Military retirement vs 401K
 

Long time reader, first time poster seeking advice.

I am going to have a 20 year military retirement (CW4, Army) that starts paying the day I retire (22 Jan 2007). If I get on with a company that has a 401K would it be worth while to pay into it or save the money I would put into it and invest it myself?

I am sure there are plenty of military folks who have looked at the pros and cons of this and am curious to read what they have done and why? All my flight experience is with the military and I have never worked for a civilian company as a pilot so this is very new to me.

Thanks in advance to all who reply.

40 views and no opinions on this?

My suggestion: Fully fund an IRA and put all you can into the 401K, especially if there's any company matching contribution---that's free money. Both defer taxes on the earnings. If you have a choice in how your 401K funds are invested, diversify, be conservative, and do not buy any airline stocks or bonds.

Thanks Tom, that is what I was looking for. The concern was with the airline stocks and bonds. I wasn't sure it if was required to reinvest it all in the company you were flying for or not.

I have a cousin who's father in law is a retired 747 Captain for United and lost alot of money after the chapter 11 stuff.

There are no cons to paying in to a 401k. What could you be thinking? You said you don't know whether you should save in a 401k or on the side. Why not both? Like the previous post said, if the company matches then it is free money. Military retirement or not; you'll want more when you retire. (at 65) :D

Thanks for the heads up guys.

401 vs Roth IRA
 

Here's my take on this. Contribute to the 401(k) if there is a company match. Free money as mentioned before.
You have a choice to make after that though. The 401(k) deductions from your pay will be pre-tax money. This will reduce your taxable income and reduce your taxes for that tax year. A Roth IRA would be funded with after tax money with no tax deductions. But(and there is always a but) the money will grow tax deferred until you retire. At that point, you can take distributions on your Roth IRA with no taxes due on the contributions or the tax-deferred growth of your money.
The Roth money can be used at anytime without tax penalties. This could be attractive if you become unemployed in the future. A emergency fund of sorts.
If you were tap your 401 before retirement at 59.5 you would pay a 10% early distribution penalty and your current tax rate on the earnings.

There is a program thatl lets you tap your Traditional IRA without early withdrawal penalties but it is not for most people.
This program is called a 72(t). It allows you to withdraw your IRA based on your life expectancy.
I have a 401 account with my previous employer, a traditional IRA and a Roth IRA.

The main problem with being retired military, is that you have 20 years or less to pay into a 401K as a civilian employee. I have not found a retirement plan that yields as much as military retirement does, considering military salaries, and the fact that most of us will receive retired pay for close to double the amount of years we spent on active duty. Also consider the COLA increases every year. If you can live frugally, and max out a 401K for 20 years, I suppose you could have a sizable balance by retirement time.

While I advise taking advantage of a 401K, and "free money" and the tax benefits all considered, I don't think they can be the main component of a retirement plan like the government and investment community thinks that they can be. If a person can put money into them regularly for 40 years, and get the long term benefits of the stock market, they can probably be well off by retirement. But with the ups and downs of careers these days, consistant funding is problematic.

I think in future decades, this 401K philosophy of retirement plans, is going to have many seniors living a much lower standard of living than thought possible. If one is a high wage earner, or more likely owns a small business, they will be alright. The vast majority of folks at the median income or below, who are "working stiffs", are going to find the 401K money just doesn't last very long, considering the increase in life spans.

If you did TSP you can/should roll that into a 401(k). As said before, put in the % required to get the maximum company match as it's free money. Also, 401's are a tax shelter.
In most cases, you are free to invest a 401 as you see fit. You are thinking of an ESPP (Employee Stock Purchase Plan) which lets you buy company stock at a certain % of the going price, with the company fronting the rest of the cost. These are OK, but if not used smartly, you'll end up like all those ENRON folks trying to sue their company because they were stupid.
I am a big fan of 401's because I like managing my money..but you can split it up between a bunch of mutual funds and be (almost) hands off.

The bottom line, you need to get smart about 401's and investing (read any of Jim Cramer's books to start) as they are not automatic like a traditional retirement. But the money is YOURS, and you don't have to worry about someone changing the rules on you down the road. I think you'll see a continued chipping away of the military retirement as we get older. Cola is a great example, as it's always time late......

HTH
Spongebob

The trick with the COLA issue, is to find a place to live where the inflation rate is less than the CPI-W rate increases COLA is based on. Of course there are other QOL factors in doing this, but if you want to maximize the value of your pension, that's the way to do it. Works for Social Security too, as SS and military retirement operate the same way COLA wise.

I've been doing this 11 years, and my retirement pay certainly goes further than it did at the start.