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BLUF: I made a lot of money while I was in the military, gaining millionaire status well before my recent retirement at 20 years in.
I’m visiting a friend in Hawaii right now. We have a lot in common.
He retired from the Navy 20 years ago.
I retired from the Air Force 5 months ago.
Like me, he retired financially independent and never worked again.
He spends his days surfing, hanging out with friends, and traveling.
What we did, anyone can do while they’re in the military.
We both had enough money saved up to never work again.
I’ll show you the exact steps we used to get rich in the military.
Getting rich in the military requires a different strategy than the average civilian. There are unique challenges we face for both how to invest and how to buy real estate.
Getting rich in the military can be boiled down to doing three things correctly:
- Saving Money while in the Military
- Investing while in the Military
- Real Estate while in the Military
I’ll talk through the specifics of each step then reveal at the end which one is by far the most important.
Let’s dig into this.
1. Saving Money while In the Military
The secret to saving money in the military is to grow the gap.
What the hell does that mean?
Growing the gap simply means expanding the distance between how much you spend and how much you earn.
Those are only two ways I’m aware of to get extra money. You can:
SPEND LESS
or
MAKE MORE
The bigger the gap between these two things, the more money you have to invest each month.
Let’s talk about both individually.
The first half of growing the gap is:
Spend Less
Our society is built around consumption.
We LOVE buying things.
If you can find a way to avoid unnecessary spending early in your career, you’ll be able to buy whatever you want later in your career.
Being careful with money until you’re out of debt and have built up a decent net worth is the first key to getting rich.
This is all about reducing expenses.
The two categories for saving money that give you the biggest bang for the buck for reducing expenses are housing and vehicles.
Most people waste absurd amounts of money on these two things.
Tackle these two things first. Live in the cheapest house you can. If buying a house doesn’t make financial sense, rent. (we’ll talk more about this later).
Don’t buy new or fancy cars. Pay cash or have low payments on reasonable used cars that will last a long time.
Knock out these two biggies first, then trim the fat on vacations, eating out, furniture, iPhones, clothes, etc.
If you want to go deeper on this subject, read the following article I wrote a few years ago that was picked up by Business Insider. (They changed the title for some reason).
Make More
The unfortunate truth about expenses is that you can only cut so far.
You can’t cut beyond zero.
When you get close to zero, life isn’t much fun.
You can only be so cheap with furniture, clothes and food.
You’ll find yourself living in a small empty room sleeping on the floor eating top ramen.
There is a limit to how much you can trim expenses, but there is no limit to how much you can increase your income.
Read that sentence again.
This is important in the military.
We aren’t known for high salaries. Enlisted also make less than officers.
The solution here is to start a side hustle, side business, part-time job, small business, etc.
If you have a significant other, they need to do the same.
If you google how to start a side hustle, you’ll get 1000’s of articles on that.
My point is, you just got to do it.
I flipped houses for extra income while in the military.
Figure out what will work for you.
I love the military, but it’s just not enough money alone to build significant wealth.
My wife and I both took several extra jobs while I was in college to pay off my student loans quickly.
Grow the gap between what you spend and what you earn.
Then invest the gap.
That is what is addressed in the next two steps.
2. Investing While in the Military
After you grow the gap, the next secret to getting rich in the military is to contribute correctly to your Thrift Savings Plan (TSP) and IRA.
Most people don’t understand the difference between the two and/or don’t contribute to both.
Before I explain this, let’s make sure you understand the smartest way to invest.
Investing is insanely easy, but we screw it up by thinking we or someone we know can beat the stock market.
Index Fund Investing
People on wall street have a benchmark they need to beat to be successful investors.
It’s beating the S&P 500 index, which is essentially a list of the 500 largest publicly traded companies.
The amount of hedge fund managers, investment planners, and stock broker cool kids that beat the S&P 500 index over periods longer than 10 years is microscopic.
Over 20 years, virtually non-existent.
People spend absurd amounts of money paying others to invest for them, only to get beaten by a stock market index over the long term.
A stock market index they could have invested in for free.
If the experts can’t do it, don’t think you can!
Warren Buffett is probably the best investor in the world. He’s previously held the title of richest man in the world, and is always near the top of the list.
While he is one of the very few people who have beaten the S&P 500 index over the long term, even he doesn’t recommend trying.
In fact, when he passes away, he’s investing his family’s inheritance in the S&P 500 index instead of his own company’s stock.
That should tell you something.
