Financial Moves That Military Families Need To Make Early in 2021
After a tumultuous year in 2020, now is a good time for everyone to reassess their finances and make the most of their benefits for 2021. And military families have access to special financial benefits that aren’t available to civilians, including low-cost investments, special tax breaks, military relief funds and low-interest loans. Here’s how to make the most of these valuable benefits to get your finances on track after a volatile year and help build your savings for the future.
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Make the Most of the TSP Match
Members of the military can save automatically in the Thrift Savings Plan, which is a low-cost and easy way to build tax-advantaged savings for retirement. If you’re in the Blended Retirement System, the Department of Defense will match your Thrift Savings Plan contributions up to 5% of your pay. That’s free money. Try to contribute at least enough to get the full match. “The BRS is a per pay period match, so you have to watch that you don’t cap out early and in turn miss matching later in the year,” said Patrick Beagle, a certified financial planner and retired Marines helicopter pilot in Springfield, Virginia. You won’t get the match if you aren’t in the Blended Retirement System, but you can still benefit from investing automatically in this tax-advantaged plan. You can contribute up to $19,500 to the TSP in 2021 (or $26,000 if you’re 50 or older). If you’re deployed to a combat zone and receive tax-free income, you can contribute up to $58,000 to a TSP in 2021. See TSP.gov for details.
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Consider Roth TSP Contributions
You can either make pretax contributions to the TSP, which reduces your taxable income now and grow tax-deferred until retirement, or you can make Roth TSP contributions, which don’t provide a current tax break but grow tax-free for retirement. Getting a tax break today might seem attractive, but you’re likely to be in a lower tax bracket while you’re in the military than you will be in the future — especially since part of your pay is from a tax-free housing allowance. If most of your other retirement savings will be taxable when withdrawn, making Roth TSP contributions can diversify your retirement income, providing some money you can tap without taxes no matter what happens in the future.
Review Your Investments
After a volatile year, it’s a good time to make sure your investments still match your timeframe and risk tolerance. An easy way to do this is with the TSP’s L Fund, a target-date (lifecycle) fund. You choose the L Fund based on the year you plan to start withdrawing the money (for example, L 2050 for withdrawals starting around 2050) and the fund starts out invested primarily in stock funds for the long-term and then gradually shifts to more-conservative funds as your withdrawal date gets closer. “The lifecycle target is based on withdrawal date, not retirement date,” Beagle said. Choose the L Fund closest to the date you plan to stop working entirely and start withdrawing the money, not when you plan to retire from the military.
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Check Your Beneficiary Designations
If you were young and single when you joined the military, you may have designated your parents as your life insurance and TSP beneficiaries. The money will go to your designated beneficiaries, even if you’re now married, no matter what your will says. Update the beneficiary designations for your life insurance and retirement plans when you get married or divorced or have other major life changes.
Prepare For Financial Emergencies
Even though service members tend to have more stable jobs than many civilians, they can still have financial emergencies, such as car or home repairs. Or your spouse may lose his or her job, which happened to many families this past year. Make building up your emergency fund one of your top financial priorities. Set aside enough money in a safe and accessible account to cover at least three months’ worth of your essential expenses, Beagle said. Add more if you plan to leave the military soon. Keep this money in a money-market account or savings account that you don’t use for your regular bills. If you do have unexpected expenses you can’t cover on your own, see if you can get help from a military relief fund before taking on expensive debt. Each branch of the service has a military aid society that provides interest-free loans or grants for emergency expenses, such as car and home repairs, extra child care costs because of COVID-19 and disaster relief. See the Air Force Aid Society, Army Emergency Relief, Coast Guard Mutual Assistance and the Navy-Marine Corps Relief Society.
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Consider Refinancing Your Mortgage With Special Military Rates
With interest rates so low now, many people can benefit from refinancing their mortgages. You may be able to reduce your interest rate and your monthly payments, or you could pay off your mortgage faster. Veterans and servicemembers who currently have a VA loan have an extra option — a VA interest rate reduction refinance loan (IRRRL). “VA IRRRL is a huge deal now,” Beagle said. See the VA’s factsheet for more information. Compare the rates, fees and closing costs for the VA IRRRL loan with traditional refinancing and calculate how long it would take for your savings to cover the closing costs and fees — refinancing may not be worthwhile if you plan to sell your house in the next few years.
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