Suze Orman recently gave less-than-great advice to a military couple. If you know JoAnn & Tony from Colorado then I’d love to ask them if their plans have changed. Until we hear from them, today is a great chance to show why financial advisers might not always understand the intricacies of military benefits.
For those of you with recorders, the “It’s A Family Affair” episode started airing 23 April 2011 on CNBC and might still be in rotation. Our dual-military couple start their “How Are We Doing?” segment at about minute 40.
JoAnn & Tony are 52 & 54 years old, empty nesters with all three kids out of college (and two married). From one frame grabbed out of the video it appears that they’re a retired E-8 and a retired O-4 earning $6700/mo in active-duty military pensions. They’re working in bridge careers bringing in another $5500/mo.
Assets include:
- Their home valued at $360K.
- $477K in retirement accounts (including $123K in their TSPs)
- $320K in “emergency” funds
- $145K in taxable investment accounts.
They plan to completely retire in three years, and over that three years they could conservatively save another $150K. Their current retirement/taxable accounts add up to approx $942K and could grow to at least $1.1M by the time they retire from their bridge careers.
They owe $116K on the $360K home. No other debt. Expenses are $6035/mo, which probably includes the mortgage payment, and also includes premiums on term life insurance policies.
JoAnn pointed out that they put three kids through college and paid for two weddings without going into debt. I suspect this couple’s military experience has made them experts in frugal living, and I’m pretty sure that they have a very good handle on their expenses and their budget.
When they retired from the military they turned down each other’s Survivor Benefit Plans. They’ve bought term life insurance on each other that they plan to keep until he’s age 70, and then they’ll let the insurance expire. Reading between the lines, I suspect that they plan to defer their Social Security benefits until age 70 so that either one of them will have sufficient pension/SS if the other dies. I think they also expect to save more money on term insurance premiums than they’d pay for SBP.
If they retire in three years, their military pensions will be at least $6700/month pre-tax (plus three years of COLA raises). Conservatively, after taxes their pension estimate would be $5500/mo on expenses of $6035/mo. (Expenses would drop if they paid off the mortgage during the next three years.) In other words, even with a mortgage payment they’d only be dipping into their savings at $535/mo or roughly $6500/year. That’s less than 1% of their retirement & taxable accounts now, let alone what they’d grow to in three years.
Sounds pretty good, right? JoAnn thought Suze would give her an A+. I’d be pretty happy with her situation.
Suze gave her a D-/F.
The failure grade hinged around their lack of SBP. Suze felt that if either spouse died then the remaining spouse wouldn’t have enough pension or SS income to avoid running out of money. Suze says that when they drop the term life insurance at Tony’s age 70 then JoAnn “can’t count on their savings to be there for her if her spouse dies”, leaving her with just one pension and one SS deposit. This is despite the fact that they have $320K in “emergency funds”, presumably in CDs and money markets, and a net worth over $1M.
Suze went on to admonish them to both keep working until they were ages 67– or preferably 70! No other alternatives. There was no discussion about how much they’d need to save to self-insure, or buying an annuity, or changing their asset allocations. Presumably Suze’s staff digs into these details and accounted for their impact. (Those details don’t fit into the show’s three-minute sound bite format.) Suze gave JoAnn a pretty harsh lecture, too, which wouldn’t go down well with a veteran of any rank, and (in my opinion) even insinuated that they were incapable of understanding the complexities of managing their own finances.
Suze completely missed the value of the COLA in their military pensions, their cheap Tricare health insurance, and their cheap long-term care insurance. She gave them no credit for their savings. She even claimed that they couldn’t tap into enough of their 401(k)s before age 59.5, but the words she used leave room for interpretation and she probably didn’t want to go into the details of a 72(t) withdrawal.
In her defense, Suze gets a lot of air time in our house. Each show is worth an hour’s money conversation with our 18-year-old daughter, who now completely knows the rules for “Can I Afford It?” and has the big picture on “How Am I Doing?” When she hears the word “girlfriend”, she knows there’s trouble: “You are SO denied!” is part of our household vocabulary.
Suze is also extremely conservative in her advice. Lately that advice has been to continue working until at least age 67 (if not 70!) to maximize savings and Social Security benefits. She expects “retirement” to mean (1) pension/portfolio income for life with no consumption of principal, (2) healthcare & long-term care insurance, and (3) survivor benefits or life insurance to replace income after a pensioner’s death. Many in her audience are struggling with consumer debt and lack an understanding of the fundamentals of saving for retirement.
Meanwhile, over on Early-Retirement.org, most early retirees are limiting their expenses to 3-5% of their portfolio. Consuming the principal is a given. Most will watch their portfolios to cut back on lifestyle or work part-time if necessary, while others are ready to buy a single-premium immediate annuity if their portfolio dips toward the failure line. If Suze moderated a retirement seminar among these people, her head would explode. But then Suze has one of the world’s best jobs and thinks it’s a wonderful thing to be able to work until age 67.
If JoAnn was over on E-R.org then they’d point out that her $1M of accounts, invested in a 50/50 split of stocks & bonds, would easily throw off an average 4% per year (before inflation & taxes!) for another 30 years. She could start withdrawing 4% the first year and raise it every year for inflation. Meanwhile if her spouse died just after the life insurance expired, and her pension/Social Security income dropped to an absolutely horrific worst-case level of $3000/mo, then she’d still be receiving two COLA pensions that would keep up with her expenses. Even if her widow’s expenses stayed at $6035/mo, she’d only need $3000/mo or $36K/year– less than 4% of their accounts.
In other words JoAnn (when she reached her late 60s) would be spending principal but would be doing just fine. The numbers in the last paragraph don’t account for the fact that the mortgage would be paid off, she’d have cheap healthcare and cheap long-term care insurance, and she’d be able to tap her home equity for large expenses. Even if one of them dies at the absolute worst possible time, their savings would last longer than the survivor. I’d love to confirm the details with JoAnn, but I suspect that her pension/SS income would be more like $4500-$5000/mo and her expenses would have dropped to slightly over $5000/mo.
JoAnn’s risk assessment seems conservative enough to me. However Suze is telling them to hold up their pants with a belt, suspenders, duct tape, SuperGlue, and a nail gun.
Granted, it’s difficult to explain the military retirement system in a three-minute segment. But if it’s difficult to explain Joann’s situation on TV, then why bother? I don’t think Suze should have taken JoAnn’s call, let alone stomped on her with those Suze-Smackdown combat boots. It just seemed mean.
If anyone knows how to reach JoAnn & Tony, retired Air Force veterans in Colorado, I’d love to learn more from them!
Related articles:
The biggest benefits of a military retirement
When should you stop working?
Retirement budgeting
Military retirement spending: how much will I need?
Military retirement: how much can I really spend?
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