By: Kelsey King – 2016 Financial Poise Essay Contest Finalist. University of Tennessee: Chattanooga
Ask the average 20-year-old if he has started saving for retirement. Odds are, his 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 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, and will go into full effect in January 2018 (Tilghman, 2016). 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.
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 up to 100% after 40 years of service, and soldiers may draw their pensions immediately upon retirement from the U.S. military (Retirement, n.d.). So, if a young man enlists at 18, serves for 20 years and retires from the army at 38, he would have the option to begin receiving his pension and continue to collect 50% of his base pay until he passes 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), which is like the military’s version of a 401(k) (Summary of the Thrift Savings Plan, 2016). 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, he walks away with nothing besides any investments in his TSP or personal IRA.
Eighty percent of people who serve in the military do so for less than 20 years (Tilghman, 2016). They blend back into civilian life and go on to becoming 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 he or she serves for four years or 40. Twenty-somethings joining the armed forces may still be gambling with their futures, but Financial Poise writer Michelle Gershfeld advises: “You are not going to win the lottery. Counting on winnings from gambling or even from an anticipated inheritance, does not count as financial planning” (Gershfeld, Financial Pain Will Not Self-Correct: Take Action, 2016). 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 are aged retirees.
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. The way the pension is paid out has also changed. 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 TSPs, the government will match it, up to 5% of the soldier’s base pay, and the soldier will own his or her TSP after two years of service; keep in mind, 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 (Tilghman, 2016). While the soldier walks away with the money invested in his TSP, regardless of his service time, he cannot draw upon it until he is at least 60 years old. A young man 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 man could enlist in the army at 18 and discharge at 22 with a retirement fund worth thousands of dollars that may only grow. 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 that 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 are in a bull market or a bear market. While time shows that our stock market continually rises, some TSPs that were 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 who have decades ahead of them to ride out and withstand risk, but it lacks the stability offered to career soldiers by the old plan.
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. The road outside of every military installation is lined with temptation for military service members. Sign after sign offers special “deals” for our soldiers, military are “instantly approved” to own cars they cannot afford, or get “special financing” for jewelry payments that last longer than their relationships. Every two to four years, soldiers receive orders to move to their next duty station. With each move comes expenses: buying and selling houses, temporarily paying two mortgages while waiting for the old house to sell, shipping vehicles overseas, and the inevitable minor emergencies that accompany every major life event. Then, there are the temporary separations from family that every serviceman experiences—six weeks for training, three months for school, and nine months to a year away on deployment. Don’t forget that while the husband or wife is off defending the country, life will still happen. The car breaks down, the pipes burst, or a spouse develops a shopping addiction. Without a well-planned budget and both partners on the same page, many families fall into financial chaos.
Military spouses may be separated for months at a time. During that time, spouses may have even less financial accountability for each other. Also, if an emergency occurs during deployment, both spouses need to competently understand the family budget in order to keep the household running. Both members need to agree to a spending and savings plan, and trust the other partner and his or her actions. If a spouse spends the money that should be going into the TSP or an additional Roth IRA, he or she could ruin the couple’s retirement plans. Everyone needs a budget, whether a newlywed new recruit or a seasoned family of five. Michelle Gershfeld provides guidelines that are helpful to any couple that shares money. First, “communication is always the first line of defense, and attack.” Through communication, both parties “must agree about what funds to earmark for savings, expenses and personal, discretionary spending” (Gershfeld, Do You Know Where Your Money Is?, 2016). In addition to the family budget and saving plan, it never hurts to have an emergency fund and to outline what constitutes an emergency. When the pipes burst while the soldier is deployed, there needs to be a plan to put back the pieces and pay the plumber without causing a divorce.