Here are several things I see investors try to do, but eventually screw up:
- buying and selling stocks based on news, newsletters, hype, tips
- day trading after taking a course or reading a book
- investing in bitcoin or other unproven, over-hyped fads
- trying to sell when market drops and buy back in lower
If you see others do this, rest assured they will eventually lose a lot of money.
You will too.
Key point for wealth:
Investing your money in the S&P 500 index, or the TSP equivalent “C” fund and leaving it for the long-term will beat 98% of professional investors in the world.
It will definitely beat all those losers and shisters (word?) on social media claiming they can pick winners or have a secret formula.
Investing in the S&P 500 index and leaving it is what I’ve done since I was 25 year old.
I took Warren’s advice, and it didn’t disappoint.
Timing the Market
Here is the secret to avoiding large drops in the market.
Don’t try. You’ll screw it up.
The advice I gave about index fund investing is useless if you are jumping in and out of investing every time you or somebody you know gets nervous about the market.
Selling your investments because of pandemics, elections, wars, bad news, market or real estate cycles, etc. is a recipe for low returns. It doesn’t work over the long term, even if you get it right once in a while.
Two recent examples of this would be people that got out of their investments when Trump won the election in 2016, and people that panicked and sold when the pandemic started in March 2020.
In both cases, the stock market continued a relentless upward trend, and people missed out on large gains.
I’ll keep this key point for wealth simple:
Don’t try to time the market.
Roth vs. Traditional Retirement Accounts
In your TSP/401k as well as your IRA, you’ll have a choice of what type of account between Traditional or Roth you want to set up.
This affects the type of tax advantages you’ll get in these accounts.
Traditional retirement accounts mean you can deduct the amount you contribute from your taxable income that year.
Roth accounts are funded with money that has already been taxed and you don’t deduct it from taxable income for the year you contributed. When this money is withdrawn once eligible, none of it is taxed as income.
There is a lot of debate as to which is more suitable for a military member.
I believe that both of them are great, and it’s difficult to be certain which one will work out better for you in the long run.
Generically speaking, if you believe you’ll have less taxable income in retirement then in your working life, you may be better off with traditional retirement accounts.
If you believe you may have more taxable income in retirement than you did throughout your working years, a Roth might be the best.
Investment Order of Operations:
Contributing the maximum to retirement accounts is KEY in building significant wealth in the military.
This is done by contributing to both your IRA and TSP every year.
You are allowed to contribute the max to both. It’s not one or the other.
If you have a spouse, they can contribute the max to their IRA whether or not they are working.
Sometimes it’s confusing to know which accounts to fund first. This should help…
There is an optimal order to invest your funds in.
- If you have TSP matching, invest 5% of your pay to the TSP. This is free money you don’t want to miss! With no matching in your TSP, start at the next step.
- Max your IRA contribution (and your spouse).
- Max your TSP contribution.
While I do believe in paying off consumer debt before steps 2 and 3, these are all things that should be done BEFORE investing in real estate and BEFORE investing in non-retirement accounts.
Why this order?
While TSP’s have a much higher contribution maximum ($19,500 in 2021 vs. IRA $6,000), the investment options and withdrawal rules are more restrictive than IRAs.
Additionally, people used to say the TSP had the lowest expense ratios.
This is no longer the case.
You can get just as good or better expense ratios at Vanguard, Fidelity, or Charles Schwab.
The fees are so low with the TSP as well as these three companies that they aren’t even really worth arguing about.
TSP Investing
The Thrift Savings Plan (TSP) is the federal equivalent of a 401k plan. It’s a retirement account for military and federal employees.
It is different than an IRA and you are allowed to contribute the max to both of these each year.
The TSP is the most important investment you’ll make in your path to wealth because it has a higher yearly contribution limit than IRAs ($19,500 TSP vs. $6,000 IRA in 2021) and it’s tax advantaged.
There are several funds offered by the TSP that are roughly equivalent to mutual fund indexes offered by traditional investment companies.
- G Fund – Investment in U.S. Treasuries
- F Fund – Mimics Bloomberg Barclays US. Aggregate Bond Index
- C Fund – Mimics S&P 500 Index
- S Fund -Mimics U.S. Completion Total Stock Market Index (small and medium U.S. companies not included in the S&P 500 Index
- I Fund – International Fund focused on larger developed economies
- Lifecycle Funds – A tailored mix of G, F, C, S, and I funds that slowly adjusts to more conservative over time
Everything you Need to Know about the TSP
While there are a number of ways you could invest in the TSP, I’ll use a simple and effective method as an example. It’s the one I used.
100% in the C fund.
This is the equivalent of investing in the S&P 500 index, which is what I talked about earlier and has been my investment strategy.
