The new military retirement system will require military personnel to save more if they want to match the pension benefits of the old system, says First Command Financial Services Inc., an organization based in Fort Worth, Texas, that counsels military personnel on financial issues.
Military personnel who enlist after Jan. 1, 2018, will be part of a new military pension system that includes elements similar to retirement plans in the private sector. It replaces the traditional pension that was granted after a 20-year military career.
The new system will enable people who leave the military before 20 years to take some retirement savings with them, similar to 401(k) plans in the private sector, but it will require them to save some money for retirement on their own during their careers.
The new system replaces the traditional 20-year pension, a benefit that has been part of military careers for many years, with a blended program that includes a reduced pension in exchange for a lump-sum bonus and a new matching funds program through the government’s Thrift Savings Plan (TSP). Under the new plan, the government will match Thrift Savings Plan contributions up to 5 percent of the personnel’s pay.
Military personnel who hope to receive pensions equal to the ones paid under the traditional plan will need to contribute to the Thrift Savings Plan in order to take advantage of the matchng funds and also will need to save the bonus money, First Command says.
In its report, "Military Retirement Reform and Its Impact on America’s Career Military Families," First Command says personnel who do not take these actions could end up with pension benefits that are approximately 18 percent lower than under the traditional program. Overly conservative investment choices and lower-than-anticipated stock market performance are among additional factors that could reduce the size of monthly retired paychecks.
“The matching funds and lump-sum bonuses of the new military retirement system offer valuable and portable benefits to our non-career service members, but those who expect to serve out a 20-year career face a more clouded future,” says Scott Spiker, CEO of First Command. “Our next generation of career service members will receive fewer government guarantees, namely smaller pensions."
“That means they face a future that will require greater reliance on long-term investment growth as well as their own savings behaviors and investing acumen,” he says.
The new pension program also includes financial education classes. The education, along with advice from financial professionals, are needed for military personnel to succeed financially, First Command says.
“Our marketplace studies have consistently shown that partnering with a financial advisor has a positive relationship with confidence in one’s ability to retire comfortably,” Spiker says. “Financial education and professional financial advice represent two different but complimentary approaches that can help America’s career military families make the most of their government benefits.”