In every budget, every dollar needs to have a purpose. What isn’t spent should be saved, especially for retirement. Individuals may not be able to choose exactly which stocks their TSPs invest in, but they still need to understand how to diversify their plan, stick to it, and the importance of investing more than the minimum. It is not mandatory for soldiers to invest their own money into their TSPs. The TSP will be established, and the government will invest an amount equal to one percent of the soldier’s base pay into his plan. Our government will match the first five percent of base pay that a soldier invests in his or her TSP (Tilghman, 2016), but it is up to the soldier to choose to invest some of his pay into his fund, or to spend it all elsewhere. The TSP is broken up into five investment funds: government securities (G), fixed income index (F), common stock index (C), small capitalization stock index (S), international stock index (I), and lifecycle funds (L). Lifecycle funds are comprised of the other five funds with greater risk taken earlier in the fund and less risk taken as the fund owner nears eligibility to draw from it. These L funds are designed for people who “may not have the time, experience, or interest to manage their TSP retirement savings” (Summary of the Thrift Savings Plan, 2016, pp. 11-12). Financial expert Dave Ramsey suggests investing only in the C, S, and I funds (3 Steps to a Confident Military Retirement, 2014). These funds are more likely to yield a higher rate of return and resist depreciation due to inflation.
After the first 5 percent of base pay invested, the government offers no further incentive for investment. However, it may be wise to further invest a total close to 15 percent of one’s pay into his TSP, a separate Roth IRA, or a mutual fund. After a soldier decommissions from the military, he can roll his TSP over 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 TSP or civilian stock markets, there are several mistakes to avoid. Portfolios should not create a false “illusion of diversification,” human emotion must not get in the way of sound judgement, and investors must understand their risk (Neild, 2015). These three financial mistakes boil down to lack of financial education and misunderstanding or misusing information. While it may be tempting to go with the flow and put one’s money where one’s friends say to, that is not always wise. “The troubling nature of bullies telling people what to do in life and with their money is happening everywhere at every age” (Gershfeld, Just Say No to Money Bullies, 2016). 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” (Stephenson, 2016). Whether choosing a mutual fund or individual stocks, soldier and civilian investors alike need to look for several key factors of a good investment. The investor needs to be on the appropriate platform to find appropriate investments, and take a good look at the company and any intermediaries 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’s, the company is not controlled by “bad actors,” and any investment will be valid and binding (Stephenson, 2016).
Joining the United States Armed Forces is a mixed bag of hurdles and potentially greater advantages. 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 retirement plan, every soldier will have retirement plan they can continue building after they complete their service. Should a soldier choose to financially educate himself, he can conceivably grow a quite profitable retirement fund, avoid financial pitfalls, and sustain financial tranquility.
3 Steps to a Confident Military Retirement. (2014, May 26). Retrieved from Dave Ramsey: https://www.daveramsey.com/blog/3-steps-to-confident-military-retirement
Gershfeld, M. (2016, April 6). Do You Know Where Your Money Is? Retrieved from Financial Poise: https://www.financialpoise.com/columns/get-financially-fit/do-you-know-where-your-money-is/
Gershfeld, M. (2016, April 13). Financial Pain Will Not Self-Correct: Take Action. Retrieved from Financial Poise: https://www.financialpoise.com/columns/get-financially-fit/financial-pain-will-not-self-correct-take-action/
Gershfeld, M. (2016, March 9). Just Say No to Money Bullies. Retrieved from Financial Poise: https://www.financialpoise.com/columns/get-financially-fit/just-say-no-to-money-bullies/
Neild, T. (2015, March 15). Episode 36 with Ted Neild. (C. Cahill, Interviewer)
Retirement. (n.d.). Retrieved from Military Compensation: http://militarypay.defense.gov/Pay/Retirement.aspx
Stephenson, A. (2016, March 6). Episode 26 with Andrew Stephenson. (A. Purdy, Interviewer)
Summary of the Thrift Savings Plan. (2016, 1). Retrieved from https://www.tsp.gov.
Tilghman, A. (2016). New Military Retirement Law Creates Big Decisions for Many Troops. Military Times.
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