Investing while at the Academy

My C3C DS asked me an interesting question about a week ago. He asked me about investing. I was proud to hear that he is thinking about his future and impressed that a 19 year old would think about putting his money away instead of what car to get. When I started my career I invested in a deferred compensation account and later started a Roth IRA. My question is where could he get information on this while at the academy or who he could contact to start investing. He already has a USAA account but I'd don't know how successful they are in regards to deferred compensation and Roth IRA accounts. Thank you.

USAA has a solid portfolio for investment options in a Roth IRA and the interface is easy as pie. USAA has financial advisors that can assist him in setting up the account - but it's also very easy to do on his own (USAA IRA link). He can call USAA and ask for an advisor (210-531-8722).

The mins are usually $3000 to buy into a mutual fund (he can start the IRA account with any amount obviously) BUT he can elect to have a monthly automatic deposit for $50 and that is also sufficient to begin investing in most of the funds. Several of the funds have a Morningstar rating of 5 stars and perform well. While fidelity or some of the others might do marginally better in some years on their funds, the USAA interface is much easier to use and every account comes up on one dashboard. And its easy to manage on the mobile app.

I've had a Roth IRA with USAA since I was a C3C as well. It's been awesome, I've saved so much, and glad I started early. These days I enjoy my USAA 401K, but that Roth account looks pretty now!

What's nice is that he will be able to take the USAA career starter loan as a C2C. While I couldn't max my IRA as a C3C, the career starter loan let me max two years right away when I got it. Huge helper!

Again, USAA's mission is to help every single member secure their financial future! I encourage him to call and ask for a financial advisors. The financial advisors work only on salary, have no incentives to sell products, and their mission is to help members make sound financial decisions. Even if you don't want to take their funds advice, they can provide great information on USAA investment, retirement, and other products and see how they align with financial goals. They can get him started with an IRA no sweat.

Thank you for the info. I will pass it along.

This question belongs to bogleheads forum, but the short answer is, I suggest Roth IRA with Vanguard, such as LifeStrategy 2060 fund or similar and forget it. This is lowest expense diversified investment mix of index funds which will combine stocks and bonds in "set it and forget it" cruise control type of investment strategy.

My son started investing at the Academy as well. He invested his starter loan by maxing his Roth IRA for two years like Hornet did and then taking the balance and spreading it into three other funds through USAA. He grew it enough to buy a house while stationed at Luke. When he moved he kept the house and bought another one in Florida. He is making money on both houses and still keeps all of his investment funds through USAA. He likes his contact at USAA and says that he is great to work with and understands his needs since my son likes to be very involved in keeping up on his money. The only thing that he doesn't use USAA for is his mortgage.

Stealth_81

DS is a C3C as well. He started asking about while in High School actually, but I had him hold off just because he didn't have any real income. He did however always put his savings into a CD in his student accounts.

Apparently, Investing is a thing at USAFA, and since he's an Econ Major, there are quite a few of those around him doing it as well. I get an update every week or two. He has his purchase strategies as well as exit strategies for each acquisition. He seems a lot more educated about it than I ever was.

I can honestly say, when I was 19 (back in the late 80's), and in the Marine Corps..... 'Investing' was not exactly the 1st thing on my mind....

https://www.youtube.com/user/yourmilitarymoney/

The thing is, at 22 years old when you graduate the academy, you have time on your side to invest in your future. That doesn't mean time to WAIT. It means you don't have to play catch up and invest $10,000 per year. If after graduation and getting commissioned, if you invest in TSP (similar to a 401k), you can invest a modest amount each month that will accumulate greatly over the next 40 years. Literally netting you over a million dollars.

As for while at the academy, the key is how much you spend and what will you do with an almost zero percent loan that you have access to. Even with as little money as you make while a cadet, there is absolutely no reason that you can't save enough in those four years to get you started off at your first base with an apartment, furniture, etc. You can easily have $10,000 saved up by graduation day. Unless of course you spend it all. But saving an average of $2500 per year is very easy and doable.

Then, with the next to zero percent loan, you can max out a Roth IRA each year for 5 years, have enough plus some of what you saved for a good used car, and by the time your 5 years is up and the loan is paid off, you will be totally debt free with a great start towards your retirement.

