Investing while at the Academy

[Capri120]

My son has already established a Roth IRA with Fidelity in 2016 (glad to see a Fidelity office right across the highway from the Academy). It is my plan to deposit the $5500 into his account each year while he is the the academy. Had he stayed at UT-Austin, I was looking at another $80k to get him to graduation, so $22k seems like a bargain!

Totally agree with the bargain. That is why we have $200 automatic deposit going into DD's USAA account every two weeks so she can max her Roth every year. Between this small stipend and all her high school grad gift money, she had more than enough "spare change" to fully fund hers for 2016.

We also give her a semi-annual "bonus" for her grades worth up to $3 - 4K or so, if she does really well.

 

[Christcorp]

Badfinger, good for you.

I was in the same boat. Saved for both my kid's college education. Son got accepted with full ride scholarships to 5 schools; daughter got full rides also. Son chose the academy; daughter chose UW. Being "THEY WORKED HARD" and wound up saving me/wife so much, we gave both our kids $200 a month spending money their full 4 years in college. Plus, the car passed down to them to use in college, (Good dependable cars) we turned the title over to them in their name upon graduation. (Son is still driving the 2003 Camry he's had since 2009). The remainder of the money saved...... Well; we paid off our house 15 years early.

But we had no problem doing this for our kids, considering how hard they worked to get full rides and save us money. Fortunately for us, both kids learned money at a young age. Neither has debt. Son took the $35K starter loan and invested part each year. His "Loan" is paid off this year. Both kids have healthy savings and investments.

 

[Capri120]

What has inflation been?

Last year's average was 1.3; current 2017 average is higher, running about 2.6.

Ref: http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

 

[Badfinger]

My son has already established a Roth IRA with Fidelity in 2016 (glad to see a Fidelity office right across the highway from the Academy). It is my plan to deposit the $5500 into his account each year while he is the the academy. Had he stayed at UT-Austin, I was looking at another $80k to get him to graduation, so $22k seems like a bargain!

Totally agree with the bargain. That is why we have $200 automatic deposit going into DD's USAA account every two weeks so she can max her Roth every year. Between this small stipend and all her high school grad gift money, she had more than enough "spare change" to fully fund hers for 2016.

We also give her a semi-annual "bonus" for her grades worth up to $3 - 4K or so, if she does really well.

 

[MN-Dad-2016]

On the other hand, interest rates are linear across the board. Meaning, if the loan rate was to go up from 0.75% to 1.25%, so would the savings rates, cd's rates, bonds, etc. As such, it would all be relative and balance.

To reiterate, my post above showed the total interest on the USAA $35K loan so low in a large part because of the brisk payback. So when you take the total amount of interest and divide it by 5 years, that calculation is irrelevant and can only lead to confusion.

Up to a couple days ago, I assumed the $35K was actually a great option for my son. As I said, our DS could borrow it for cheap to make ends meet in Boston for medical school. After hearing more of the details and now knowing it's basically a $600 a month savings plan for USAA (brilliant marketing on their part by the way), IMHO, the value of the loan has diminished in my mind to a "good" deal and not a GREAT deal. In essence, USAA is giving away about $600 in interest to attract a new customer who will be higher earners in the coming year. Smart!!!! Heck, Bank of America (as an example) will pay me $150 per open checking account. AMEX (when Costco terminated them) gave me $500 to sign up for their card. To name a few...

Now if USAA gave cadets $35,000 and asked to pay back a small amount per month, then everyone is welcome to consider it an incredibly deal. But their "loan" isn't typical because of the fast payback and high monthly payments. The way it sits now, it is basically a $600 a month saving plan and or a cheap loan for a short time. Back to the ability to invest in stocks, or putting it in the bank. If you put the money in the S&P500 and if it goes down fast like it did in 2008, the $35K loan won't be such a smart move. If it goes up fast like it did in 2011, the cadets are going to look brilliant. I've come to learn that the term is so short and the monthly payback so large, the "$35K" can really only be viewed as a 1-2 year loan. Because at the start of the 2nd year, the loan is around $27,800 (minus $262 for the 1st year interest). The following year you are only borrowing $20,600 (less another $155; assuming the rate stays the same) etc. Soon, it's under $10K.

