Money, indeed, cannot buy happiness. But, for the military man, it can buy insurance, mutual funds, “growth” stocks, “blue chip” common stocks, and the kind of peace of mind that comes with knowing that nobody is ever going to have to pass the hat to, in Abraham Lincoln's memorable words, “. . . care for him who shall have borne the battle, and for his widow, and his orphan.”
Any discussion of personal financial solvency must be prefaced by three axioms of economics. The first is an old saw, “Large gains require high risks.” This is an inexorable law of finance, personal or otherwise.
The second is another old maxim, “Nothing makes money like money.” This is to say that, quite apart from risk, one does not reap huge returns, in absolute terms, from small investments. Those familiar mutual fund curves of accumulated wealth look impressive for an initial investment of $10,000. For an investment of $500, however, the absolute growth of a few thousand dollars over a period of many years is less than overwhelming.
Third, there is a financial corollary to the law of Monday-morning-quarterbacking, “Hindsight makes the largest profits. Foresight is something else again.”
Having these axioms clearly in mind, let us choose a starting point. It might well be to categorize personal finances by ascending level of risk, something like the following:
Fixed Dollar Amounts
(1) Permanent insurance—a sure[*] thing, with group leverage.
(2) Term insurance—a sure* thing (in peacetime), with group leverage.
(3) Savings account—a sure* thing, payable on demand.
Amounts Protected against Inflation
(4) Equity in a family home—a sure* thing, temporarily frozen, but paying its way.
(5) Mutual funds—low risk securities.
(6) Selected “blue chip” common stocks—moderate risk securities.
(7) “Growth” stocks—high risk securities.
Ordinary common sense immediately suggests the wisdom of working our way up this scale, step by step, not overloading any one category on the way, nor yet venturing into any higher one before a reasonable minimum is established in each one below. What is a “reasonable minimum?” There can be no universal standards, obviously. However, consider the following generalized yardsticks:
(1), (2) Insurance—we shall postpone this until later.
(3) Savings—the foreseeable required cash outlay in the next three to five years.
(4) Family home—whatever minimum equity is required to secure a mortgage.
(5) Low risk securities—your firm retirement plans (e.g., the house you have been waiting for).
(6) Moderate risk securities—your retirement aspirations (e.g., a second home at the beach).
(7) High risk securities—your retirement dreams (e.g., a third home in the mountains).
This is all very well, you say, but what about the erosion of those “fixed-dollar amounts” owing to inflation? It appears that inflation is here to stay as a fact of modern life. Progressive economists say that “annual inflation” of the order of 2 to 3% is even essential to avoid deflationary stagnation. To be sure, insurance and savings are vulnerable, but this is a price one must pay for certainty on a reasonable minimum at the lower risk levels of his financial structure. Do not let the spectre of inflation frighten you away from insurance and savings altogether; but, do let it remind you not to overcommit yourself to either. Recall, particularly, that a large mortgage is perhaps one of the best hedges against inflation available—a long-term contract payable in fixed-dollar amounts.
Before we go on, the matter of a family home deserves further comment. It is probably the one exception to the rule of filling our financial structure from the bottom up, because the choice between it and the next higher category, mutual funds, is largely a matter of personal inclination and circumstance. All the complex arguments on buying-versus-renting tend to obscure the controlling fact that it costs money to have a roof over your head. Analyze the proposition in the simplest possible terms. If you rent a moderately priced house, the norm for rental will be somewhere around 10% of the market value of the house per year. If you buy the same house, before taxes and upkeep in today’s market, you will be out of pocket 7% on the value of the house—7% interest on your mortgage, and 7% income loss on your downpayment and acquired equity. Now add taxes at roughly 2%, and you are up to 9%. Even if we assume that your interest deduction on income tax offsets upkeep and maintenance, you have little edge on an annual basis. Your gain must come, then, from resale appreciation (i.e., inflation), less your buying and selling costs, which of themselves will approach 8% of the house value.
Sale by owner? Watch out! The pitfalls are many, and the headaches multitudinous. It can be done, it has been done successfully, but it introduces an element of uncertainty which considerably increases the risk.
