Why Military Pensions are Insufficient to Retire On

federal pay

In most companies and industries, employee sponsored 401 (k) plans phased out traditional retirement plans. Still, the military offers its uniformed members a pension scheme. Typically, military members receive a pension equal to 50% of the highest three-year base pay. Each year, pension amounts increase by 2.5% for members with twenty and above years of service.

Though this amount is significant, it might not be enough for you and your family’s needs. Typically, military members serve for less than 20 years, meaning that after discharge, you’ll most likely have no pension.

A New Blended Retirement System

In January 2018, the Blended Retirement System (BRS) was introduced for service members who leave before the 20-year mark. It has three retirement options: pension only, a Thrift Savings Plan (TSP), or a reduced hybrid (pension and TSP) option.

After January 2018, enrollments into the BRS are automatic. If you have less than 12 years of service, you can elect to enroll into the BRS. Members with fewer than eight years can leverage the BRS’ provisions to save more for their retirement.  But why is that so? It is because your matching contributions can exceed your pension’s total value. But this requires that you remain in service for twenty years or more to qualify for a military TSP.

Depending on your status, it is challenging enrolling in the BRS if you have between 8 and 12 years of service. Additionally, your TSP contributions and base pay may affect your eligibility. Often military members with 20 or more years prefer a pension based retirement scheme.

Benefits of TSP

But What is TSP?

It is a retirement saving scheme for service members and federal employees. This plan remits 1% of an employee’s base pay into a TSP with a further 4% to 5% matching contribution. With a TSP, you can choose to invest your contributions in any of the five index funds or a lifecycle fund. An advantage of TSP indexed fund options is their relatively low expense ratios. Typically, expense ratios are 40 cents per $1,000 that you invest. Plus, you can opt between a traditional TSP, a Roth-based TSP, or a hybrid TSP. All matching contributions are deposited in a conventional TSP no matter what option you are enrolled in. For 2018, the maximum contribution value for a TSP is capped at $18,500.

What Are Other Saving Options Available?

Option# 1: Traditional and Roth IRAs

With this approach, members can contribute to Roth and non-deductible IRAs as well as TSPs. You can open either of these investment accounts at your local brokerage firm. What’s more, both function independently and contributions are capped at $5,500 per year. However, they are limits on incomes for eligibility.

Married service members can have their spouse make IRA contributions where applicable. Spousal IRAs have a contribution limit of $5,500 each year.

Option #2: Taxable Brokerage Accounts

Another alternative is to invest additional funds in a taxable brokerage account. Unlike IRAs and other retirement schemes, brokerage accounts charge no penalties for early withdrawals. Also, brokerage accounts impose no contribution caps.


Estimating How Much You’ll Need for Retirement

  • Know Your Needs

Estimating how much money you’ll need requires understanding what retirement means as well as its implications. So evaluate your lifestyle to determine the finances you require. Below are the factors that can affect your financial status during retirement:

  • Maintaining a large house or living in a low-cost maintenance home
  • Whether you’re traveling internationally or living closer to home
  • Spending on hobbies such as golf or engaging in volunteer work
  • Taking up a part-time job

Although you are retired, you might secure a part-time job, earning you some much-needed income. If so, you are better off with fewer retirement savings.

  • Craft A Retirement Budget

After knowing what type of retirement you’re looking at, it’s time to create a budget. Start with public expenses to gain an idea of your retirement expenses. Let’s say you spend $5,000 each month; you need $60,000 each year to meet your living expenses. So if you retire at age 63 and live for another 27 years, your retirement estimate equates to $1,620,000. Of course, other costs and inflation might push this figure upwards. Nonetheless, it is a reasonable ballpark estimate.

Increased life expectancies and kids who need support beyond college might stretch your military pension.  This means you’ll have insufficient finances to cover all your needs. Typically, retirees withdraw 4% of their retirement benefits each year.  With the above example in mind, you require about $1,620,000 to cover $60,000 in monthly expenses.

Besides that, how much you need depends on the factors below:

  • Your place of residence as tax rates differ across states
  • Lifestyle choices you make during retirement
  • Any debts you might be paying while retired
  • Whether you have family members depending on you for support
  • Your revenue streams either from part-time work, real estate, or other investments

No matter your retirement status, a retirement calculator is a great way of simulating different saving scenarios. Alternatively, you can consult with a financial planner for help in creating a retirement plan.

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