For the first time in history, military personnel who don’t reach the traditional 20-year service milestone will be entitled to retirement benefits. Starting January 2018, service members with at least two years of duty will be entitled to tax-deferred government contributions, similar to those of an employer sponsored 401(k) plan. Currently, military personnel must serve at least 20 years before earning a pension payout. Depending on the year service began, and a member’s full duration of duty, the pension payout spread is typically between 50 percent and 75 percent of average or final base pay. Despite these generally attractive numbers, Military Times reports that more than 80 percent of the military are non-career service members and never capitalize on the payout.
Historic Changes to Military Compensation — Coming January 2018
Enacted under the 2016 National Defense Authorization Act and signed into law November 2015, the updated military retirement program combines the current pension program with a new option providing contributions and matching provisions in a Defense Department Thrift Savings Plan (TSP). Individuals who entered the service before 2006 will be grandfathered under the current pension plan, but those joining after January 2018 automatically enter into the new benefit structure. Anyone who enlisted between 2006 and 2017 can choose to remain in the traditional pension program, or, switch to the new benefit option by January 2018.
Significant differences exist between the current and new military pension plans. Financial planners who advise the armed forces must understand how the adjusted program will impact their clients and be prepared to explain how both options can affect their family, future career plans, or retirement.
What’s New Under the 2018 Military Pension Plan?
- First, it’s important to understand that the new program still provides a defined benefit, albeit a lower one. Whereas the traditional payout after 20 years is 50 percent and after 30 years is 75 percent, the new payout will be lowered to two times an individual’s years of service rendered. Twenty-year service members will now received 40 percent, and 30 years of service will provide a 60 percent benefit.
- The lowered payouts are offset by a new, guaranteed government matching contribution that fully vests after only two years of service. Under the new military retirement benefit, those just entering the service receive an automatic one percent of base pay contribution to a TSP, with ownership rights gained upon two years of service. After completing two years of duty, that match increases up to 5 percent depending on the individual’s personal contribution amount. Troops allocating 3 percent would be saving a pre-tax total of 7 percent (one percent automatic contribution plus 3 percent personal contribution plus 3 percent government matching contribution). Those contributing 5 percent of basic pay would save even more, capitalizing on the maximum 5 percent government match.
- A Continuation Pay program will replace the existing Career Status Bonus (CSB). With the new program, active duty service members reaching 12 years of service will get a continuation bonus if they agree to at least a new four year contract. The existing plan requires service members to reach a 15-year service milestone before a bonus is collected. Along with the decreased service requirement however comes a significantly decreased payout equal to 2½ months of basic pay compared to the $30,000 CSB.
- Unlike the existing pension plan retirement, funds from a TSP cannot be withdrawn without penalty until the owner is at least 59½ years of age. Also new to the retirement plan is the option for retirees to choose either a full retirement annuity each month or a smaller pension along with a lump sum payment.
What Advisors Should Address About New Retirement Options with Military Clients
Some experts believe the new retirement options represent a generous gesture while others have met the new plan with skepticism. Reasonable arguments can be made for both advantages and disadvantages of the new program, but here’s what financial planners who advise military personnel should be explaining to them:
- By offering TSP benefits upon entering the service, the Defense Department is incentivizing young citizens to join different branches of the military. Service members voluntarily assume risks that ordinary citizens do not face and attractive retirement benefit options should be viewed with utmost significance. Prior to the new program, it was not necessary to consider retirement benefits at the onset of a military commitment, often in early adulthood. Now, service members are eligible for government contributions immediately following boot camp completion, creating a need and and opportunity for early retirement planning conversations. Advisors serving millennial military personnel should proactively open these discussions and advisor who want to grow their base of military clients and families can use the new program as a way to spark valuable conversations.
- Higher matching benefits accompany higher personal contribution levels and years of service. The design of the plan encourages personal retirement saving by increasing government matches as individuals contribute more on their own, and also provides bonuses to those who remain in active duty over an extended timeframe. Help clients determine a realistic and optimal contribution level and service commitment so they capitalize on the highest level of matching available to them without unnecessarily complicating their existing financial situations or future plans.
- Those who entered the military between 2006 and 2017 are in a position of control over their financial destiny with regards to retirement benefits. Unlike their counterparts who entered prior to 2006 or future enrollees entering in 2018, 2006-2017 enrollees can choose to participate in the existing 50 percent of base pay structure or the new TSP model.
Determining the most advantageous option requires the following considerations:
- How many years of service have already accrued?
- If an individual is nearing the 20-year milestone, choosing the traditional payout option might be a more logical move.
- Do they intend to reach the 20-year retirement threshold as they have fewer years to accumulate wealth under the new system?
- Is it financially feasible for the client to make personal contributions to the plan and at what level?
The government automatically gives basic training finishers a 1 percent of base pay contribution, then a dollar-for-dollar match up to 3 percent. Contributions between 3 and 5 percent are then matched at 50 percent, so service members with the ability to set aside more of their pay have a significant opportunity to sock away tax-deferred savings.
- Participants in the Thrift Savings Plan must be prepared for typical market activity and retirement regulations. Just as the underlying investments in a 401(k) plan are subject to market volatility, so are the investments in a TSP. Returns will vary accordingly and your clients must be prepared for changes in the value of their account. While the current retirement program guarantees a lifetime benefit of 50 percent of the last three years of base pay, the new plan allocates less but adds new dividends under the TSP match, which is dependent on market conditions, as previously noted. And while the new retirement plan holds penalties if withdrawing funds before age 59½, benefits can be received as a monthly pension check or a reduced check with a lump sum upon departure from the military.
With the new military retirement program impacting the financial future of hundreds of thousands of military personnel, many may seek advice about which option to choose and how to take advantage of program options. Are you prepared to help your military customers — including reservists — on how to best choose and manage their military retirement plan?
Each year, more than 180,000 people join the armed forces. If you’re not actively serving members of the armed forces, the new retirement benefit changes represent a tremendous opportunity for expanding your practice to serve the men and women who sacrifice and serve our great nation. The American College of Financial Services provides financial services professionals with comprehensive education across core financial planning competencies. The College’s Chartered Financial Consultant® (ChFC®) helps advisors develop the skills and expertise needed to confidently advise clients both with military and nonmilitary status in areas like retirement and insurance planning, income taxation, portfolio management principles and estate planning.
In addition to providing training that strengthens financial services professionals’ ability to serve our country’s military population, we directly support veteran and military affairs with full scholarships for active duty, veterans, and their spouses through The College's Penn Mutual Center for Veteran's Affairs. These scholarships provide service members and their families with an opportunity to build successful careers within the financial services profession. Scholarship guidelines can be found here.
Develop the expertise needed to confidently serve clients who need a trusted advisor to guide them through their working years and into retirement. Download How the ChFC® is a Game Changer in Advancing Your Financial Planning Career.
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