No credit or poor credit? If you are having trouble getting approved for a credit card, then you should check out secured credit cards, which require a deposit and sometimes come with an annual fee. The deposit works as collateral for your charges and if you don’t make on time payments, the bank will use your deposit to pay your charges. Secured credit cards cost a little more than traditional credit cards, but they often come with guaranteed approval and with proper use will help you improve your credit score. After proving your ability to make payments, you can often upgrade your secured credit card to a non-secured card that has a better interest rate and doesn’t come with annual fees.

Important notes about building credit with a credit card

Getting a credit card can help you build your credit so long as you treat it responsibly – otherwise you are only going to hurt your credit score. Credit cards can be a trap for some people, so it’s best to make sure you only make charges you can and will pay in full each month. Otherwise you may find yourself getting into a cycle of debt that is difficult to escape from.

Tips to establish your credit and increase your credit score:

1. Understand how your credit score works.
2. Only charge what you can pay with cash.
3. Pay your full credit card bill each month.
4. Repeat the process.
5. Add time.

The key to establishing a good credit history and credit score is being able to prove that you are responsible and can continually pay loans that you receive. There is no silver bullet to improving your score quickly; it takes time and commitment.