Investing all your money in the C fund throughout your career and not touching until you reach the age where you can withdraw penalty free (59 ½ years old) is a great way to start your quest to being rich in the military.
It is widely accepted that the S&P 500 index has made on average a 7-9% return over the long run. I’ll use a 7% average for this model.
Here’s an example of investing $1,000 a month in retirement accounts and what you’ll end up with after 30 years.
Keep in mind, investing $1,000 a month is only half of what you’re allowed to invest through retirement accounts (TSP and IRA together).
As you can see, you’ll end up with $1.2M and change in 30 years, and it grows a lot faster as time passes.
Imagine if you invested $2,000 a month!
You don’t have to imagine, it’s double ($2.4M).
What if your spouse did the same thing as you. Double again ($4.8M).
The Power of Early Contributions
Some more investing wisdom.
While I realize it’s hardest to contribute the max early in your career, those early contributions make far more money than the money you contribute later in your career (when it’s much easier).
This is because of the importance of time on compound interest growth.
Let’s take for example $2,000 you invest in the first year of a 30-year career.
Compounding at 7%, that initial $2,000 alone grows to $16,237.
That’s the result of 30 years of compound growth.
$2,000 invested at 20 years into your career only ends up being $4,020 at the end of a 30-year career.
That’s how much less you get with 10 years of compound growth. 20 years less than the example above.
Big Difference.
So while investing money early in your career is harder to do, in this case it grew 4X faster than the money contributed 20 years later.
Don’t miss out on that compound growth!
While I used 100% C fund in my example, there are a number of well-researched ways to invest in the TSP.
Just remember to pick a strategy and stick with it for the long term.
Jumping around and changing strategies often will lose you money.
IRA Investments
As I said earlier, everyone is able to contribute the max to both their TSP (or 401k) AND their IRA. Spouses can also contribute to their own IRAs whether they work or not.
Fully funding your IRA is easier than with TSP because there is a lower contribution limit ($6,000 for IRA vs. $19,500 for TSP in 2021). Everybody should find a way to fully fund this from day 1 one on the job.
Remember to harness the power of early contributions.
I started investing in 1999, and haven’t missed a year. This was key for me getting rich in the military.
An easy strategy to invest in IRAs is following Warren Buffett’s advice and put it all in the S&P 500 index fund.
Warren Buffett gives up on Beating S&P 500 Index
That is exactly what I did.
There are also several well-researched alternatives to this. The key is not to jump back and forth between strategies or jump in and out of the market when you are scared. This will ruin your returns.
Investing in the S&P 500 index fund seem too simplistic for you?
Here is a post that lists several well-researched investment strategies and explanations:
Brokerage Account
When you’ve maxed out your TSP and IRA, then it is smart to invest money elsewhere. The easiest and most straightforward choice is to put index funds in a brokerage account.
This is different from a TSP or IRA. This account is outside of retirement accounts, and there are no tax advantages to investing in them. There are also no contribution limits.
When you sell index funds, stocks, or do anything that earns money in a brokerage account, the profit that you’ve made is taxed as a capital gain.
It’s smart to have money in a brokerage account because you cannot access the money invested in retirement accounts before age 59 ½ without penalties. There are some exceptions to this, but it’s not worth going into here.
It will typically be easiest to have your brokerage account (non-retirement investment account) at the same company as your IRA. (Charles Schwab, Fidelity, or Vanguard)
You can and should invest in this account with the same rules discussed earlier. Notably:
- Don’t time the market
- Stick to a strategy long-term
- Don’t make short term trades
Many use the same investment strategy in this account as their IRA account.
While investing in a brokerage account after an IRA and TSP are maxed is the smartest and easiest move, real estate investing is also an option.
The preference at this point should be which one you are more comfortable with, and you can do both.
I did.
Real estate investing was another key part of me getting rich in the military.
3. Real Estate Investing
Has anyone ever heard the easiest way to get rich in the military is buy a house at every duty station and then make it a rental when you leave.
I got news for ya!
Nothing could be further from the truth.
Most that try this route realize they have made mediocre to poor investments.
If you do this, most of the properties you buy will have a negative cash flow every month.
I tried this myself and later regretted it.
Here is the key to doing real estate right in the military:
Don’t buy a house unless it will cash flow well as a rental property.
This will make a little more sense if you understand the 1% rule in real estate.
The 1% Rule: If a property will rent for at least 1% of its price, then it will probably be a good investment.
If you buy a house for $100,000, and you would be able to rent it out for $1,000 a month or more, you would satisfy the 1% rule.
