It’s tax season again, and with all the craziness of 2020 accounted for in this year’s receipts, those in America’s military need to savvier than ever when it comes to their taxes.
It’s one of the last things we want to think about, and one of the biggest things military families overlook… taxes. We see the taxes taken out of our paychecks and don’t think much about it after that. But we actually have more control than we think.
Joe Lucey is a Marine Corp veteran, longtime financial advisor, radio personality, and the author of the new book “New Tax Secrets” — which focuses on the many practical elements of current and future tax planning that most people are unaware of.
Take a few minutes to read my conversation with Joe below, because it could save you thousands of dollars!
How did you transition from a military career to a financial one?
I was in the Marine Corps from 1987-1993. I was an F/A -18 Avionics Technician – mostly out MCAS Beaufort, South Carolina. I first enlisted in the military to find my way after high school. After my service, I went to the University of Minnesota school part-time while also working as a bartender. Interestingly enough, this is when I found my opening to a financial career. While bartending, I began running into a few financial advisors that came into the restaurant that I worked for during happy hour. Along the way, I got one of them to hire me to make cold calls for his company. From this, I had a direct path into the financial business.
I look at this experience as a stroke of luck. Ever since childhood, I wanted to get into the financial business. I used to think getting into the financial business came from the traditional path of going through school and starting off on a more structured corporate level. But thankfully, my financial career came from running into somebody who gave me a once in a lifetime opportunity to work for him.
What’s the biggest mistake you see people make when it comes to taxes?
The biggest lie that we’ve been told for several generations now is that you’ll put money into your tax-deferred retirement accounts at a lower tax bracket than when you’ll take the money out. I think one of the biggest mistakes families tend to make is thinking more in terms of what they can save on taxes today than what this is going to cost them in taxation long-term. Many families sacrifice their working years, putting aside money in tax-deferred IRAs, 401 K’s, TSPs, and more – then getting a tax deduction upfront and planning on paying the taxes when they take it out down the road. But, many families fail to consider the future tax rate impact. The current US tax rates are at 40 plus year lows, but very few economists or tax professionals expect that them to remain low much longer. The US debt has skyrocketed after several rounds of COVID stimulus packages, and the result is very likely much higher tax rates in the future. Thus, people should consider the ultimate amount of taxation that will be paid on that money long-term instead of short-term.
What are the top three things servicemembers and their families need to know about taxes?
First, service members and their families should know that Roth IRAs are tax-free! By setting aside money and paying a little bit of tax on the money today, along with compound interest and time, assists with accumulating money that can be used tax-efficiently. Individuals should also keep in mind that the IRS cares very little about what an individual’s net worth is. They care more about how income is going to hit a person’s tax return in their retirement years. Also, as time goes along, more and more tax deductions – like when children leave the house or houses get paid off – start to disappear for families. Therefore, servicemembers end up paying far more tax on the money that they were deferring early on than what they would get down the road.
The second thing to consider would be starting a cash balance life insurance policy as soon as possible. The younger you are, the lower the costs of these! They can be utilized for many different things, including access to tax-free assets, even prior to retirement age to help fund childrens’ college educations and more.
Lastly, servicemembers should ensure that when retiring from the military, they should understand the options around their pensions. Married service members should carefully make pension decisions when that time comes, accounting for income both while both spouses are alive and following a passing of the servicemember and surviving benefits that may pass to a spouse. For example, individuals should consider what potentially will be left for a surviving spouse. Typically, surviving spouses pay higher taxes alone than when they filed taxes jointly. By not considering critical pension decisions, servicemembers can be making a tax mistake that can cost them a small fortune.
What do you wish you’d known about retirement planning earlier?
I wish I knew a lot of retirement planning tips earlier, like many other people! For servicemembers, my retirement planning tip is to make sure you’re optimizing mailbox income. Consider what’s going to hit the checkbook whether or not the stock market, your TSP, and 401k are performing. Ensure you’re fully optimizing some of the benefits that veterans receive, like a pension, and make smart decisions around your Social Security elections.
Also note that retirement planning isn’t only focusing on investments and the investment returns – it’s about looking at all other areas of retirement planning. How do you make sure that you’re going to protect an income stream so you can maintain your lifestyle in retirement? Individuals can take steps to reduce taxes, both during your earning years and during retirement. People should also address other concerns, such as healthcare planning and family planning. In total, make sure you’re looking at everything as a balanced plan.
Is there a rule for how much someone should have in their retirement portfolio based on age and income?
The number one rule is to start as early as you can, and let time work to your benefit. The longer time you have your money working for you and your retirement accounts, the easier it is to accumulate more savings. I personally dislike when folks talk about rules of thumb, because as we go on, they don’t necessarily hold up. For example, one of the biggest rules of thumb that most of us have heard for years is that when you retire, you should be able to plan on living on 4% of your retirement savings. But, when that rule was created in the early 90s, it was based on interest rates on bonds and other fixed income being much higher than they are today. Today, in a low interest rate environment, some newer studies suggest that the rule tends to fail unless we reduce that 4% withdrawal rate down to something closer to 2.5 or 3%.
Many military veterans get the benefit of being able to rely on pensions, which most Americans don’t have the luxury of even considering in their retirement planning. Thus, it allows servicemembers to depend on our retirement balances less. It also provides us a more predictable income. Yet, the downside can be over-relying on a pension that down the road, does not allow us to set aside money for unforeseen expenses or additional luxuries for our preferred lifestyle. Overall, make strategic financial and tax planning decisions, folks!