Current members of the military who choose to become part of a new retirement system may be shortchanging themselves in the long run, says a financial firm catering to service members.
Under the new military retirement system that goes into effect January 1, 2018, service members will get a 20 percent reduction in retirement pay in exchange for a defined contribution program of automatic and matching Thrift Savings Plan contributions, a mid-career continuation pay bonus and the lump sum buyout option. The program will apply to all new service members starting next year, but current military members with 12 years or less of service are eligible to opt in to the new program.
The new system, called “the Blended Retirement System” because it offers both the Thrift Savings Plan as well as the traditional pension, is being cast by the Defense Department as a way to give service members new financial choices at retirement.
But a detailed analysis of the program by Fort Worth, Texas-based financial firm First Command Financial Services reveals that those who sign up for the cash buyout will likely pay a high price.
The lump sum option allows military members to receive up-front dollars by forfeiting a portion of their working-age retirement pay. If they join the new retirement program, their monthly retirement pay will remain at the reduced level until age 67 and then return to the full amount.
Although those choosing a lump sum payment will receive a substantial amount initially, the total amount he or she would have received in traditional retirement benefits would be higher, First Command says. The firm did an analysis for service members of varying ranks and found the lump sum payment could be hundreds of thousands less over a period of years.
“Service members who select the lump sum payments could put themselves at risk of a significant drop in the lifetime value of their own retirement package,” said Scott Spiker, chairman and CEO of First Command. “The promise of a lump sum that could total in the six figures will surely appeal to many service members,” but it could leave them with fewer dollars overall.
“The opaqueness and uncertainty associated with the lump sum buyout reinforces the value of consulting with a financial coach,” he added. “Service members should plan on working with professionals who have the necessary advanced knowledge to conduct a meaningful analysis of the retirement system, help them weigh all of the information and make informed decisions.”