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Low Interest Rates Mean DoD Savings Deposit Program is a Screaming Good Deal


Interest rates across the board are at or near the lowest they’ve been in history. That means it’s harder to get a good return on saved or invested money. Take a look at this page.

This page lists the yields – or the return available- for people who own U.S. Treasury bonds. The yield on the 10-year Treasury bond, as of this writing, is hovering right around 2 percent. That means that you can expect to receive an income, on average, of two cents per year for every dollar you have invested.

To put things in perspective, at this time 10 years ago – in late February 2003, a 10-year treasury was generating nearly twice that in income.

Because yields on Treasury bonds have fallen, yields on almost everything else has fallen, too. The 10-year Treasury bond is widely considered a market benchmark. Treasuries are free of credit risk – the credit quality of the United States government, despite a downgrade in August of 2011 by Standard & Poor’s, is still considered the strongest in the world by investors, who flock to it in times of uncertainty. Yes, bond prices can rise and fall – and Treasuries are no different. But with Treasury bonds, the investor is assured he will receive the scheduled interest payments and repayment of principal, as scheduled. There is no risk of bankruptcy or credit failure.

When there are more dollars looking to buy Treasuries then sell them, bond prices get bid up as buyers compete to own them. That, in turn, drives yields down – yields and prices always move in opposite directions. And they’ve never been lower for long periods of time than they have been this year.

In turn, that means other bonds get more expensive, too – and their yields, on average, go down. Why? Because they need to beat the sure-bet Treasury yields. Investors take on more risk with other kinds of bonds – and therefore they demand more yield in compensation. The more risk, the more yield they demand – and therefore bid down bond prices.

Aaa-rated corporate bonds – the few highest-rated companies out there – are now yielding just 3.9 percent – close to half of the long-term average Aaa-rated corporate bond yield of 7.45 percent. Which is why you can get a mortgage secured by a house for around 4 percent now. The global debt markets are dynamic. People who buy houses compete with bonds to attract capital. If banks thought they could get a better yield buying Aaa corporates or Treasuries than lending they would do that instead.

The globally low interest rates are also doing something else: They are making the DoD Savings Deposit Program a better deal than it’s ever been.

Why? The returns on money deposited into the DoD Savings Program are statutory, not market-based. Congress made a decision to fix returns on up to $10,000 of contributions from deployed servicemembers at 10 percent, regardless of market forces. So while everyone else’s returns on savings declined, DoD Savings Deposit Plan participants are still getting the same 10 percent yield.

That’s a devastatingly good deal for an investment that is essentially risk-free. If you were able to do the same thing on Wall Street, you would be a legend.

But wait – it gets even better: Most people are deployed for 6 months to 15 months. But let’s say you are deployed for a year. If you bought a one-year Treasury in today’s market, you would only get a pitifully small yield of 0.15 percent. That's hardly worth dealing with.

If instead you deposited your money in a one-year CD, the highest interest we were able to find in today’s market with FDIC insurance was 0.97 percent from Ally Bank.

That means that your 1-year returns from the DoD Savings Deposit Program is over ten times better than the best risk-free, guaranteed option available in the U.S. market.

Giving up FDIC insurance and going with a money market instead doesn’t get you much more. The most you can do in today’s market with a money market account is 1.01 percent (from EverBank), and unless you put in $5,000 off the bat, they charge you an $8.95 per month fee, which wipes out your interest. They do offer check-writing privileges, though.

Congress knows the Deposit Savings Program is a good deal, though, and so they limit their losses: You can only contribute when deployed to a combat zone, and then you can only contribute $10,000 to the program.

You also have to commit to leaving the money in place until you return from your deployment. You can’t close your account until your deployment ends.

There are some emergency withdrawal provisions, but you must get the approval of your commanding officer, who must certify that the withdrawal is necessary for your family’s health and welfare.

Eligibility

You can contribute to the Savings Deposit Program if you have been deployed to a combat zone for at least one month, or for at least one day for three consecutive months. You have to be eligible to draw Hostile Fire Pay.

Money in the program will earn interest for 90 days after you return to your permanent duty station from a combat zone.

If you contribute, Uncle Sam will return your money to you via direct deposit 120 days after your deployment ends. You can also request an earlier disbursement by sending an email with your name, Social Security Number and date of departure from the combat zone to CCL-SDP@dfas.mil, or Faxing it to 216-522-5060, Attn: SDP.

Alternatively, you can mail it to DFAS-Cleveland Center (DFAS-CL), ATTN: SDP, Special Claims, 1240 East 9th St., Cleveland, OH 44199-2055.

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