The way I look at it (not in hindsight but in real time), the real opportunity of a $35K short period (and exclusively using CC's S&P500's recommendation) will make a difference if the market go up fast over a very short time. Just like it did for the 2011-2016 grads. It is a bet because in actuality, we are talking about a short term risk with someone else's money. It's an entirely different debate wondering if the market will be up a lot as it has in the past when we were the undisputable world leader (25% of the wealth with 4% of the world population) and an economic superpower with less competition. In short, the jury is out. Anyways, I'm not willing to bet it will up anywhere as close to what it was in the next 40 years.

Simply put, I now view the $35K loan as marketing designed to attract future higher income earners that they will transition into car loans, house loans, insurance, etc etc. But to call this an "investment vehicle" as if it is a super-de-duper benefit (after examining the details) turning into a $1.x Million dollar deal in 40 years by putting in $35K into the market (which is fueled by your own savings called payback) is a big stretch.

Personally in 2017, it's why the bulk of my investment are in my business when I can better control the outcome. I can wrap my head around my industry and in the end, it's a lot easier to make more money by simply out working the competition. But one day we don't all want to work. So I do stare at financial vehicles to get me to where I need to be. For me, and if I was 22 years old, I'd be worried about how my savings and blend of investments will get me to the retirement finish line. So I'm in the camp of take it out of the hands of an employer (and the stock market). I realize that this is not a desired or realistic way for many people. But that's my approach. if I want more $$ in a year, I work harder and smarter.

 

[MN-Dad-2016]

My son has already established a IRA with Fidelity in 2016 (glad to see a Fidelity office right across the highway from the Academy). It is my plan to deposit the $5500 into his account each year while he is the the academy. Had he stayed at UT-Austin, I was looking at another $80k to get him to graduation, so $22k seems like a bargain!

Last point on the topic which I think is an interesting one. Before I go off to my point, congratulations to your son for setting up a Roth so early. Our son did the same in 2016 (not before) because he had to save some $$'s for pending medical school. (The HPSP scholarship is around $26K and doesn't change based off of where you live; Boston is atrociously expensive). Anyways, with the $20K at graduation bonus and the fact that he figured out ways to save money while in Boston, he maximized on his Roth and has no fear of running out of funds.

With that all said, people who discuss the amount that they are saving often times never talk about something inevitable called taxes. Meaning, if someone has $1M in their IRA (or in my case KEOGH), it's factually going to be far less than $1M because they haven't paid their taxes. Putting it another way, it can be rationally debated that in the future/retirement, the tax rate for a newly minted 2nd Lieutenant may actually be LESS now than in 45 years. Because at the end of the day, that $1M example isn't worth a $1M because no taxes have been paid. So after tax savings, when you are not making all that much, could be a much smarter move. For me at least, 40 years out is soooo cloudy.

Many higher earners b_tch because we pay 40% federal tax (plus Social Security, plus state tax). Well, check out the rest of the 1st world countries. It is close to or greater than 50%, and with some countries, it starts with the 1st penny earned (same high tax rate for everyone). Countries like the UK, Japan, Denmark, Sweden, Belgium, the Netherlands etc all get hammered. In Denmark, they soak you at 52% starting at your 1st Kron earned and then you add in 25% consumption tax (and 180% on an automobile).

My point? With the have versus the have-not's expanding, and the mounting national debt which IS an issue, I don't think it is a stretch that in a decade or 2 or 3, the tax rate is a whole lot higher. And to CC, when Trump talked about lowering taxes and the market thought it might happen, what happened to the S&P? Yep, it went up a lot (as it should). If one day the have-nots decide to tax the haves and get "free" healthcare and "free" college, then expect the tax rates to explode. Then, the people contributing their savings AFTER tax right now might actually be smarter. Personally, this is my approach; pay your taxes now and get it over with because the future isn't exactly clear. To the cadets reading this post, I'll be dead before you retire. But let's see how far off I am. You heard it here 1st. I'm hoping my prediction is off and taxes are lower. I just don't see it that way.

So when someone looks in hindsight and predicts the same returns for the USA (S&P500) in 40 years in the future, I say: not so fast!

 

[Capri120]

Actually, with a ROTH IRA, taxes have already been paid. Additionally, there is no tax on the interest earned on that savings. So, 40 years down the road when dispersements are taken, no taxes are owed or due.