Of course, there will be those who will live beyond their means and/or make very stupid financial decisions. There will be those that spend all their money each month and not have anything saved. There will be those who take the $35,000 loan and buy a new car. These cadets, I don't know what to say about. Finances are something some parents and schools teach kids while growing up, and they have a sense of fiscal responsibility. Some kids, because of their parents and upbringing will live beyond their means, not save, and live paycheck to paycheck. I've seen many enlisted who make a fraction of what officers make, in much better financial situations. I've also seen many officers who are responsible and have a very good life because they balanced their spending and savings. Of course, I've also seen many captains and majors who also had maxed out credit cards, large car loans, and nothing in savings.

Life is not worth living if you save everything and don't get to enjoy life. You should be able to take vacations, spend money on your kids, splurge occasionally, etc. but you need to balance that with saving for the future. Saving for your kids college, a house, retirement, etc. but if you really feel you need that $60,000+ corvette or Lexus instead of the $20-$25,000 car, go for it. You're the one who needs to determine your own self esteem and worth. Best of luck.

Stealth_81 said:

My son started investing at the Academy as well. He invested his starter loan by maxing his Roth IRA for two years like Hornet did and then taking the balance and spreading it into three other funds through USAA. He grew it enough to buy a house while stationed at Luke. When he moved he kept the house and bought another one in Florida. He is making money on both houses and still keeps all of his investment funds through USAA. He likes his contact at USAA and says that he is great to work with and understands his needs since my son likes to be very involved in keeping up on his money. The only thing that he doesn't use USAA for is his mortgage.

Stealth_81

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How long can you take to repay the loan? So your son essentially took a $35K 0% interest loan, invested all of it and then payed it back with future paycheck dollars.

brutus said:

How long can you take to repay the loan? So your son essentially took a $35K 0% interest loan, invested all of it and then payed it back with future paycheck dollars.

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It is a 5-year payback that begins 6 months after graduation from USAFA. His payments were a hair under $600/mo for that time. As a single Lt the payment was no hardship on his budget.

Yes, the actual interest rate for that year was 1/2% for $35,000. It does vary year to year. The loan is first offered at the beginning of their Junior year and that is when most take it. Interest accrues from the origination date of the loan but as I said, repayment doesn't start until after graduation.

Stealth_81

I have "the talk" with all of my kids, as most parents do. They usually go in the order of "the birds & the bees" followed by "saving of the dough" talks. More than 70% of Americans don't have $1,000 in savings. Truly sad and stupid. Don't be one of them.
As many have said, I highly recommend getting your DS/DD into a ROTH IRA, which usually requires $2,500-$3,000 initial buy in. Fidelity, Vanguard, USAA, etc. have several good funds with low maintenance fees (1/2% or less). $2,500 initial purchase, $200/month contribution, average 6% (fairly conservative estimate) annual return, in 42 years will be worth approximately $462k+. That'll get him/her a nice Ferrari at age 60!

Some interesting reading. Just wondering if these loans are exclusive to cadets attending a service academy or if they are also available to those commissioning through ROTC? This is all new to me!

gill0610 said:

Some interesting reading. Just wondering if these loans are exclusive to cadets attending a service academy or if they are also available to those commissioning through ROTC? This is all new to me!

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There is a similar USAA Career Starter Loan available to ROTC and other commissioning sources such as OCS/OTC, enlisted paths and direct commissions. Similar terms, usually a bit higher loan rate. The loan rate is still astonishingly low for a no-collateral loan. Google "USAA ROTC cadets and midshipmen."

Thanks!

My take is never take a loan

Christcorp said:

The thing is, at 22 years old when you graduate the academy, you have time on your side to invest in your future. That doesn't mean time to WAIT. It means you don't have to play catch up and invest $10,000 per year. If after graduation and getting commissioned, if you invest in TSP (similar to a 401k), you can invest a modest amount each month that will accumulate greatly over the next 40 years. Literally netting you over a million dollars.

