Retirement Planning for Military Personnel
By: Will Hoofman
June 29, 2020
The first step in retirement planning is creating a budget. Most budgets can be simple if you recently joined a branch of the military. Your main expenses are covered like your Basic Allowance for Housing (BAH), Basic Allowance for Subsistence (BAS), and health insurance (Tricare). Your other expenses are discretionary in nature. Think about it, you may pay for things like cable, internet, personal care, entertainment, and going out to eat when you get tired of eating on base. The fortunate ones have a car which means you have additional expenses in the form of a car payment, maintenance, gas, and insurance. Fast forward 20 years and you are eligible to retire from the military and begin a second career. Did you take the right steps? Did you plan accordingly? Do you have any regrets? No matter where you are currently in your career, now is the time to step back and look at the big picture.
I am beginning my military career and have just signed on the dotted line. It is a whirlwind when you receive your first assignment. You go through a structured program for a couple of weeks with new information coming at you like water through a fire hose. You even get to go to a four-hour financial class that seems to never end. The main takeaways from that class should have been to save more, spend less, and have fun. Increase your Thrift Savings Plan (TSP) contribution every time you are promoted or deployed. Think about ways you can generate other sources of income. Stay long enough so you are eligible for the GI Bill. All these things were talked about in a short window of time. Did you listen?
The first question you should be asking yourself is which retirement plan am I in? Am I part of the High-3 Legacy Retirement System or Blended Retirement System (BRS)? The High-3 plan is for individuals that joined the military prior to January 1, 2018. Military personnel had the option to switch from the High-3 to BRS if they had been in the military for less than 12 years at that point in time. So, what are the differences?
The High-3 plan is calculated by averaging your highest salary for three consecutive years multiplying it by your years of creditable service and then multiplying it by a 2.5% multiplier.
Let us look at the calculation for the BRS plan and then we can discuss the differences.
The BRS plan is calculated by averaging your highest salary for three consecutive years multiplying it by your years of creditable service and then multiplying it by a 2.0% multiplier.
In each example above, let us assume that you retire making $60,000 each year for your last 3 years. You retire at 20 years of service. Doing the math gets us:
High-3 plan: $60,000 x 20 x 2.5% = $60,000 x 50% = $30,000 Annual Pension
BRS plan: $60,000 x 20 x 2.0% = $60,000 x 40% = $24,000 Annual Pension
The big difference between the High-3 plan and the BRS plan is the pension multiplier. As you can see, the High-3 pension amount will be higher than the BRS pension amount with all other variables being equal. The Department of Defense (DoD) noticed that they were not keeping many of their personnel for the 20-year minimum requirement to be eligible for a pension or any government contributions to their TSP. The DoD decided to introduce the BRS which has a matching contribution just like you would see with a 401k – which is a private-sector retirement plan.
In addition to receiving a 2.0% multiplier in the BRS scenario, the BRS also has both automatic and matching components. You will receive a 1% automatic contribution after 60 days of service. These funds will be 100% vested— a person has rights to the full amount of some type of benefit—at 2 years of service. At your 2-year mark, you will start receiving an additional match dollar-for-dollar for the next 3% and $0.50 on the dollar for the next 2% which will be 100% vested at the onset. Below is an illustration of the contributions.
|Your Contribution||Automatic Contribution||Matching Contribution||Total Contribution|
|More than 5%||1%||4%||Your contribution + 5%|
Now that we have a good foundation regarding the potential pension opportunity, let us now move our focus to your TSP. You have five main funds which are the G, F, C, S, and I. These funds are listed from least risky to most risky. The G Fund invests in nonmarketable short-term US Treasury securities. This is the default fund for people who joined the military prior to January 1, 2018. The F Fund invests in fixed income securities issued in the U.S. The C Fund mimics the S&P 500 Index which is a compilation of U.S. equities. The S Fund imitates the Dow Jones U.S. Completion Total Stock Market Index. This index represents the top 95% of the U.S. stock market based on market capitalization. Finally, the I Fund invests in international equities, specifically in Europe, Australasia, and the Far East.
For people that want to just put their investments on autopilot, they can put their money in the Lifecycle Funds (L Funds). The L Funds are tailored to meet investment objectives based on various time horizons. This strategy invests in a mix of all the funds listed and becomes more conservative as its target date approaches. The L Funds are rebalanced to their target allocations daily. The investment mix of each fund is adjusted quarterly. The L Funds are the new default fund for people that joined the military starting January 1, 2018.
I am closing in on the end of my military career and I am headed to my Transition Assistance Program (TAP) class. At this point, its time to make a new plan for post-military life. Will I sign up for the survivor benefit plan for my spouse? Am I looking for a job that can replace all my income? Do I keep my TSP or roll it over? Do I convert my Servicemembers’ Group Life Insurance (SGLI) to Veterans Group Life Insurance (VGLI)? What am I going to do with my extra income from my pension? These are just a few of the questions that you start to ask yourself. Let us try to address some of these concerns.
Do the math when it comes to signing up for the survivor benefit plan. You are automatically enrolled if you do not make a decision. This plan is an annuity and provides up to 55% of retired pay to an eligible beneficiary upon the death of the member but comes at a cost. It will cost 6.5% of your pension for up to 30 years. At 30 years or upon your death (whichever comes first), you are considered paid-up and no further premiums are deducted from retired pay. Most individuals like to supplement their pension with another job. It does not have to be a $100,000/year job but does need to be enough to cover your expenses and save some money. After you secure a job, you need to decide what you are going to do with your TSP. Do you roll it over to your employer, roll it into an Individual Retirement Account (IRA), keep it at TSP, or cash it out? Hopefully, you do not cash it out or you will take a penalty if you are not 59 ½-years old. Life insurance is another big topic. You will need to check the rates of VGLI policies. These are 5-year term policies which means the prices will go up every 5 years. The biggest perk to a VGLI policy is its acceptance of pre-existing conditions. If you convert your SGLI to VGLI within 240 days of separation, you will be covered for life insurance without having to receive a physical exam. You can also check rates with an insurance agent regarding getting a longer-term policy to lock in your rate. Do you have additional funds at the end of each month? This could be a time to invest additional funds in vehicles like an IRA, a taxable investment account, or diversify your investments some other way.
It is up to you to plan for retirement and the first step is creating a budget. Continue to monitor your progress and make changes along the way. At the end of the day, you want to put yourself in a position that if you continue to work, its because you want to work, not because you have to work.