 

[MN-Dad-2016]

Actually, with a ROTH IRA, taxes have already been paid. Additionally, there is no tax on the interest earned on that savings. So, 40 years down the road when dispersements are taken, no taxes are owed or due.

Thanks for the clarification. I was intertwining IRA/401K/and a Roth IRA. For the past 20 years, I've only paid attention to the KEOGH (up to 25% contribution for self employed and "pretax savings"). I stand corrected, the Roth IRA makes complete sense. And in my humble opinion, no downside for a newly minted 2nd lieutenant!

See http://www.rothira.com/roth-ira-taxes-and-tax-issues
"Despite the lack of a tax break today a Roth IRA may end up being a great investment vehicle to minimize your taxes over a long period of time. The further out your retirement date the greater chance personal income tax rates will increase. If you lock in paying a certain rate today and your personal tax rate is higher at retirement then using a Roth IRA will have saved you money."

 

[Christcorp]

Capri beat me to it. There are no taxes at all on a Roth. The money used in a Roth is after tax money you take out of your take home pay. And ALL interest is tax free.

As for the s&p500 fund, or any retirement fund you set up, you have to stop saying things like : If it goes doesn't in a couple years, or if it goes up. Retirement accounts are long term. At least 10, but for this discussion, we are talking 30-40 years. And because of the way mutual funds work, they go up. If held for 10 or more years, they've never lost money. This isn't some stock that you are trading with TD Ameritrade in and out. These are mutual funds. Managed by fund managers. You aren't "Trading" like in the stock market.

 

[Capri120]

Actually, with a ROTH IRA, taxes have already been paid. Additionally, there is no tax on the interest earned on that savings. So, 40 years down the road when dispersements are taken, no taxes are owed or due.

Thanks for the clarification. I was intertwining IRA/401K/and a Roth IRA. For the past 20 years, I've only paid attention to the KEOGH (up to 25% contribution for self employed and "pretax savings"). I stand corrected, the Roth IRA makes complete sense. And in my humble opinion, no downside for a newly minted 2nd lieutenant!

See http://www.rothira.com/roth-ira-taxes-and-tax-issues
"Despite the lack of a tax break today a Roth IRA may end up being a great investment vehicle to minimize your taxes over a long period of time. The further out your retirement date the greater chance personal income tax rates will increase. If you lock in paying a certain rate today and your personal tax rate is higher at retirement then using a Roth IRA will have saved you money."

I have a hard time keeping all the different ones straight. Google is my close friend
Plus, I have always been a numbers person, not so much with names, though.

 

[Badfinger]

4. THEN; after graduating, consider investing. This can be done by simply setting up a monthly allotment into a good mutual fund (Recommend S&P500 fund). Not sure what options are available through TSP. But start there for investing. Next choice would be through USAA if that's the back the individual is having their paycheck go to. They have very good investment services.

Ugh...don't care for mutual funds at all. If you are willing to put in the homework, investing in individual stocks would be my

My son has already established a IRA with Fidelity in 2016 (glad to see a Fidelity office right across the highway from the Academy). It is my plan to deposit the $5500 into his account each year while he is the the academy. Had he stayed at UT-Austin, I was looking at another $80k to get him to graduation, so $22k seems like a bargain!

Last point on the topic which I think is an interesting one. Before I go off to my point, congratulations to your son for setting up a Roth so early. Our son did the same in 2016 (not before) because he had to save some $$'s for pending medical school. (The HPSP scholarship is around $26K and doesn't change based off of where you live; Boston is atrociously expensive). Anyways, with the $20K at graduation bonus and the fact that he figured out ways to save money while in Boston, he maximized on his Roth and has no fear of running out of funds.

With that all said, people who discuss the amount that they are saving often times never talk about something inevitable called taxes. Meaning, if someone has $1M in their IRA (or in my case KEOGH), it's factually going to be far less than $1M because they haven't paid their taxes. Putting it another way, it can be rationally debated that in the future/retirement, the tax rate for a newly minted 2nd Lieutenant may actually be LESS now than in 45 years. Because at the end of the day, that $1M example isn't worth a $1M because no taxes have been paid. So after tax savings, when you are not making all that much, could be a much smarter move. For me at least, 40 years out is soooo cloudy.