Ask yourself if the owner who feels his house would bring $30,000 through an agent, would really offer it to anyone on a direct sale for $1,800 less? Would you? On the other hand, is it not just possible that an agent, whose judgment a mortgage company respects, could justify a loan $2,000 greater than you or your buyer, as unknown individuals, could negotiate? Rationalize it as you will, the realistic way to evaluate the desirability of owning a home is to make the conservative assumption that you might find it expedient to use an agent.
In such an evaluation, recall that our financial edge in owning really comes from inflation. We buy in 1970 and borrow 1970 dollars. We sell in 1980, collect 1980 dollars, but can use those 1980 dollars to pay off our loan, even though they are worth only 75₵ on the 1970 dollar. This boils down to the plain fact that we must hold on long enough for inflation to overtake the 8% it costs us to buy and sell. So, if we can arrange duty assignments to permit a sort of recurring home base to which we can be reasonably assured of coming back—e.g., Washington for any branch, New London for submariners, Norfolk or San Diego for aviators, Newport or Long Beach for surface officers—a family home is likely to pay off handsomely over an eight- to ten-year span, and provide a good deal of convenience and personal satisfaction in the interim (if owning your own home does bring you satisfaction).
Now, let us examine the much-discussed mutual funds carefully. How about those striking graphs showing the growth of $10,000 invested in 1949? The burgeoning success of many mutuals has led to misconceptions. They are represented as high gain—low risk, but, as we have noted, such a thing is a myth. When mutual funds are small (say under $50 million), investing in a relatively narrow selection of stocks, they can offer high gain, but the very narrowness of investment means at least moderate risk. As they grow, they must spread their investment, and, perforce, become market averagers in the process.
T. Rowe Price Growth Fund, for example, doubled in per share net asset value between 1957 and 1961, while increasing total holdings from about $9 million to around $70 million. From 1961 to the present, it has very closely paralleled the market, on the basis of investing an equivalent amount at Moody’s Industrial Index and reinvesting all proceeds. However, after becoming market averagers, these large mutuals do necessarily offer low risk—the least, probably, that one can find in common stocks.
You are still skeptical, with visions of that mountainous graph of growth since 1949? Remember that the market is an auction place, and despite what any salesman says, it is influenced as much by emotion as by financial fact. Moody’s Industrial Price Index increased about sixfold from 1946 to 1966. In that same period, Moody’s Industrial Earnings per share increased threefold. A threefold increase in market prices, then, was supported by financial fact. The other factor of two was pure emotion—a willingness of buyers to pay 20 times earnings in 1966 vis-à-vis ten times in 1946; and a concomitant willingness to accept a dividend rate of 3% rather than 6%.
Consider this carefully, and ask yourself if it is really reasonable to expect buyers to pay 40 times earnings in 1989? On the other hand, could there be a popular reaction away from the fashionable “growth” issues back toward a price-earnings ratio of ten? Weigh these thoughts before extrapolating a sixfold market gain from 1969 to 1989. They are imponderables, of course, and they should not discourage you from any investment. But, do let them instill caution, and salt the glowing predictions of the “hard sell” salesmen. Let them remind you of an immutable law of investment—invest in common stocks, mutuals included, only those funds of which you could afford to lose a substantial portion without serious impact upon your family fortunes.
Now let us turn to insurance, and see if we can strip it down to bare essentials. If we are to think about this subject rationally, we must accept the truism that the only way to get a bargain in insurance is to cash in early for full benefit, a self-defeating procedure, at best. The net insurance cost to you, alive, for any plan is clearly established by mortality statistics. No company which is to remain solvent can offer it for less, although, of course, many can and do add a few gimmicks and charge you more. Our purpose is to accept the cost as dictated by statistics, and hedge our bet in the most economical way. We must take into account the most probable eventuality (living threescore and ten), while at the same time insuring at a reasonable level against the unlikely chance of not reaching that goal.
There are two basic types of life insurance: “term;” and “straight,” or “ordinary,” or “permanent,” or “whole” life. All plans are calculated by one or a combination of both of these basic methods, although a host of variants are offered for market appeal.