To better understanding calculating cash flow on a rental property, read How Much Money will I Make on my Rental Property*********
Another important thing to understand is that expenses on rental properties are much higher than you believe.
The 50% rule in real estate, 50% of collected rents actually go to expenses.
That doesn’t include mortgage!
So when a military member buys a house in San Diego, lives there two years, and then rents it out for $2,400 a month with a $2,200 mortgage payment, he is not cash flowing $200 a month.
If 50% of rent is expenses ($2,400 X 50% = $1,200)
That is a negative cash flow of $1,000 every damn month.
Maybe 50% expenses is a little high (it includes property management), but even with 30% expenses, which is definitely low, you are still losing a lot of money!
Once you understand the 1% rule and the 50% rule, you’ll see houses in high cost of living areas almost always make poor rental properties.
The big lesson here is don’t buy a property unless you’ve done the math and you know it will make a good rental property when you move away.
If you can’t make the numbers work, it makes more financial sense to rent in these locations, or live on base, and save money to invest elsewhere.
That might be in a brokerage account, or in a rental property that will actually make money.
You’ve probably heard that renting is throwing money away.
Yeah Rich on Money! Who wants to pay off someone’s else’s mortgage?!
It’s not that simple.
The transaction costs of buying and selling a home combined with future negative cash flows and high expenses make renting more economical than buying in many cases.
I only bought real estate when it was a smart money decision.
I used real estate to accelerate my financial journey, but it’s not for everyone.
To understand more about real estate investing in the military, check out:
Which Step is the Most Important
I talked about the three concepts you must master to get rich in the military.
- Saving Money while in the Military
- Investing while in the Military
- Real Estate while in the Military
The first step is saving money while in the military. I also explained this as growing the gap between what you spend and what you earn.
The next two steps were investing and real estate while in the military. Both of these are examples of how to invest the gap.
Which one of these three steps is the most important?
Saving your money or growing the gap is the most important and the secret to wealth in the military.
Without this step, you won’t have enough money to make a difference in investing or real estate.
It’s about investing early and often, and relying on the magic of compound growth.
Once you’ve got this extra money, you need to make sure to invest it right by following steps two and three.
Let me know what you think the most important step is for becoming rich in the military.
Let me know if the comments. I need to get back to surfing.
Rich on Money
Check this post out!
Hello,
You tackle a lot of topics here in a short amount of time. That is great if you are a consumer of personal finance like me, but for new Airmen and other military it might be too much information at once.
A topic you might address is geographic arbitrage. I am a Air Force civilian and by moving to Altus, Oklahoma I was able to get a cheap house and I can easily save a much higher amount of my income than when I was at Maxwell. Part of this is getting a smaller and cheaper house, but another part is that it is just a cheaper area of the country where I have decided to move. With Airmen PCSing every few years and the difference in housing allowance I would like your opinion of where it makes most sense to live if saving money is your most important thing. For civilians, locality pay doesn’t touch being in a HCOL area. You are much better off being in a LCOL area in a working class neighborhood if you really want to put back large amounts of money.
Thank you again Rich for your advice a year or so ago and I believe it was good advice. I was debating whether to get into real estate in Montgomery, AL or contribute more to my 401k. You recommended increasing to the max to my 401k. I believe most people need this advice and that real estate isn’t a panacea for always making money. You bought most of your real estate during the 08 financial crisis, which if you had money or income to buy any investment then you would have done well. I think real estate is much more expensive and in that way a riskier asset now than then. As always hindsight is 20/20.
Have fun in retirement.
Brandon, you make a good point about the post being a lot. I’ve got these younger airmen in mind. While I will be making a youtube video about this, I think i’ll need to make a separate investment only video, as that portion is just too involved and intense.
I’m considering trying my hand at tiktok to talk about bite sized issues in a minute, and see if I can get some important info out to the younger troops that way. I actually have a goal of starting that while I’m here in Hawaii.
I don’t think the issue is how much you make in each location. It’s more about making the decision of whether or not you should buy there using what I talk about in the real estate section. If you are not going to by, rent or live on base for free. If you can rent and make a couple hundred a month after paying utilities, do it.
In Monterey, I rented for $1300 but received $2300 in BAH.
Rich,
Excellent as always! I actually appreciate the length and having all the info in one article/location. Sharing with several wingmen just starting their AF journey. Thanks for taking the time to share your story and continue to inspire.
Aloha to you and Doug!
~Dee
Thanks so much. I really enjoy making this stuff. I appreciate your comment. Aloha!
>investing in bitcoin or other unproven, over-hyped fads
hard disagree on this point but just an opinion 🙂
everyone’s got one.