Many higher earners b_tch because we pay 40% federal tax (plus Social Security, plus state tax). Well, check out the rest of the 1st world countries. It is close to or greater than 50%, and with some countries, it starts with the 1st penny earned (same high tax rate for everyone). Countries like the UK, Japan, Denmark, Sweden, Belgium, the Netherlands etc all get hammered. In Denmark, they soak you at 52% starting at your 1st Kron earned and then you add in 25% consumption tax (and 180% on an automobile).

My point? With the have versus the have-not's expanding, and the mounting national debt which IS an issue, I don't think it is a stretch that in a decade or 2 or 3, the tax rate is a whole lot higher. And to CC, when Trump talked about lowering taxes and the market thought it might happen, what happened to the S&P? Yep, it went up a lot (as it should). If one day the have-nots decide to tax the haves and get "free" healthcare and "free" college, then expect the tax rates to explode. Then, the people contributing their savings AFTER tax right now might actually be smarter. Personally, this is my approach; pay your taxes now and get it over with because the future isn't exactly clear. To the cadets reading this post, I'll be dead before you retire. But let's see how far off I am. You heard it here 1st. I'm hoping my prediction is off and taxes are lower. I just don't see it that way.

So when someone looks in hindsight and predicts the same returns for the USA (S&P500) in 40 years in the future, I say: not so fast!

I am with you. Roth IRA all the way. And the government is now offering a Roth TSP. Unfortunately for me, it was only recent and their silly rules for distributions from a mixed TSP (Roth and Non-Roth) is too stringent for my liking. If I could go all Roth TSP...oh yeah!

 

[Capri120]

4. THEN; after graduating, consider investing. This can be done by simply setting up a monthly allotment into a good mutual fund (Recommend S&P500 fund). Not sure what options are available through TSP. But start there for investing. Next choice would be through USAA if that's the back the individual is having their paycheck go to. They have very good investment services.

Ugh...don't care for mutual funds at all. If you are willing to put in the homework, investing in individual stocks would be my

My son has already established a IRA with Fidelity in 2016 (glad to see a Fidelity office right across the highway from the Academy). It is my plan to deposit the $5500 into his account each year while he is the the academy. Had he stayed at UT-Austin, I was looking at another $80k to get him to graduation, so $22k seems like a bargain!

Last point on the topic which I think is an interesting one. Before I go off to my point, congratulations to your son for setting up a Roth so early. Our son did the same in 2016 (not before) because he had to save some $$'s for pending medical school. (The HPSP scholarship is around $26K and doesn't change based off of where you live; Boston is atrociously expensive). Anyways, with the $20K at graduation bonus and the fact that he figured out ways to save money while in Boston, he maximized on his Roth and has no fear of running out of funds.

With that all said, people who discuss the amount that they are saving often times never talk about something inevitable called taxes. Meaning, if someone has $1M in their IRA (or in my case KEOGH), it's factually going to be far less than $1M because they haven't paid their taxes. Putting it another way, it can be rationally debated that in the future/retirement, the tax rate for a newly minted 2nd Lieutenant may actually be LESS now than in 45 years. Because at the end of the day, that $1M example isn't worth a $1M because no taxes have been paid. So after tax savings, when you are not making all that much, could be a much smarter move. For me at least, 40 years out is soooo cloudy.

Many higher earners b_tch because we pay 40% federal tax (plus Social Security, plus state tax). Well, check out the rest of the 1st world countries. It is close to or greater than 50%, and with some countries, it starts with the 1st penny earned (same high tax rate for everyone). Countries like the UK, Japan, Denmark, Sweden, Belgium, the Netherlands etc all get hammered. In Denmark, they soak you at 52% starting at your 1st Kron earned and then you add in 25% consumption tax (and 180% on an automobile).

My point? With the have versus the have-not's expanding, and the mounting national debt which IS an issue, I don't think it is a stretch that in a decade or 2 or 3, the tax rate is a whole lot higher. And to CC, when Trump talked about lowering taxes and the market thought it might happen, what happened to the S&P? Yep, it went up a lot (as it should). If one day the have-nots decide to tax the haves and get "free" healthcare and "free" college, then expect the tax rates to explode. Then, the people contributing their savings AFTER tax right now might actually be smarter. Personally, this is my approach; pay your taxes now and get it over with because the future isn't exactly clear. To the cadets reading this post, I'll be dead before you retire. But let's see how far off I am. You heard it here 1st. I'm hoping my prediction is off and taxes are lower. I just don't see it that way.