For term insurance, the company, in effect, acts as a repository for contributions (premiums) by a group of men of the same age in an amount to match the total specified benefit for the expected number of deaths over the following five-year period. For example, the mortality curve for U. S. males shows that a group of 978 men, age 35, can expect to lose 14 of their number by the time they reach 40. So, if they agreed upon a benefit of $10,000, collectively they would have to pool $140,000 in 60 months, or a monthly average of about $2.50 apiece. Dirt cheap? There must be a catch. There is, indeed! You grow older. Your fellows, with whom you can share the risk, grow fewer. More of you die. In short, you price yourself out of the market by your middle fifties. At 60, the same sort of arithmetic used above would indicate a monthly premium of over $20 per man per month.
Over the age span when the theoretical cost of term insurance is attractive, it can be made even cheaper through selectivity and restriction to groups with demonstrably superior health and conservative living habits. Military personnel constitute such a group (in peacetime), and a number of associations have been organized to capitalize upon this preferred risk factor. They operate through annual master policies with commercial insurers, and, for the most part, narrow the risk further by limiting initial membership to active duty officers. Two basic sub-types are available: increasing cost for fixed coverage (or, conversely, decreasing coverage for fixed cost); and, level cost for fixed coverage for a specified term, namely, active duty.
An example of the first sub-type costs $9 per month, and the coverage is $30,000 through age 30, $25,000 for age 30 to 35, and so on, down to $10,000 for age 60 to 65. Note that the preferred risk selectivity has served to extend the reasonableness of cost through 65 (the coverage from 65 to 70, for the same premium, is $2,500). In peacetime years, favorable experience has resulted in rebates on premiums up to $4.50 per month. It is a great buy through your 59th year—even a good one through your 64th—but exorbitant after that.
Decreasing coverage can complicate planning. How could we achieve level coverage? If, instead of a group all the same age, we can collect a cohesive group of varying age but close similitude otherwise, we could average the cost. Hypothesize a group of active duty military officers with the proportion in each five-year age bracket approximating that shown by the standard mortality tables. This might be 1,000 of age 25 to 30, 900 of age 30 to 35, 800 of age 35 to 40, etc. Now, let us predict from the mortality table the deaths over the next five years in each group. We add these, multiply by the desired benefit, divide by the average number living through the five years, and we have an average pro-rata cost. The group we have selected is continually replenished by young input, and continually attrited, to use the modern military vernacular, through disenrollment by retirement without a death benefit. Hence, the rate we predicted should hold. One association using this method offers $20,000 coverage for $9 per month, with the highest peacetime refund having been $5.50. Of course, youth subsidizes age to a certain extent in such a plan; but the vast majority of us live to retirement, so we eventually share in our advanced years the advantage of having paid somewhat more while young.
The epitome of the level coverage concept is the Servicemen’s Group Indemnity. This is based upon the entire military population with an overwhelming preponderance of youth, and consequently can be offered by the government for a mere $2 per month for $10,000 coverage. Moreover, it is guaranteed by the government against the traumatic effects of wartime casualty rates which could seriously affect the other plans. Truly, no one can afford not to buy Servicemen’s Group Indemnity!
So much for the term plans. How does the other basic type differ? It offers equity. Suppose 1,000 men, 25 years old, decided to pool their money and pay a little more than just enough to meet benefit costs in order to invest the surplus. Without overhead, the mortality table shows that at an investment return of 2½%, they could protect themselves for $10,000 each by paying about $12 per month for life. This would be made possible through accumulation of surplus and investment return in the early years, and calculating the expected payout eventually to each and every one according to the schedule predicted by the mortality table. That is “whole life” insurance. But paying unto death is an obvious nuisance. Recalculation on the basis of each member paying only through his 65th year reveals that the cost increases only to about $13.50 per month. This is “straight life.”
What then, is each man’s equity? It is his pro-rata share of the total pool at any given time, and is known as the “cash value” of his policy. A 25-year-old group starting a straight life pool calculated to be paid up by age 65, would enjoy an individual cash value of about $2,000 at age 35, about $4,000 at 50, and about $8,000 at 60. If, at any point in time, a sub-group decided to stop paying premiums and to invest their collective cash value in a “pay-out-at-death” pool, they would create for themselves a “paid-up” insurance benefit. The benefit would be somewhat larger than the cash value at the instant of stopping premiums, because the pool would earn an investment return while waiting for all participants to die. Thus, for age 50, when cash value was about $4,000, those desiring to pool for paid-up benefit could insure themselves for about $7,000 each.