As for while at the academy, the key is how much you spend and what will you do with an almost zero percent loan that you have access to. Even with as little money as you make while a cadet, there is absolutely no reason that you can't save enough in those four years to get you started off at your first base with an apartment, furniture, etc. You can easily have $10,000 saved up by graduation day. Unless of course you spend it all. But saving an average of $2500 per year is very easy and doable.

Then, with the next to zero percent loan, you can max out a Roth IRA each year for 5 years, have enough plus some of what you saved for a good used car, and by the time your 5 years is up and the loan is paid off, you will be totally debt free with a great start towards your retirement.

Of course, there will be those who will live beyond their means and/or make very stupid financial decisions. There will be those that spend all their money each month and not have anything saved. There will be those who take the $35,000 loan and buy a new car. These cadets, I don't know what to say about. Finances are something some parents and schools teach kids while growing up, and they have a sense of fiscal responsibility. Some kids, because of their parents and upbringing will live beyond their means, not save, and live paycheck to paycheck. I've seen many enlisted who make a fraction of what officers make, in much better financial situations. I've also seen many officers who are responsible and have a very good life because they balanced their spending and savings. Of course, I've also seen many captains and majors who also had maxed out credit cards, large car loans, and nothing in savings.

Life is not worth living if you save everything and don't get to enjoy life. You should be able to take vacations, spend money on your kids, splurge occasionally, etc. but you need to balance that with saving for the future. Saving for your kids college, a house, retirement, etc. but if you really feel you need that $60,000+ corvette or Lexus instead of the $20-$25,000 car, go for it. You're the one who needs to determine your own self esteem and worth. Best of luck.

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I have told my son to think long and hard about taking this loan when the time comes. Starting out your career $35k in debt does not sound like something I would have wanted to do.

Badfinger said:

My take is never take a loan


I have told my son to think long and hard about taking this loan when the time comes. Starting out your career $35k in debt does not sound like something I would have wanted to do.

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Yes, being $35K is debt, does sound like a bad way to start off a career. However, this isn't quite that simple of a statement. Not compared to "REAL" debt.

What I mean is:

1. If he uses the $35K to buy a car, then that is "REAL" debt. Not a good idea.
2. If he needs money to "Set Up House"; because there are "NO DORMS" for officers; he may need some money.
3. You don't have to take the whole $35K. You can take $5k, $10k, or whatever you want; up to the $35K
4. If you do what a LOT of people do, and take the $35K and "Invest" it, then that is a real smart thing. My son for instance, took the $35K, put $10K in CD's; and put $5K into a ROTH IRA each year. His loan will be paid off this December. He's making a much higher percentage of interest on the ROTH's, and CD's then he's paying on the 0.05% loan. (or whatever the low rate is).
5. If the $35K was invested in an S&P500 fund; and NO MORE ADDED TO IT, in 40 years, it would be worth approximately $1.2 Million Dollars. Since inception, the S&P500 has averaged 10% return. In the last 10 years, not the greatest because of the crash of 2008-2009, it still returned about 8% average.
6. Many military members, if they're smart, also contribute to TSP (Thrift Savings Plan - Similar to a 401K).
7. Bare minimum pay, of a 2nd Lt out of the academy, with housing, is around $45,000 per year.
8. The $35K loan is about $550 a month. Basically interest free. That's less than $7K a year to pay back. If you think of it as "SAVING $550 a month" it's easier to understand.
9. Of the $35K, if you put it in ROTH IRA's (S&P500 Fund), you can only put in $5,500 per year. If you have the money in your savings account when you take the loan, and set up an AUTOMATIC Monthly Contribution to the ROTH IRA of $450, the bulk of the money will still be in the account if there's a financial hardship.

CAVEAT: Y'all know me. Caveats for everything.
1. If you're BAD WITH MONEY, then you need to fix that first. You don't need to take a $35K loan, even at almost zero interest, if you live payday to payday
2. If you're going to use the ENTIRE $35K for THINGS; even a car or furniture for an apartment,............ Sorry; I won't discuss it with you. You're part of #1. See #3 next for further clarification.
3. While as a cadet, you don't make that much money. GRANTED. No argument. But even with enjoying weekends skiing and spending time with friends and the occasional flight home for the summer; there is no reason in the world that you can't have $10,000 saved by the time you graduate. That's only $200 per month. Yes, the first year sucks, but you have enough in subsequent years to save $10,000. That will take care of setting up your apartment or wherever you're going to live.
4. While there's nothing wrong with buying a car when you graduate, you definitely need one, if you think you must have the $30+K new car, then revert back to #2. I won't discuss it with you.

