Why Military Pensions can be Insufficient to Retire On | Rick Spruill

RICK SPRUILL – 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, mainly since most military members serve for less than 20 years. This means that after discharge, you’ll most likely have no pension.

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.

Advertisement

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 yearsor 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.

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 enroll in. For 2018, the maximum contribution value for a TSP is capped at $18,500.

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.