The foregoing approximate figures are based upon theoretical mortality figures, without overhead or company profit. Practice obviously must deviate from the theoretical. Companies must pay the help, support a sales force, and advertise. Moreover, large commercial insurers must use general mortality rates instead of preferred risk groups. On the other side of the coin, investment return is almost certain never to sink in our lifetime to a level of 2½%, and so excess dividends may run as much as 4% of the cash value.
Our own Navy Mutual Aid Association does offer straight life to our own preferred risk group at a rate which closely approaches the theoretical. Rather than cash payments on excess earnings, however, this association deposits dividends into a “Terminal Dividend” pool, to increase the benefit for all members equally on an actuarial basis. At present, the size of this pool makes the actual cost per dollar of benefit well below the theoretical cost of straight life insurance.
As mentioned earlier, there are many variants of straight life; “endowment” plans, “retirement” plans, “education” plans; to name a few. In essence, they differ only in the rate of build-up of cash value. The sooner you want more payout, the faster you must pay more in. Some plans actually include, without explicitly identifying, an element of superimposed term insurance for added protection during the “family” years.
Now the “hard sell” advocates of mutual funds dismiss permanent insurance as tantamount to low return, inflation vulnerable, savings plus decreasing term insurance coverage. Like all facile arguments, this is a gross—not to say inaccurate—oversimplification. To evaluate such a contention objectively, first draw the distinction between essential protection and important, but nonetheless nonvital, investment requirements. In the former category is your widow’s daily bread. In the latter, we might place funds for the education of your children. This money is without question important. But is it as vital as your widow’s livelihood in this day and age of ready availability of myriad sources of student assistance?
No securities can ever reasonably be considered “protection,” and, therefore, they have no place in a protection plan. On the other hand, once an adequate protection plan is established, mutuals do have a definite place in an investment plan.
Permanent insurance has a place in a protection plan, but it can reach a plateau of diminishing return. We have seen how term insurance costs increase out of bounds with increasing age. Consider, in the case of permanent insurance, the obverse of paid-up value. Let us call it “incremental coverage”—face value (i.e., full benefit) less paid-up value. If, as noted earlier, at age 50 in the theoretical straight life plan, a man’s cash value is $4,000, and his paid-up value is $7,000, his “incremental coverage” is $3,000. For this he is still paying $13.50 per month. Consequently, he is getting only three-tenths of the value in coverage per dollar premium which he enjoyed at age 25. The curve of rising incremental cost coverage is actually steeper from around age 50 through age 65 than the cost curve of group term plans. From this, we can appreciate the value of the paid-up option commencing at about age 50.
Next, through the period from age 25 to 50, let us compare the equity accumulation in a straight life plan to monthly investment of the premium amount in mutuals. Even at the phenomenal rate of the 1950s and 1960s, equivalent to 12% compounded annually, the mutual accumulation would just about equal the full benefit of Navy Mutual Aid at the end of 25 years. If the mutual fund grew at a more modest rate of, say, 7% compounded annually, its accumulation would about equal the paid-up value. For this particular $10, then, you arrive at approximately the same position if you live 25 years, but the insurance has protected you, meanwhile, against the bad luck of not reaching 50. The mutual fund is a great buy for $10 per month, but not until a protection plan is established.
On the basis of the foregoing, we shall throw out some more axioms (loosely, statements accepted as truth until disproved):
► Think of protection first (your widow’s daily bread).
► Think of investment only after protection is established.
► Never use mutuals, or any security, for protection.
► Never use insurance for capital accumulation.
► Always think of cash value of a permanent insurance plan as contingency, paid-up insurance if you desperately need the premium money for something else—or, when incremental coverage cost gets too high.
► After making protection decisions and establishing a plan, think of mutuals as inflation resistant, growth-participating, investment for college education, and retirement plans.
