Will Your Military Pension Be Enough In Your Golden Years?
Most companies have eliminated pension plans for the more popular 401(k) option, as it allows employees to make contributions toward their retirement. The military, on the other hand, still provides the pension. If a person stays in the service for the full 20 years, they get 50 percent of their highest three years of base pay. For every year of service after 20, the percentage rises by 2.5 percent.
As generous as this may be, it’s not going to be enough to support you and spouse during the golden years (retirement). And, since 80 percent of military members serve less than the 20 years noted, it’s likely that most don’t get a pension at all.
This is why the Blended Retirement System was created.
The BRS became active Jan. 1, 2018, which gives military personnel one of three options:
- Pension
- Thrift Savings Plan (TSP)
- Both with decreased pension
Anybody joining the military after this date is automatically enrolled in the program.
Members who have 12 or fewer service years can choose the BRS. Anyone with eight or fewer years in service may see the BRS option as more lucrative for their retirement years. Why? This is due to the five percent match on the TSP contributio0n that may surpass the sum seen in a pension (should you make a career out of the military and qualify for the pension).
If in the eight to 12-year service range, the decision to choose the BRS is a little more complicated. Your decision will depend on a multitude of things such as but not limited to:
- How much more time you plan to give to the service
- Your current base pay
- How much contribution is directed to your TSP
Anybody with 12 years of service or more should stick with the pension-only option.
Other Ways To Save For Your Golden Years (Besides the TSP)
- Traditional and Roth IRAs– You may make contributions to a Roth IRA as well as to your TSP. These investment accounts can be opened at any preferred brokerage firm, and are not considered a part of the military. Up to $5,500 a year can be contributed. There are income limits for this type of investment option. Your spouse can also contribute to their own IRA, and if they don’t work, you can opt for a Spousal IRA that lets you contribute up to $5,500 a year for them.
- Taxable Brokerage Accounts– Extra money can be applied to a taxable brokerage account, which provides an array of flexibility due to no penalty in withdrawing the money before a particular age. You can also invest how much you want into the account.
What You Are Looking For During Those Years
When it comes to determining how much money you need, you need to consider what retirement means for you. What is it that you want? Where would you like to go? What is important to you? The lifestyle you’re looking for is going to have a huge impact on the amount of money you’ll need for these years. Some choices that affect financial needs include:
- Maintenance of a large home or selling the home to something more affordable and comfortable
- International travels vs. staying local
- Spending money and time on hobbies
- Part-time job
If you don’t like the idea of never working and want to earn some money still, you can always get by with a smaller amount of money saved.
Think Of Your Retirement Budget
Once you know what life you want during your retirement, it’s easier to estimate the expenses. Develop a mock budget that includes the necessary costs. It’s not going to be perfect, but you get an idea of what amount of money is needed to have what you want.
For instance, you plan on spending $5,000 a month or $60,000 a year. If you retired at 63 years old and lived until you are 90, you need to have at least 27 years’ worth of expenses laid out. In retirement, the money necessary to live this lifestyle is $1.6 million.
Particular Note– This doesn’t account for various factors like inflation that could increase or decrease the amount.
The basic rule is to have at least 60 percent of your pre-retirement income to live on during retirement. Some expenses such as a mortgage or childcare may not be a part of the budget, but you may add others to it such as medical costs, travel, etc.
Since parents tend to take care of their adult children after college and longer life spans, the military pension you get may not be enough for retirement. How much you need each year to live on will depend on a few factors:
- State in which you reside
- Preferred lifestyle
- Age, life expectancy, and health
- Remaining debt during retirement
- Financial support to family members
- Earned income through part-time work, real estate or investments
Always seek out the advice of a flat-fee fiduciary financial planner to help you set up a retirement plan that works for you.
About Michael Wood
Michael Wood is the principal and owner of Integrity Retirement Planning, LLC with offices located in Cambridge, Maryland. Michael began his career in Insurance and Financial Services with Bankers Life and Casualty in 1999 where he practiced insurance until 2002 at which time he started his own company.
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