Military Retirement and Diversification

If you’ve spent any time learning about investing and retirement and such, you’ve heard the term diversification.  If you’re not familiar, when talking about investments, Merriam-Webster says that diversification means “to balance defensively by dividing funds between securities of different industries or of different classes.”  In its simplest form, is usually means a strategy of having different investments at different levels of risk.

The general, generic advice given in our country is that you should have more exposure to risk when you are younger, then gradually move your investments into less volatile categories as you move closer to retirement.  There are all sorts of “formulas” available, telling you what percentage of your assets should be in which groups, depending on your age and long-term goals.  Imagine that your overall savings, investment and retirement plan is a tic-tac-toe board.  When you are younger, and have more time until retirement, you should probably have most of your squares in a variety of higher reward, higher risk investments, such as stocks.  Every decade in age, as you get closer to retirement, another square or two should move into less rewarding, safer investments so that you don’t risk losing all your money just before retirement.

If you are a military retiree, or plan to stay in the military long enough to collect retirement pay, your overall strategy differs from the rest of the world in a very big way.  As a military-savvy financial planner told me, “You have to consider the fact that you already have a million dollar bond fund.”  What he meant by this is that a military pension is very safe and stable, and it represents a large investment.  My friend Doug Nordman, author of The Military Guide to Financial Independence and Retirement, did an excellent blog post detailing how and why a military retirement is so valuable.  By his good math, a retirement check of $3,000 per month is worth well over a million dollars.  For an average retiree in their late 30s or 40s, this means that you automatically have all this imaginary money in a very stable investment.

What does this mean for you?  In order to be well diversified, you have to be risky.  For most military retirees, their pension is the largest part of their overall investment/retirement portfolio.  Military retirees already have a portfolio that is skewed towards the very safe.  In order to achieve balance, you have to add some more aggressive, less secure parts.  The details are up to you.  If you have to chose between two TSP funds, and one is a little more aggressive, then knowing that you have a military retirement makes the more aggressive fund right for you.

What you do not want to do is put all the rest of your savings in equally safe investments.  You will have relative safety, but you will miss out on the opportunity to grow your money, and that would be the opposite of diversification.

There is obviously much more to consider when building an overall investment and retirement plan.  The implications of a military retirement change everything, and that is the important thing that I hope you take away from this post.  After all, a “million dollar bond fund” is a lot of money, and you need to plan around it.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.