Now, given an insurance program, how should benefit payments be stipulated? Most insurance plans, permanent or term, provide an option of payment for the life of the beneficiary, with the notable exception of Servicemen’s Group Indemnity. These payments can be considered as coming from a pool derived from the benefits of a group of decedents. The payout problem is similar to that described earlier for cash benefits paid dying members. However, the beneficiary pool, once established by the death of a group of men, differs in that it pays living beneficiaries. This, obviously, makes the payout much faster, and the earnings of the surplus concomitantly smaller. If pool calculations were made on the basis of all payments to a widow stopping at her death, each one would receive about $40 per month for each $10,000 benefit commencing at age 50. No one, of course, likes to think of his benefit being wiped out if his wife dies simultaneously, or even shortly after him. Hence, the usual procedure is to guarantee payments for 10 or 20 years, payable to a contingent beneficiary if the principal dies during the guarantee period. As this imposes additional liability upon the pool, monthly life payments are reduced accordingly, to the order of $35 per month versus the unguaranteed $40. Against this, consider the 4% now available at Savings and Loan Associations. On a $10,000 principal, 4% comes to almost $35 per month. Moreover, many Savings and Loan Associations now offer plans for regular payout of interest and principal over a contracted period of years. If we choose a plan for payout to depletion at age 80, a widow at 50 could receive as much as $50 per month from $10,000. Life payment by the insurance company seems a poor buy in comparison.
For larger benefits, a bank-managed trust fund will do at least as well on earnings, and, over an extended period, should appreciate with the general growth of the economy, and inflation.
Another dimension in protection planning is the availability of pension plans: Dependency and Indemnity Compensation for active duty death; Social Security, and Retired Serviceman’s Family Protection Plan (FPP) for retired death. It would be foolish not to map out your protection plan with full consideration of these bulwarks.
The first two need no elaboration. The latter is worth some discussion. It should be evaluated from three points of view:
► The availability of comparable protection as you age.
► The level of benefit desired.
► The cost to you alive per dollar benefit.
On the first count, at age 45, the odds for reaching 60 are six to one. If you choose permanent insurance as an alternative to FPP, you would have required considerable, and you would have paid since your youth. For a lieutenant retiring on 20 years, with wife two years younger, about $15,000 insurance would be required to equal an FPP option providing the widow one-quarter of net retired pay. For a commander at 26 years, FPP one quarter would equate to some $30,000 insurance. For a captain at 30 years, the figure would approach $40,000. Premiums on these amounts from age 25 would have amounted to a good deal.
On the second point, level of benefit, there is no categorical answer—this is a particularly personal decision. As a yardstick, however, it would seem plausible to consider the loss of active duty Dependency and Indemnity Compensation. Through the commander retiring at 26 years, the FPP one-half option very closely approximates this loss. For a captain at 30 years, one-quarter comes fairly close.
On the last point, believe it or not, FPP turns out to be competitive with straight life policies. We do not compare it with term, because we are thinking of a plan to protect you if you do, as the statistics say is likely, live beyond 60. The deduction for FPP at age 50 is only slightly more than the theoretical cost for a straight life policy taken out at 25. So, the trade-off is paying from retirement until you or your wife dies, against paying from age 25 until practicable to convert the permanent insurance to paid-up at around 50.
In sum, FPP is assured protection which you cannot outgrow. It is competitive with straight life taken out at age 25 in cost-per-dollar benefit. And, it offers the flexibility of postponing payment until you retire. It can be evaluated logically as a replacement for Dependency and Indemnity Compensation.
All right. We have convinced ourselves that a protection plan is the first order of business. Let us recapitulate key points before we begin:
► Term insurance affords the cheapest protection while you are young. Associations of preferred risk active duty military officers can make it even cheaper, and extend its usefulness into the early sixties.
► Term insurance is susceptible to wartime perturbations in mortality, except for Servicemen’s Group Indemnity, which is protected by government subsidy.
► Permanent insurance protects beyond age 60.
► Because it involves equity, even in relatively small groups (e.g., Navy Mutual Aid), permanent insurance is more resistant to wartime influence. In large commercial groupings, it is usually possible in normal times to obtain a policy which has no wartime restrictions whatsoever.
► For insurance payback to beneficiaries, lump sum payment, deposited at 4% interest only, equals life payments for a beneficiary under age 50.
► In evaluating a protection plan, include the added dimension of available pension plans for widow’s income.
► Finally, never forget that even with the most generous monthly income, your wife will still need a modicum of cash to see you properly buried, to settle your estate, to readjust her finances, perhaps to relocate to more economical or more compatible surroundings.
With these points in mind, let us pitch in. It is convenient to think of your wife’s life in terms of four periods, not distinct in all cases, to be sure, but different enough to justify drawing a generalized distinction for advanced planning purposes:
I.Early years with small young family—say through age 35.
