Bucks Blog: A 10 Percent Savings Rate? Yes, but There’s a Catch

Associated PressU.S. soldiers stand guard in Zabul province in Afghanistan.

Most of us looking for a low-risk savings account would jump at an annual interest rate of even 1 percent. So, what would you think of earning 10 percent?

That’s right: 10 percent.

There is a catch, of course. Getting this rate involves risking your life in a foreign country. It’s only available to members of the United States military serving in designated combat zones, including Afghanistan, Iraq, Pakistan and the Persian Gulf.

The rate is available through the Department of Defense Savings Deposit Program. The program, which dates to the Vietnam era, was created to “provide members of the uniformed services serving in a designated combat zones the opportunity to build their financial savings,” according to a Web site maintained by Defense Finance and Accounting Service, which provides payment services to the Defense Department.

The program caught our eye here at Bucks when it was mentioned in a publication from USAA, which provides banking and financial services for members of the military and their families. USAA says the program “can provide a welcome savings boost, thanks to a generous 10 percent interest rate earned on combat pay.”

Joseph Montanaro, a financial planner with USAA in San Antonio, Tex., says the program can be a boon for service members, allowing them to earn about 10 times what their money would earn in a typical domestic savings account at current rates.

There are a host of conditions, however. To qualify, military members must be deployed in a combat zone for either 30 consecutive days, or at least one day in each of three consecutive months. A maximum of $10,000 can be deposited in the account, typically by automatic paycheck withdrawal (or “allotment,” in military parlance).

The program is restricted to pay earned while in the qualifying zone. Soldiers can’t deposit more than their net monthly pay. Nor can service members simply take $10,000 they had managed to save in a low-rate certificate of deposit and put it in the military program as a lump sum to earn the higher rate, said Steve Burghardt, a spokesman for Defense Finance and Accounting Service.

The funds are paid out when the combat tour is finished, he said. Money can be left in the account indefinitely — but interest accrues for just 90 days after soldiers return from combat duty. In general, the funds can’t be withdrawn until soldiers are no longer eligible for the program. If an emergency comes up, military members have to petition their commanding officer to obtain early access to the money.

And, while combat pay isn’t taxable, interest earned in the savings program is.

Roughly 19,500 service members currently participate in the program, Mr. Burghardt said.

I plugged some numbers into an online savings calculator. If a soldier deposited $300 a month into the savings program for a year at 10 percent, he’d earn about $170 in interest. A 1 percent rate — the most generous currently available on low-risk savings accounts back home — would earn roughly $17. (The numbers may vary slightly depending on the assumptions built into the calculator used.) So the program appears to be a benefit, for those who are eligible — and who don’t need access to the money right away.

As for those of us who aren’t eligible, maybe we should just be thankful that we’re not.

Have you ever used the Defense Department’s savings program? What was your experience?

Article source: http://bucks.blogs.nytimes.com/2012/11/29/a-10-percent-savings-rate-yes-but-theres-a-catch/?partner=rss&emc=rss