Unfortunately, there's a lot of kids coming out of high school, that have absolutely no knowledge or experience with finances. And it's not limited to the military academies. It is everywhere. And unfortunately, the "Better Off" or "More Well to Do" environment that a kid grows up in, usually the LESS knowledgeable they are of finances. Many think they should be able to have the same standard of living and lifestyle as they grew up with. Not realizing that their parents probably didn't start off well to do. On the other hand, it's not uncommon when kids grow up in a family that lives payday to payday, for them too to live that way. They don't know how to save. I really wish it was mandatory that high schools taught at least 1 semester of basic finances and budgeting. Probably would be a good thing for the academies to do also.

Anyway; if a person is responsible, the $35K can be a great loan. You can use it for a great retirement investment. If needed, you can use part of it to get started in your new life. If you're not responsible, then it's definitely a bad idea. Fortunately, USAA (It is USAA who is giving this loan, NOT the military); they usually require a direct deposit from your bank account. So at least you can't default on the loan.

Remember too. If you do take the loan, and for some reason you do not stay in the military for the full 5 year minimum commitment; not only do you still owe the loan, but my understanding is that the interest rate will be jacked back up to traditional loan rates. Probably in the 8-10% range. So either make sure you stay in a minimum of the 5 years, or have the money available to pay it off in full if you get out early.

Stealth_81 said:

My son started investing at the Academy as well. He invested his starter loan by maxing his Roth IRA for two years like Hornet did and then taking the balance and spreading it into three other funds through USAA. He grew it enough to buy a house while stationed at Luke. When he moved he kept the house and bought another one in Florida. He is making money on both houses and still keeps all of his investment funds through USAA.
Stealth_81

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Your son had impeccable timing. The West Valley of PHX area was the epicenter of foreclosures (new growth housing meant mortgages where everyone was underwater). If he bought around 2011, I can say with certainty he is up at least $100K. Homes are still going up in 2017 at about 4% in appreciation. If he doesn't know, rents are going up even faster. It might be time to raise the rent. See https://www.zippia.com/advice/fastest-growing-cities-in-america/ (look at Surprise AZ; ranked #7 as the fastest growing US city). The pendulum swung so fast the other way it surprised (pun not intended) everyone.
In 2011, I bought a 2006 built home in an amazing neighborhood for $52 a square foot or 38 cents on the dollar from what the original owner paid back in 2007. It's more than doubled. We winter here. In summary, your son put his USAA loan to good use.

MN-Dad-2016 said:

Your son had impeccable timing. The West Valley of PHX area was the epicenter of foreclosures (new growth housing meant mortgages where everyone was underwater). If he bought around 2011, I can say with certainty he is up at least $100K. Homes are still going up in 2017 at about 4% in appreciation. If he doesn't know, rents are going up even faster. It might be time to raise the rent. See https://www.zippia.com/advice/fastest-growing-cities-in-america/ (look at Surprise AZ; ranked #7 as the fastest growing US city). The pendulum swung so fast the other way it surprised (pun not intended) everyone.
In 2011, I bought a 2006 built home in an amazing neighborhood for $52 a square foot or 38 cents on the dollar from what the original owner paid back in 2007. It's more than doubled. We winter here. In summary, your son put his USAA loan to good use.

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He is aware of the market activity there in Surprise. He currently rents the house to an F-16 Instructor Pilot at Luke and they have kept a gentleman's agreement about raising the rent until they move on. That is coming soon so he will raise it to market rate then. The house is now paid off so he makes money even at the lower rent. He bought the house at the beginning of 2013 as a foreclosure and he did get an amazing deal on it. The value is up about $100K from what he paid, just like you said. It is located near Reems and Cactus Rd so the location is perfect for access to Luke and family needs like shopping and parks. He did well.