II. Middle years with full family responsibilities.
III. Her fifties with the children mostly grown up and gone.
IV. Her sixties and beyond.
We reflect upon her respective income needs in these periods, and select an income goal for each. Without implying any recommendation, let us arbitrarily choose for sake of illustration; $500 per month for Period I, $600 for Period II, $400 for III, and $300 for IV.
In sizing up the problem of meeting these goals, it is again convenient to consider your death as occurring under one of three sets of circumstances with markedly differing impact upon your wife’s benefits:
A. While on active duty.
B. After retirement, but still in middle years.
C. After retirement, and over 60.
[Figure 1 shows three x-y graphs, where x=Widow’s Age and y=Widow’s monthly income, for the following scenarios: A. Death on Active Duty; B. Death Retired, Under Age 60; and C. Death Retired, Over Age 60.]
For each of these eventualities, we note the income benefits which are automatic: Indemnity Compensation and Social Security. In round numbers, we will assume the former to be around $200 per month. Social Security, we will assume to be $200 per month through Period II (i.e., until the youngest child is 18, or 22, if in college), zero through Period III, and $100 per month in Period IV for life. We will use these values to map a protection plan, as shown in Figure 1.
For Case A, we observe a deficiency of $100 per month in Period I, $200 in Periods 11 and III, and zero in Period IV. For Cases B and C, however, there is no active duty Indemnity Compensation, and the deficiency becomes $400 in Periods II and III, and $200 in Period IV.
From what we have learned before, we reason that Period IV, Case C is the first to examine, because we enjoy no Indemnity Compensation, and by living beyond 60, we have priced ourselves out of the term insurance market. Our choices are Family Protection Plan (FPP), or straight life insurance. If we assume a generalized insurance benefit figure from our previous discussion of $50 per month for $10,000, our Period IV deficiency of $200 would necessitate $40,000 face value. Now, recall that our figures on straight life were predicated upon enrollment at age 25. Advancing age prices you out of straight life enrollment just as it prices you out of term insurance, because you and your contemporaries have a higher mortality rate and fewer years to pay into the pool. The cost to enroll at 50 is prohibitive. Hence, all our thoughts on permanent insurance must be based upon enrollment at a nominal age of 25. At that age, to carry $40,000 straight life would cost, as we have seen, something over $10 for Navy Mutual Aid, and about $40 for $30,000 commercial coverage.
Next, we should re-examine all cases for the next most serious deficiency. Clearly, it is Period II-Case B. We must look to this if we are to retain the flexibility to exercise the option of early retirement if we so choose. It is also clear that Period II is the one in which we are young enough to capitalize upon term insurance. Our benefit needs are high, and so are our monthly expenses. Therefore, were we to commit ourselves to somewhere around $50 per month for permanent insurance as Period IV-Case C coverage, our ability to capitalize upon term insurance in Period II-Case B is seriously impaired. We are forced to conclude that FPP is the preferable option to cover IV-C and leave us loose for II-B.
But before we leave this point, remember that we have been talking only about monthly income. How about that cash for estate settlement, readjustment, relocation? In case A, of course, lump sum active duty Death Gratuity payment, plus any accrued leave, should handle it nicely. For Cases B and C, however, that is lost, and it would seem that Navy Mutual Aid is the best recourse for assured cash benefit for the critical Case IV-C, when we live beyond 60.
So, we tentatively decide upon FPP at $200 per month benefit and Navy Mutual Aid, and turn our attention to what we can do about Case II-B. We recall that association decreasing term would cover us for $9 a month (less possible refund) with $15,000 from age 45 to 50, $12,500 from 50 to 55, and $10,000 from 55 to 60. This suggests that we consider II-B and III-B at the same time. In so doing, it is important to bear in mind that we have taken care of Period IV, so that all the proceeds from any term coverage we get for II-B and III-B can be safely programmed for benefit payout to exhaustion at the commencement of Period IV, when our widow’s Social Security payments resume. This permits a much higher monthly income, naturally. For example, two association memberships for a total benefit of $30,000, at widow’s age of 45, would yield her about $225 from Savings and Loan payout through her 60th year. If our death occured at 52, we could leaver [sic] her covered with 25,000, which would provide her with about $250 per month for ten years. Once we pass 55, we could drop one membership, because if we die at, say 57, $10,000 would provide her with about $185 per month for five years.
