I am not going to lie—this will be a pretty lop-sided competition. However, I will have additional articles on how the losing party can catch up or beat the victor. Welcome to part one of Dividends vs. Military Retirement.
Off the top of your head, which of the two sides do you think will win? The civilian investing in dividends will likely have a higher wage; however, the military personnel will have more consistent raises.
Assumptions. I will attempt to make this as fair as possible. Our competitors today will be Sally and John. Sally graduated from the University of San Diego (USD) at age 22 and got a job making $100,000/year.
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John also graduated from USD but joined the Marines. Now he is a 2nd Lieutenant stationed in Miramar, California (San Diego area), making roughly the same with basic pay, housing allowance, and medical expenses factored together.
The mission. The plan is to keep this as simple as possible. Let’s assume that John the Marine will make $3,333/mo in his military pension after 20 years of honorable service.
Thus, Sally’s goal is to achieve this level of dividend income after 20 years in the civilian workforce. Both start at age 22, with high-paying jobs, so who will be better off in 20 years?
If you are good at math, you know that $3,333/mo equals $40,000/year of passive income. To achieve $40,000/year in passive dividend income (at a 4% dividend yield), Sally would need $1 million in her dividend portfolio.
The question. Can Sally save and invest $1 million in 20 years to achieve her $40,000 in passive dividend income? Let’s begin.
The unfair advantage. The magic of a military pension is that someone (Uncle Sam) is doing all the saving and investing for you. No matter how much income John saves in his personal brokerage account, he will retire with his military pension.
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John, however, has to give up certain “rights” to gain access to this pension. He has to move locations on demand and can’t express himself as freely as civilians. Some people find these restrictions very limiting, but I find the financial freedom of being in the military as the equalizing factor.
So if John never saved or invested over 20 years, we would still end up with his $1 million retirement plan. We are not even going to get into the medical, disability, and other military retirement benefits.
How can Sally compete? Today, we will look at what Sally can do to achieve her $40,000/mo in passive income and compete with John.
The next article will look at Sally’s advantages by remaining a civilian. If she leverages those, she may be in a better position in time.
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Saving rate. The most crucial part of becoming wealthy is having the correct financial mindset. The second most important part is your savings rate. In America, we think that saving 5% of our income will earn us a decent retirement.
I like to say that “a 5% savings rate will get you 5% of a retirement.” Sally’s savings rate needs to be at least 50% to stand a chance. But let’s run the numbers through our compound interest calculator.
Sally’s monthly income is roughly $8,300 before taxes and $7,000 after taxes. She needs to invest $2,000/mo into her dividend portfolio to reach $1 million in 20 years.
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However, she will still be paying into her 401K, buying real estate, and building an emergency. She would need to have at least $3,500/mo set aside for total investments.
Is a 50% savings rate viable? That’s hard to say. She will have to take drastic steps to achieve this amount of savings, especially in San Diego.
However, she does have options on how to invest her cash. I based the $1 million amount on a dividend growth portfolio. You would achieve $1 million in assets at a 4% dividend yield, thus giving you $40,000/year.
But what if her dividend yield was 8%? That’s right, what if she built an income investing portfolio instead of a DGI one?
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At an 8% dividend yield, her $1 million would net $80,000/year of passive dividend income. To be honest, if I were building a pension-like portfolio, I would build an income portfolio over a DGI one.
A dividend growth portfolio is a multi-generational wealth tool, while an income portfolio is more of an employment substitute. With DGI, you invest with strong companies and brands that grow over time.
You don’t care too much about individual securities with income investing. You may be investing in a high yield bond fund, but change to another one because it has better stats. There is no real loyalty with income investing, just dollar signs.
In a perfect world. Sally would have both a DGI and an income investing portfolio in an ideal world. She could live off the income while the DGI compounds into the infinity-sphere. Don’t forget she still has a 401K and other assets for diversification. So, it’s not very risky to depend on an income portfolio.
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John vs. Sally. If John copies Sally’s account management, he always comes out ahead. He receives his $40,000 no matter what happens as he invests over 20 years. However, if he starts his income investing portfolio at $80,000/year, he now has $120,000/ year in passive income.
I am currently working on getting my $1 million in a dividend portfolio. Once I retire, I will collect this military pension as well. It’s not a bad life.
The winner. The winner thus far is John. Not many people are in the military, so you are more likely in Sally’s position. My advice is to save, save, and save some more. Things don’t get easier with time.
As we grow and achieve success, it comes at the price of responsibility. Each new soul we bring into our family requires time and resources. If you can save now versus tomorrow, do it NOW.
In Part Two, I will cover how Sally can dramatically shift the tide in her favor. Remember, she can stay in one place for 20+ years—John can’t.
In Part Three, I will help you do the math to decide if you should stay in the military or try your hand in the civilian world. If you are a good saver, you have a much better chance of surviving in the 1st Civilian Division (1stCivDiv, inside joke).
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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