So when someone looks in hindsight and predicts the same returns for the USA (S&P500) in 40 years in the future, I say: not so fast!

I am with you. Roth IRA all the way. And the government is now offering a Roth TSP. Unfortunately for me, it was only recent and their silly rules for distributions from a mixed TSP (Roth and Non-Roth) is too stringent for my liking. If I could go all Roth TSP...oh yeah!

For me, I have just stuck with a company matched 401K in a mixture of investments from a stable fund to company stocks. For DH, who has been self-employed over the last four decades, a mixture of Roth and SEP, with each of those in various funds. Ugh...too much to keep track of.

 

[Badfinger]

On the other hand, interest rates are linear across the board. Meaning, if the loan rate was to go up from 0.75% to 1.25%, so would the savings rates, cd's rates, bonds, etc. As such, it would all be relative and balance.

To reiterate, my post above showed the total interest on the USAA $35K loan so low in a large part because of the brisk payback. So when you take the total amount of interest and divide it by 5 years, that calculation is irrelevant and can only lead to confusion.

Up to a couple days ago, I assumed the $35K was actually a great option for my son. As I said, our DS could borrow it for cheap to make ends meet in Boston for medical school. After hearing more of the details and now knowing it's basically a $600 a month savings plan for USAA (brilliant marketing on their part by the way), IMHO, the value of the loan has diminished in my mind to a "good" deal and not a GREAT deal. In essence, USAA is giving away about $600 in interest to attract a new customer who will be higher earners in the coming year. Smart!!!! Heck, Bank of America (as an example) will pay me $150 per open checking account. AMEX (when Costco terminated them) gave me $500 to sign up for their card. To name a few...

Now if USAA gave cadets $35,000 and asked to pay back a small amount per month, then everyone is welcome to consider it an incredibly deal. But their "loan" isn't typical because of the fast payback and high monthly payments. The way it sits now, it is basically a $600 a month saving plan and or a cheap loan for a short time. Back to the ability to invest in stocks, or putting it in the bank. If you put the money in the S&P500 and if it goes down fast like it did in 2008, the $35K loan won't be such a smart move. If it goes up fast like it did in 2011, the cadets are going to look brilliant. I've come to learn that the term is so short and the monthly payback so large, the "$35K" can really only be viewed as a 1-2 year loan. Because at the start of the 2nd year, the loan is around $27,800 (minus $262 for the 1st year interest). The following year you are only borrowing $20,600 (less another $155; assuming the rate stays the same) etc. Soon, it's under $10K.

The way I look at it (not in hindsight but in real time), the real opportunity of a $35K short period (and exclusively using CC's S&P500's recommendation) will make a difference if the market go up fast over a very short time. Just like it did for the 2011-2016 grads. It is a bet because in actuality, we are talking about a short term risk with someone else's money. It's an entirely different debate wondering if the market will be up a lot as it has in the past when we were the undisputable world leader (25% of the wealth with 4% of the world population) and an economic superpower with less competition. In short, the jury is out. Anyways, I'm not willing to bet it will up anywhere as close to what it was in the next 40 years.

Simply put, I now view the $35K loan as marketing designed to attract future higher income earners that they will transition into car loans, house loans, insurance, etc etc. But to call this an "investment vehicle" as if it is a super-de-duper benefit (after examining the details) turning into a $1.x Million dollar deal in 40 years by putting in $35K into the market (which is fueled by your own savings called payback) is a big stretch.

Personally in 2017, it's why the bulk of my investment are in my business when I can better control the outcome. I can wrap my head around my industry and in the end, it's a lot easier to make more money by simply out working the competition. But one day we don't all want to work. So I do stare at financial vehicles to get me to where I need to be. For me, and if I was 22 years old, I'd be worried about how my savings and blend of investments will get me to the retirement finish line. So I'm in the camp of take it out of the hands of an employer (and the stock market). I realize that this is not a desired or realistic way for many people. But that's my approach. if I want more $$ in a year, I work harder and smarter.

