With the continued focus on budget cutting within the military, all eyes are once again turned towards personnel costs. Although there are many controversial programs which have resulted in significantly more financial expenditures over the years, technology often wins out over service members for the way of the future. As part of the recent package that was passed, the overhaul of the retirement system is being once again pushed.
The current military retirement system is a 20 year windfall, permitting service members who serve for 20 years on active duty to immediately begin receiving benefits once they retire. For many, this means that retirement checks can begin coming in as early as age 38, and continue for the rest of the service member’s life. The challenge is making it to 20 years though, as only 17% of current service members stay in long enough to earn this. The other 83% leave the military with nothing.
That is not to say that there are not opportunities to save towards one’s retirement while in the military. There are funds within the Thrift Savings Plan which can be used much like a ROTH IRA, focusing on long term growth in a life cycle fund. These are not the same as traditional workplace 401(k) programs though, and they do not offer matching rates from the Department of Defense as civilian members can receive.
The new plan, proposed over the last few years and finally gaining traction with politicians, is much more similar to the civilian sector retirement plans. Based off of a 401(k) model, service members would contribute 1% of their base pay automatically into the plan with the amount matched by the government. Service members could then increase that amount voluntarily and have their contributions matched up to 5% of their base pay by the government.
After two years of serving in the military, the service member would be deemed vested and when they leave the service, regardless of how long they served, they would have access to these funds, avoiding tax penalties if withdrawn after age 60.
When working with numbers, it is important to realize that future gains and losses will be dependent on the market return for the investment. This makes it easy to make assumptions that can be completely off-base, resulting in a lower or a higher return.
Those supporting the new process show that over the lifetime of the service member, the amount invested will continue to accrue interest, potentially making it significantly more lucrative of a deal than simply receiving a set amount of money monthly as the current 20 year model does. Critics identify that the new model reduces the amount of income per month by 20%, and assumes a 3% interest rate while in service and a 7.3% interest rate while out.
People are quick to draw reference to the fact that the majority of conservative investments available through the TSP only provide a 3-5% rate of return, not a 7.3% rate. This creates a significant difference when the numbers are put side by side.
While it is true that the majority of service members will receive something under the proposed retirement, the fact is that those who do 20 years of service will not have to wait another 20 plus years to access their funds, and it can help to augment their life immediately.
Service members joined for a variety of reasons. It is justifiable to recognize that something is better than nothing when it comes to retirement, and encouraging savings amongst service members is a great idea. Saving money by reducing people’s retirement 20% and making bold, unreasonable assumptions on market rates of returns for investments is another thing completely. At a minimum, they should be honest and upfront early.
Since many simply join for one to two enlistments, offer them the new plan, allow current service members the right to choose and recognize that this is not simply an emotional discussion, but a logical and financial one which service members have a right to have.
Disclaimer: The content in this article is the opinion of the writer and does not necessarily reflect the policies or opinions of US Patriot Tactical.