November 11, 2016 9:28 AM

The United States military retirement system is undergoing one of the biggest changes in decades, providing an opportunity to financial advisors who are looking for new and creative ways to grow their practice. For the first time in history, military personnel will be able to choose between the standard 20-year pension and a government contribution matching plan. The Retired Pay Reform, included as part of the 2016 defense authorization bill, was signed into law November 2015, but will not take effect until Jan. 1, 2018.

Planning for military retirement 

Historically, more than 80 percent of military personnel do not serve for the full 20 years required to receive a lifetime pension, transitioning instead to civilian life without the financial security they’d otherwise be afforded. The new 'blended' plan would provide retirement benefits to troops who serve for as little as two years instead of requiring a career of 20 years or more to become fully vested. Defense Secretary Ash Carter explained, that a “blended retirement system is a key step in modernizing the department’s ability to recruit, retain and maintain the talent we require of our future force."

Understanding the New Military Retirement Plan

The Department of Defense will be rolling out a program to educate troops about the changes, their options and to help them make important decisions about their retirement savings and allocations. The new retirement plan blends the current defined benefit plan with:

  • A 401(k)-style defined contribution plan
  • A lump sum mid-career continuity bonus at 12 years of service, pending an agreement by the service member to continue for four more years
  • Retention bonuses paid at predetermined milestones
  • A 20-year defined annuity, similar to the one in place now

Current military personnel and any individual who joins between now and Jan. 1, 2018 can choose to remain under the traditional 20-year cliff vested pension plan or enroll in the new benefit plan. After Jan. 1, 2018, all new troops coming out of boot camp will automatically be enrolled in the new blended plan while the traditional pension plan is phased out. 

Advice for Advisors With Clients in the Military

For financial advisors and retirement income planners with clients in the military, the opportunity for self-education is huge. Financial advisors who have a military background are well-positioned to expand their services by focusing on the military as a client base segment. But previous military experience is not required to fulfill the needs of this audience. What military men and women need instead are financial advisors who understand and can cater to the unique issues they face such as:

  1. Many in the military hold high-risk jobs so their life insurance implications and needs will be different than those with low-risk jobs. Building complete financial and retirement plans for those in high-risk occupations like the military requires a smart mix of protection and growth strategies and products. Since many service men and women tend to be in their 20s, 30s, and 40s, a Roth IRA could be a better vehicle for long-term tax strategies than a typical retirement account, but depends on the particular needs and circumstances of the client.

  2. Some military personnel and veterans, depending on when they served and for how long, will qualify for long-term care benefits included as part of their pension or at a reduced cost. For financial advisors with active military clients, this is an important consideration during broader discussions about retirement income planning.

Tips for Educating Clients in The Military

Planning for retirement is typically associated with baby boomers, but in actuality, is a necessity at all ages of adulthood. When educating clients who are in the military about their retirement options, consider where they are in their career and frame the conversation to fit. The following tips can guide an effective plan to educate your military clients.

Tip: Most entry-level military personnel will require foundational education that includes budgeting and savings concepts, instruction about how to properly read their leave and earnings statement (LES), and a basic overview of military benefits.  

Tip: After establishing a foundational education, or if the client has been in the military for several years already, advisors should coincide their educational topics with various time-in-service parameters and predetermined career milestones. Career milestones may include a lump sum payout after 12 years of service is reached, retention bonuses, special pay implications, a survivor benefit plan (SBP), and the financial impact of transitioning to civilian life when the time comes.

Tip: In addition to the special topics of interest, advisors should educate military clients on broader issues like property and casualty insurance, life insurance, health insurance, tax and retirement strategies, and eventually estate planning.

Military personnel aren’t the only ones with retirement planning questions. Discover what areas of retirement planning knowledge are lacking the most, and how to help your military and civilian clients fill the gaps with the right education. Explore the full findings of America Fails Retirement Literacy Quiz.

 

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