Commentary: Financial security demands a plan

By Maj. Brian P. O'Neill, Special to the Fort Leavenworth LampApril 1, 2010

FORT LEAVENWORTH, Kan. (April 1, 2010) - One of my favorite sayings is: "A child does what feels good. An adult makes a plan and sticks to it."

I borrow this little dig from financial author Dave Ramsey because it makes a great litmus test for military leaders. While it can be applied to many aspects of military life, it really shines a light on personal finance.

Many military members are diligent savers and live well below their means. They are not the reason why payday loans stores setup a gauntlet outside of most installations. Whether you're a lieutenant, private or colonel - if you're an American, chances are you are in debt for cars, credit cards or student loans, because nearly 50 percent of America carries debt balances each month.

Why not maintain some debt' Debt helps build credit, right' You can't have a good credit score if you don't have some debt. We've all heard such maxims. Along with catchy commercials, they are part of a culture that doesn't even acknowledge a life without debt.

OK, debt is bad, but what does this have to do with a financial plan'

Author Dr. Thomas Stanley would echo that one's greatest wealth-building tool is one's income. If income has to go to interest payments, it can't go to generate wealth. It's that simple. So here's where the need for a plan develops. What does the end of your life look like' Are you poor, subsisting on government entitlement programs in a Medicaid nursing home' Are you wealthy, drinking umbrella drinks while funding your grand kid's college' Either way - what is your plan to get there' It won't happen by accident. If poor is your plan, stop reading here.

Begin with the end in mind. This powerful planning rule borrowed from "The Seven Habits of Highly Effective People" author Stephen Covey is the first step to growing from a financial child that buys pretty shiny things with plastic into an adult who lives an executable and valid plan. A lieutenant colonel retiring at age 42 with 20 years of service in 2010 is eligible for about $4,000 each month in retirement pay. At age 65, uninflated Social Security benefits will be about $3,000 each month. If this hypothetical retiree has no other retirement income, then he will have $7,000 in pre-tax income each month. If this covers all living expenses, the plan works - if Social Security is still intact and if there are no financial emergencies. The worst part of this plan is that it's heavily dependent on an entitlement program that is already in financial trouble.

Perhaps another plan would be to build enough wealth between now and retirement to cover all expenses - and maybe even some luxuries - without relying on outside sources. What plan gets you there' If you save $2 million before retirement, invest in sound mutual funds to earn 10 percent during retirement, you can withdraw more than $7,000 every month and never touch the $2 million principal. But $2 million is a lot of money - how could a military member ever save that'

Current annual Roth IRA contribution limits are $5,000 per person. If an O-1 socked away that amount at 10 percent every year until age 65 with no other savings, the balance would be $2.4 million. (With two world wars and the Great Depression, stocks returned 10.1 percent from 1900-2000.) This equates to an income of more than $7,000 each month while never touching the principal.

To put this in some perspective, $5,000 is almost 20 percent of an O-1's basic pay in 2010 so it might be a bit tough to save this much in the first few years of military service. For an O-5, however, $5,000 is barely 5 percent of annual basic pay. If conventional wisdom is to save between 10-20 percent of income for retirement, then an aggressive lieutenant and a lazy lieutenant colonel can probably save some cash for retirement to support the retirement plan.

The bottom line is that everyone, especially military personnel, need an executable financial plan to ensure a secure retirement. The examples here are very simplistic and don't account for things such as insurance, home purchases, etc.; however, they are a great start at growing into a financial adult. Why not give it a try'

It feels good to fake success. It feels good to buy things you want when you want them. It does not necessarily feel good to do math, make sacrifices (i.e., live within your means) and develop plans for the future. It most definitely will not feel good to struggle to eat and pay rent in retirement. Young military members can get away with doing what feels good for a while. Those payday loan folks outside the gate are happy to help.

If you are older than 18, but you don't have a written plan for your financial future, maybe it is time to ask if yourself if you are a child or an adult'

Editor's note: Air Force Maj. Brian P. O'Neill is a student in the Command and General Staff College's Intermediate Level Education class 2010-01.