He bought the second house in the Miami area in 2014 as a foreclosure also, and that has done just as well as the market recovers there and home building resumes. He said he plans on continuing to buy houses wherever he goes if the market is decent and build a little real estate empire to help with retirement.

Stealth_81

I agree with Mike, if you are bad with money than don't do it, but let's be real it does cost money to start your career, hence why it is called the Career Starter loan.

My DS was an AFROTC grad and ROTC starter loans operate a little differently.
1. It is 25K not 35K
2. The interest rate is higher. It varies year to year, but it is @2-3%
3. I won't swear, but pretty sure it is a 4 yr repayment (AFROTC grads owe 4 yrs ADAF, not 5 like SA grads)

DS sat down with us and we discussed what he should do. He only took 10K. 5K was immediately placed into savings, 5K into a ROTH. He than purchased a car for 18K, nothing snazzy, because it was new he got a 0% int. loan through Toyota. The reason he opted this route was simple. He knew he was going to UPT. If he washed out the AF had the right to release him from ADAF. If that occurred than the career starter loan would jump up incredibly, whereas his car loan was locked in at 0%.

DS did not feel the pain of his loans (career and car). He not only paid off his car 1 yr early. He was stationed in TX and his GF lived in NC. He would pay for her to fly out to TX every 6 weeks. He was able to buy her engagement ring in cash while at UPT. They married when he was an O1, almost O2. He paid not only for the majority of his wedding, but also her gown, plus of course the honeymoon and now taking on her student loans. Within 9 months of marriage, they had purchased another new car (0% loan) for her and used the VA loan to buy their 1st home. He still had 1 yr left on his career starter loan.
~ The thing is he always stayed within his means.
~~Her car is not the top of the line, but they bought it with long term thoughts (small SUV) for when they have babies. Which they have one now.
~~ Their home is not the biggest in the neighborhood, but it is in the best school district....followed Moms advice (I was a realtor)...buy the smallest in the best area you can afford.
~~ They did not go off and buy things that they did not need for the house. They have a patio, and yet no patio furniture. Why? Because in the priority list it is still not high enough to beat out the other silly things like a bed for the guest bedroom when family visits or pictures to put on the walls of a 3 bdrm home.

Our family is very close, and our DS still comes to us for advice. I am glad to say that because he followed our advice when it came to the loan he has already a tiny nest egg put away so that if he decides not to take the pilot bonus and go to the airlines with their low starting salaries, he will be able to. My DIL use to joke about how much of a tight wad he is, but not anymore. Why? Because everyday she gets to be a stay at home Mom with their precious little girl. She realizes that at the age of 25 not many of her peers have that opportunity and now if it comes down to buying for need over want, than need will always win so she can be there for their family.

I am also telling this to drone into everyone's cranium...think long term when you take this loan. If you do it short term only, than my bet is you will live your life in debt. Buy that 35K car is fine, but you get to your 1st base and now have to buy sheets, pots/pans, tv, food for the fridge, deposits for cable, electricity, etc...how do you pay for that? Let's say credit card. Now 6 months later you fall head over heels in love, never planning on that. You decide to propose 2 yrs after you commission, still paying off that starter loan, plus the credit cards. How do you buy her engagement ring? Engagement rings are not cheap. Credit again. SO now you have career starter and credit cards close to maxxing. Engagement rings may not be cheap, but much cheaper than weddings and honeymoons, regardless of how much the folks chip in. How are you paying for the honeymoon? Let me guess...credit cards again.

In essence be honest with yourself before you sign on the dotted line. Do you really need the 35K or do you want it? 2 different things. Go with want and badfinger is right impo regarding the loan. Go with need than Mike is right.

Stealth_81 said:

He bought the second house in the Miami area in 2014 as a foreclosure also, and that has done just as well as the market recovers there and home building resumes. He said he plans on continuing to buy houses wherever he goes if the market is decent and build a little real estate empire to help with retirement.

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Stealth, as a realtor I would give him this advice. Don't start littering houses around the country. Sorry for going off the beaten track, but felt the need to share.