So far so good: FPP at $200 upon retirement; Navy Mutual Aid at age 25 (or upon marriage, whichever is earlier); and two term association memberships during Period II-B, one of which may be dropped early in Period III. Now, we should see what the implications of these tentative decisions are upon Case A, where we had $100 deficiency in Period I, and $200 in II and III.
First, of course, we will take the Servicemen’s Group Indemnity just on principle, because it is without doubt the greatest bargain for $2 a month the world has ever seen. Then we note that the Death Gratuity plus accrued leave would fulfill the cash readjustment requirement and thus release Navy Mutual Aid for use in meeting income goals. Including the two associations, then, our total coverage comes to about $50,000. Interest only on this sum would yield about $175 per month, giving our widow full flexibility in programming $50,000 to take care of education of the children, and her income requirements through Period III.
Now what about Period I-Case A? Navy Mutual Aid plus Servicemen’s Group Indemnity together would provide about $75 per month interest only, so we could, if we chose, postpone enrollment in the associations until late in Period I.
How much does such a plan cost? About $12 a month through Period I. Then we join two associations and pay a total of about $30. If we do not retire until Period IV (i.e., statutory age), then, hopefully, we make flag rank, a happy circumstance which puts us in an entirely different financial situation which can only be evaluated properly at that time. However, were we not so fortunate, the FPP coverage of $200 benefit income would cost about $40 per month if we retired at age 40. In this eventuality, the gross cost from retirement through Period II would be about $70. At age 50, we could convert Navy Mutual Aid to paid-up, and soon thereafter drop one association, paying $40 from this point until one of us dies.
If we retire at 50, FPP will cost about $60, and the other cost figures corresponding to those above would all be $20 higher.
Sounds like a lot, you say? Well, had we selected $40,000 straight life to cover Case IV-C, it would have covered all our needs in the other Periods, but it would have entailed $50 per month from age 25 to at least 50. If we stay on active duty until 50, the plan we have developed here would cost, say, $30 through age 50, neglecting the savings in Period I of $18 when we do not need the two association memberships. We do not include this latter, but rather set it aside as a separate accumulation for downpayment on a house, if such is needed.
Our present plan, then, has released $20 per month from age 25 to 50. In mutual funds, we have seen, this could grow to a total capital of over $15,000 in a conservative market. Here is the trade-off for retirement at 50: with FPP, $15,000 capital, and pay $60 a month for life; without FPP, pay nothing, but have no capital. If you retired at 40, the $20 per month in mutuals would come to about $6,000, still a nice nest egg.
Now, to this commitment of $50 a month through Period III ($30 for protection, and $20 into mutuals), let us add $25 to fulfill the savings account needs for large cash outlay and continuing replenishment. A total allocation of $75 has filled our financial structure up through low risk securities. With anything which can be spared above that, we can think about branching upward into selected blue chip securities. Incidentally, if and when passed, the new Survivors’ Benefit Plan promises to be more flexible and somewhat less expensive than the Family Protection Plan.
There will be some who will attack the thesis presented herein on grounds of imprecise, rounded numbers and generalized formulations. Certainly, precise calculations are required before final commitment to any contract. However, with the use of too high a degree of precision too early in an analysis, the trees obscure the forest and make general trends and principles difficult to discern. Indeed, the prolific use of many detailed figures is often a calculated tactic of the “hard sell” salesman, intended to confuse. Keep your preliminary analysis simple, and keep your family financing flexible.
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A graduate of the U. S. Naval Academy with the Class of 1938, Captain Bowers served in submarines in the Pacific throughout World War II. He then earned the degree of Master of Science from the Massachusetts Institute of Technology. During the next 20 years he commanded USS Carp (SS-338), Submarine Division 33, USS Orion (AS-18), and USS Newport News (CA-148), the latter during the Cuban Quarantine. Ashore, he graduated from the National War College, and served in the Bureau of Ordnance, the PBM Special Projects Office, the Office of CNO, as Assistant Director of Navy Program Planning, and, finally, as Commander, Naval Training Center, Bainbridge, Maryland. Upon retirement in 1968, he joined the faculty of Anne Arundel Community College, near Annapolis, as Assistant Professor and Chairman of Engineering and Technology.