I live near San Antonio...Military City USA and the location for the USAA headquarters. You would not believe the amount of USAA commercials on both radio and TV in this market. Make no mistake, the purpose of this loan is to sign up new customers for all their products. They are not doing it out of the goodness of their heart. And given this is Military City USA, you would be surprised how many who are eligible for USAA products (especially auto insurance) are able to find cheaper rates elsewhere. I am not saying they don't have good products or pricing, but like anything, you have to shop around, and give yourself an annual checkup. I learned long ago that even you though you might be loyal to a company, they will not be loyal to you when push comes to shove. Personally I would switch insurance companies a couple times a year to save on the premiums. And as far a just banking products, with many of the large world-wide brokerages getting into banking (credit cards, checking, etc), and with everything available online, it is easy to have access to your accounts/moneyservices regardless where you are in this world.

 

[Badfinger]

Actually, with a ROTH IRA, taxes have already been paid. Additionally, there is no tax on the interest earned on that savings. So, 40 years down the road when dispersements are taken, no taxes are owed or due.

At least under today's tax laws. We can only hope that is the case in 40 years.

 

[Capri120]

Actually, with a ROTH IRA, taxes have already been paid. Additionally, there is no tax on the interest earned on that savings. So, 40 years down the road when dispersements are taken, no taxes are owed or due.

At least under today's tax laws. We can only hope that is the case in 40 years.

So true. The laws change every year and definitely no guarantees of "grandfather clauses". Unfortunately, we can only do what we can do based on what we know today and hope for the best.

Kind of like social security, when I project my retirement income, I don't even count on SS being available, even though my eligibility is only a few short years away. I don't know that I can count on it.

 

[Wishful]

• Update: Went to USAA with our newly-minted 2nd Lt to get the loan. It's 36K or nothing ( no 10K, 15K, etc. option) so she signed-up for it @0.75% over 60 months.
• USAA is no longer offering the AMEX Platinum but less then 10" on AMEX'S website & the card was hers (came to the home in 3 days) with n/c to AD military (FYI: it's &550/yr, for everyone else).
• USAA Loan Adviser adviser recommended to sign for the loan AFTER receiving the card so that the loan would not show up on the credit check (loan paperwork is electronically sitting in her inbox).

 

[raimius]

A loan at less than expected inflation is an easy "win." An SA grad making 2Lt pay can easily afford the repayment. If they are smart, it becomes an interest bearing investment a couple years sooner, and should include a pre-configured "rainy day fund" (i.e. keep a bit in a liquid account for contingencies). Beyond that, once they are an O-3 and pay back the loan, it becomes easy to save $500+/mo extra, because they got used to living without that!

 

[Christcorp]

Raimius, you are so spot on. So many people look at the math of investing, budgets, and savings, but overlook the psychology. I've worked with a lot of people to get out of debt, learn to budget, or invest. It's amazing at some of the rationalization some latch in to.

1. Why are your leasing a car? Well, I'm always going to have a car payment, so I might as well have a new car all the time.
2. Why aren't you saving? With less than 1% interest, why put money in savings. (So out don't spend it, idiot).
3. Why do you spend everything and live paycheck to paycheck? I could be dead tomorrow, so I might as well enjoy life today.

The best part about a loan, especially if it's borrowing money to invest; like the USAA one; is that it gets a person accustomed to living without a set amount of money each month. Then, when the loan is paid off, that monthly payment can go into other savings or investments and not be missed. Especially in an officers case when they'll be getting promoted and more money coming in to increase the standard of living.

Unfortunately, there's still a lot of people once the car loan, signature loan, credit card payments, etc are eliminated, that don't use that payment they were accustomed to for savings or investment. Many increase their standard of living, buy a new car, new big screen, start charging credit cards and make monthly payments again, etc.

The USAA loan, if for no other reason, is a great learning tool to teach them to put money aside for emergencies, savings, investments, and retirement. Of course, when the 5 year payoff is over, if they haven't learned this lesson by then....... they probably never will.

 

[raimius]

Tip: when you get promoted/a raise, immediately set up an automatic transfer into a savings/investment account for some or all of the difference. You won't even miss that new money.