Military Saving for Retirement

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Ask the average 20-year-old if they have started saving for retirement. Odds are, their answer will be “no.” While some young adults feel trapped working minimum wage or are planning on paying back student loans for the next couple of decades, those who join the United States Armed Forces will begin building a retirement fund that will follow them after their military career.

The new military retirement plan was passed in November 2015 effective in January 2018. Military life comes with its own unique struggles and benefits, the military retirement plan being just one of them. This paper intends to explore the ramifications of the new military retirement plan and other military financial experiences.

Retirement Funds for all Military Personnel

Under the old plan, military service members are eligible to receive a pension of 50% of their base pay at the time of their retirement after 20 years of service. For each additional year of service, the percent of base pay increases to 100% after 40 years of service, and soldiers may draw their pensions immediately upon retirement from the US military. If a young person enlists at 18, serves for 20 years, and retires from the army at 38, they would have the option to begin receiving their pension and continue to collect 50% of their base pay until they pass away. The pension is the main component of the old military retirement plan.

To bolster their retirement fund, military members may also choose to invest in a thrift savings plan (TSP), like the military’s version of a 401(k). The old plan was great for career soldiers who planned to spend 20 to 40 years serving our country. However, if a soldier serves any less than 20 years, they walk away with nothing besides any investments in their thrift savings plan or personal IRA.

Eighty percent of people who serve in the military do so for less than 20 years. They blend back into civilian life and go on to become private helicopter pilots, teachers, and yoga instructors. The goal of the new military retirement plan is for every soldier to have a financial plan, whether they serve for four years or 40. Twenty-somethings joining the armed forces may still be gambling with their futures.

The government cannot force the young men and women who join our military to begin planning for their financial futures, but it can provide a retirement plan so today’s new recruits do not have to be poor when they retire.

Pensions Under the Blended Retirement System

Under the new military retirement plan, pensions are decreased by 10% – 20% compared with that of the old plan. After 20 or 40 years of service, a pension will only pay 40% and 80% of the soldier’s base pay, respectively. Retirees can now elect to receive a lump sum payment, less a discount rate, instead of the traditional monthly payment. 

All in all, a soldier’s pension may now be worth less than $100,000 after taxes. To offset the pension’s decrease, thrift savings plans will now be a mandatory part of each retirement plan. For every dollar service members invest in their thrift savings plans, the government will match up to 5% of the soldier’s base pay, and the soldier will own their plan after two years of service. Keep in mind that military service contracts are two to four years long. 

The government will also begin to give soldiers continuation pay for more than 12 years of service. While the soldier walks away with the money invested in their savings plan, regardless of their service time, they cannot draw upon it until they are at least 60 years old. A young person can go to work in a factory at 18 and seek employment elsewhere at 22 and have little to nothing in the way of a working retirement plan.

The same person could enlist in the army at 18 and separate at 22 with a retirement fund worth thousands of dollars. Under the new military retirement plan, everyone who completes at least two years of service walks away with at least a small retirement fund.

While the new retirement plan has many shining qualities, critics feel it may be too good to be true. The new retirement plan relies on stable financial markets in order to effectively support retired troops. Under the old plan, retirees were covered by their pensions whether we were in a bull market or a bear market.

While our stock market typically rises over time, some thrift savings plans created before our last financial crisis are still worth only a fraction of what has been invested in them. So, the new plan is a great idea for young men and women joining the military today with decades ahead of them to ride manage risk, but it lacks the stability the old plan offered career soldiers.

The Military Faces Unique Financial Planning Challenges

Retirement plans aside, military and civilian families face many of the same financial challenges. However, military families have a few extra hurdles on their financial track. Military targeted scams, frequent moves, and deployments can trip up less experienced or thrifty families. Temptation lurks outside every military installation.

Arrays of signs offer special deals for soldiers: military members are instantly approved to own cars they may not be able to afford. They can get special financing for jewelry with payments that last longer than their relationships. 

Every two to four years, soldiers receive orders to move to their next duty station. Each move brings expenses: buying and selling houses, carrying two mortgages while waiting for the old house to sell, shipping vehicles overseas, and inevitable emergencies that accompany every major life event.

Every serviceman experiences separations from family — six weeks for training, three months for school, or a year away on deployment. While a husband or wife is off defending the country, life still happens. Without a well-planned budget with both partners on the same page, many families fall into financial chaos.

During separations, spouses may have less financial accountability to each other. Both spouses need to understand the family budget in order to keep the household running. Both members must agree to a spending and savings plan and trust each other. If a spouse spends the money that should be going into the thrift savings plan or an additional Roth IRA, he or she could ruin the couple’s retirement plans. 

Everyone needs a budget, whether just married recruits or a seasoned family of five. In addition to the family budget and saving plan, it never hurts to have an emergency fund. When the pipes burst while a soldier is deployed, there has to be a way to pay the plumber.

Thrift Savings Plans: Keystone to a Sound Military Retirement Fund

In every budget, every dollar needs a purpose. Individuals may not be able to control which stocks their thrift savings plans invest in, but they must understand how to diversify their plan and how to be consistent. It is not mandatory for soldiers to invest their money into their thrift savings plans since the government puts 1% of the soldier’s base pay into the plan. But it’s a sound idea to invest as much personal money as possible since the government will match the first five percent of base pay that a soldier invests. 

After the first 5%, the government offers no further incentive. However, it may be wise to further invest a total more into a thrift savings plan, a separate Roth IRA, or a mutual fund. After a soldier separates from the military, they can roll their plan into an IRA. Separate from the government, soldiers and spouses have control over which IRA or mutual fund they invest in. 

Whether investing in a savings plan or civilian stock markets, there are several mistakes to avoid. Portfolios should not create a false “illusion of diversification,” and human emotion must not get in the way of sound judgment. Investors must understand their risk, according to Ted Neild, President and Chief Investing Officer of Greshman Partners, LLC. While it may be tempting to go with the flow and follow friends’ advice, that is not always wise. Even if said friends are financial experts, people should do their homework before investing anywhere.

“Investors must be given the full and complete truth in order to make an informed investment decision,” says Andrew Stephenson of CrowdCheck. Whether choosing a mutual fund or individual stocks, soldier and civilian investors need to know several key factors of a good investment. The investor should look at an investment before opening his or her wallet. To determine if investing in a particular company is worth the risk, the investor should check whether the company property and bank accounts are legally separate from that of the founder, the company is not controlled by bad actors, and any investment will be valid and binding, Stephenson says.

Military Service: A Career Path that Helps Members Plan for Retirement

If a person joined the military in 2000 at 25 years old and retired in 2016 at 41 years old, they could potentially be in their 40’s without a viable retirement plan. As of 2018, with the Armed Forces’ new Blended Services Retirement plan, every soldier will have a retirement plan they can continue building after they complete their service. Should a soldier choose to financially educate themself, they can conceivably grow a quite profitable retirement fund, avoid financial pitfalls, and sustain financial tranquility.

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