Careful about the wording on the stock market's rate of return or you'll have a disappointed cadet looking at his first year's returns. 12% is the historical average annual return of the S&P 500 over an extended period. Unless the cadet is lucky, he won't be seeing a 12% rate of return every year. And even the 12% average is tricky. For instance, from 2000 to 2017 the average annual rate of return was 7%, and in 2015 the annual rate of return was under 2%.
The other aspect he needs to remember about investing in a ROTH IRA with the USAA Starter funds is that while he probably (nothing is a given in the stock market) will get a higher return from the IRA investment, he will be paying off the loan from current income.
I'd also consider investing it outside of a ROTH in order to save up for a big purchase like the down payment on a home. He'll have a very good retirement package from the military, so doesn't necessarily need to add to it. And being able to put a large down payment for a home will save in monthly payments.
In any event, the Starter Loan offers good options for cadets.
Let me clarify. I am saying that 12% is the avg over years, not short term. The career starter loan is 4 yrs repayment.
So let's look at 2015-2018. The starter loan that needs to be repaid within 4 yrs is at 2.99 int. rate, however that IRA (not including tax benefits) would be a 9.3% growth. Mathematically that says to me 6% to their advantage investing over those 4 yrs.
~ My DS commissioned 2012. His avg growth between 2012 and 2016 when his starter loan was being paid off avg. 15,87%. IOWS, he was making almost 13% by using his starter loan to invest (15.87% growth for his 5K IRA - 2.99 USAA starter int rate_
I am not trying to get into an argument. I am just trying to illustrate that since the starter loan is 4 yrs. if you avg it out, from stock market perspective it is a better ROI.
As far as the deposit for a home, military members have the ability to take a VA loan with 1% down (1st time, which they can roll in all closing costs). They do not need to worry about PMI or doing an 80/10/10. Most military officers typically do a very unique thing compared to the avg home buyer. They do not ask how much can they borrow? They ask the realtor to back it out and say this is my BAH. how much can I get for that?
~ Trust me I was a realtor for a very long time, and that was how they worked it. Even if they had money to drop down, they didn't up their home price. They kept it at their rank BAH, or maybe the next higher rank because they knew this is not their final home, it was their 3 yr or 4 yr at best home.
~~ Bullet and I used the VA for our 1st home. We invested our tax returns as a home owner over the 3 yrs into a money market. Took that money and parlayed it into our next home using a conventional loan. Sold that home, and parlayed those returns into our next (deposit)...so on and so forth for 5 homes. In 20 yrs we never paid PMI.
Again, I am not trying to get into an argument. I am just saying that if you used the numbers posted by AROTC-dad, it is really hard to say not invest in an IRA from a long term aspect. 5K invested as a 22 yo will be a lot by the time they are 42 when they retire from the military.
~ Heck, let's remember for ROTC their release date is tied to their EAD, which is most likely 5 yrs from commissioning, not 4. So even again, if you use AROTC-dad's info the % rises.
Also, as an AF military spouse I can tell you that every base we ever lived at, you knew what rank they were when they said what development they lived in. No lie. No exaggeration. It is still true, at least for my DS. His neighborhood is filled with young O2/3s. Why? Because it is in the best school district, it is close to base, the mtg is at their BAH rate, etc. etc. etc.
We are probably now killing phyzix with all this info. However, we are at least he now is getting a new view on why or why not to use the 16K for his student debt.
Phyzix,
Personally, I still stand by my earlier posts. Do you need a car to start your career? How will you pay for it if you already have 16K in debt? Will you use some of that remaining 9K for a deposit for the car? If so, than do you realize you are adding more debt, even if the car is 20K? Do you have furniture. household items (pots, pans, dishes. linens, etc) to start your new life? Will you have enough money to pay the deposits if you must live off base (rent is typically 1st and last + utilities)? Will you have enough money to PCS and wait for that 1st paycheck while you buy food, pay for cable, pay for rent while you wait for them to catch up on your pay?
CAN YOU SWEAR that the 9K you don't need to pay your debt off will not be blown/whittled away during your sr yr because now you see it as FREE MONEY?
I am sorry if we have confused you more, but if we have than I hope your eyes are more opened to the finesse issues of taking on debt.