Here is why impo.
1. Very few renters will maintain the home like the owner.
~ Landscaping is always impo the biggie. Homeowner will make sure shrubs and trees are trimmed, driveway and sidewalks are edged.
~~ Curb appeal is the 1st thing buyers notice when driving through a neighborhood. His tenant maybe great, but if the other renters aren't than the house price for the ones selling it may decrease
~~~ Every base we lived at had certain neighborhoods/areas that military members drifted towards. In AK, Eagle River was known as base housing of the north. Simply because if you did not live on base you lived in Eagle River. In Goldsboro, there were about 5 neighborhoods that ADAF lived in. Why? Because see my earlier post....schools.
~ Interior updating
~~ Carpet is in their opinion the landlords cost. It gets nasty, oh well. The renter will not replace it, instead just accept it. The person buying the other rental home in the neighborhood will low ball because they need to replace the carpet. Hence, the price in the real estate market goes down, just like the curb appeal.

2. Homes age and with age costs are much higher
~ A roof can cost months of rent to recoup.
~~ See above regarding tenants. They are not going to be looking to see if there is aging until most likely there is damage that needs immediate action...more money
~ How often do you check your hotwater heater to make sure there is no water leaking? A homeowner impo will pay attention immediately and watch it closely if they see water leaking. Tenant, not so much
... sees the water and moves on.
3. In military communities many put parameters in for the realtor.
~ Bullet and I always did. We wanted nothing older than 8 years old. We expected a 3 yr tour which meant our house would be in the 1o yr age range.
~~ As a realtor many of my clients that were buying new construction, wanted something in the 10 yr marker. That and the school district.
~~~ Also as a realtor if the home is equal in par, same size, same school district, etc., older homes sell for lower $$$ per sqft compared to newer. See above regarding age and costs.
4. Renters typically will give 30-60 day notice, but if he decides to sell after the tenant leaves he may miss the primetime market season.
~ Renters tend to make it difficult for realtors to enter the home with prospective buyers compared to actual homeowners. They will say no that time does not work for us, and due to time constraints with the realtors buyers they will most likely skip the house altogether. Leaving the home on the market for more days. Longer on the market the more likely buyers think there is something wrong with the house, and the higher the chance of lowballing.
~~ Again, this is not saying his house per se, but another rental in the area.
5. He is lucky right now due to the market recovery, but impo every military member should think long term...just like the starter loan.
~ DS is married with a baby and 2 dogs. When he 1st got the C130J, USAFE or PACAF were his top choices for assignments. Now it is stateside, in turn that means he will rotate back and forth between Little Rock or Dyess unless Big Blue decides otherwise as a pilot.
~~ Bullet flew the 15E. The rule of thumb was typically...Seymour rotate to Lakenheath rotate back to Seymour...repeat again unless you did something amazing to get to Elmendorf. .. i.e remote.
6. Taxes
~ Don't even get me started on how complicated it becomes if you rent for a couple of years and than sell the property.
~ Sell now as your primary residence and reinvest in the next within 2 yrs you can get a pass. Rent for yrs and now you are paying capital gains, plus you have to deal with depreciation issues. Trust me on that.

If he is like our DS and Bullet with expectations of rotating back there than landlord is a great option, BUT impho as a realtor if he never expects to return, than sell when they leave. He can take the gains invest in a different way. IE: Instead of buying in the young O3 neighborhood he can buy in the O4/O5 neighborhood, but still have the mtg of an O3.

Again, sorry for the novella, but as a Mom with a DS that purchased as an O2, I felt the need to address this directly when you start thinking about how much impact this loan can have on your life long term. Luckily, Stealth's, Christcorp, Fencers and my DS have used it wisely (long term philosophy) and I highly doubt anyone of them would say they regretted the loan. Than again, none of them to my knowledge went off and used it all on a car. They all invested some way a portion of the money.

PS: While we are at it. Tell them as soon as they can get the AMEX platinum. AMEX will charge the fee and reimburse once you show you are AD. The platinum has great bennies, and if they are fiscally responsible than it is a better option.
~ We used it everything. Food, gas, cell phone payment, etc. Flew 1st class round trip to Italy for a family of 5 free, because everytime we used it we wrote that in our check registry as if we had used the debit card.
~~ I believe USAA offers the AMEX