25 Jun 2019

Military Retirement Income - What if Your Pension isn't Enough?



You've served your country in a military career. The military provides a pension in retirement; it is one of the most generous plans in the United States, given that many private-sector companies ditched pensions in favor of 401(k)s and other self-funded retirement savings options. But what if that pension isn’t enough to live the life you hope to enjoy in your retirement years?

“A military retirement is fairly generous compared to most civilian retirement plans, and can even be worth millions over the life of the retiree. However, the immediate cash flow is probably not enough for most people to retire immediately.”

Source: The Military Wallet - https://themilitarywallet.com/military-retirement-pay-enough-retire/

Several factors are at play as you determine your retirement income, including your cash flow needs, outstanding debt, mortgage payments, and other investments. Living expenses and debt payments can take a large chunk of income each month; reducing and eliminating debt prior to retirement is a good idea. Getting a real picture of your cost of living in retirement is another important step: where will you live? Do you want to travel? What activities do you enjoy? What kind of lifestyle do you hope to have? Will you start a career as a civilian, earning an income (and saving for another retirement later in life)?

Sovereign Wealth Management has created a complimentary Retirement Savings Calculator to help you plan your financial journey toward and during retirement. Just go to Sovereign.global and click on “Create Your Financial Plan). If you would like to get assistance with this involved process from a Financial Planner, they can be reached at 703 310 7255, or at info@sovereign.global for a complimentary initial consultation.

Military Retirement Calculator Framework

If you would like to do the process manually, Ryan Guina, founder of The Military Wallet and former Air Force aircraft mechanic, outlines how to determine the amount of income you’ll need:

  1. Make a rough calculation of what income you’ll need in retirement. This estimate can be more or less accurate, depending on how close you are to retirement. In general, though, if you start with a $45,000 income and adjust for future inflation, you’ll find a baseline number.
  2. Add up your estimated military pension as well as Social Security Benefits. Federal and state taxes will reduce your pension checks, as well as contributions for health and dental coverage.
  3. Take a look at other investment accounts and retirement savings accounts and calculate a 3% withdrawal rate from these accounts for a realistic estimate of income which should last you through retirement. If you’re close to retirement, your estimates will be fairly accurate. If you’re decades away from retirement, you’ll have a basic picture of retirement, but will have to make additional considerations
  4. Subtract estimated future income from estimated future expenses. If the answer is positive, you may be saving a sufficient amount, if it is negative, you likely have a shortfall and need to save more or plan to spend less.

Years of service are key in determining your military retirement income. After 20 years of service, you qualify for 50 percent of your highest 36 months of base pay. That percentage increases by 2.5 percent for every year beyond 20 years. But, if you serve less than 20 years, you fall under a different set of options.

According to an article in Forbes by Mary Beth Storjohann, 80 percent of military members serve less than 20 years, thus, the formation of the Blended Retirement System, which offers retirement benefits for those with less than 20 years of service: a choice between the traditional pension, a Thrift Savings Plan (TSP), or a reduced pension plus a TSP.

What is A Thrift Saving Plan (TSP)?

A TSP is a special retirement plan available to government employees and military service members. In general, the funds offered are low cost. If you choose the TSP option, you automatically contribute 1 percent of your salary. You can choose to contribute up to 5 percent of your salary and receive a matching contribution. TSP contributions can be made on a pre-tax basis (with taxable income at retirement) or on a Roth TSP basis (with non-taxable income at retirement). The match you receive is always contributed to the regular TSP, even if you choose the Roth version.

The articles noted above continues to  explain that members with eight or fewer years of service may be better off opting into the Blended Retirement System, which would allow you to save more for retirement, due to the 5 percent match on TSP contributions. If you’ve been in the military between eight and twelve years, the choice between a TSP or the pension is a bit different and requires consideration of your base pay, how long you plan to serve, and what you can contribute to the TSP. Storjohann says if you’ve served more than 12 years, the pension-only option is likely the best route.

Certainly, 50 percent of base pay is a decent amount. If you live frugally (read: on very fixed expenses), military pay may be enough for your retirement. While hoping for the best is an optimistic view, you should also plan for the worst.

What if you find yourself caring for parents or assisting a child or grandchild with education expenses? What if you would like to enjoy the travel and vacations you passed by in your working years? Will your pension provide for the lifestyle you desire?

While it provides a nice income, your military pension probably won’t provide enough income. You should consider supplementing your government pension with additional investments. With this in mind, work with a Wealth Manager to explore your options. In addition to your military pension or TSP, you can contribute to an IRA separately from your military savings, either on a tax-qualified basis (traditional IRA) or on an after-tax basis (Roth IRA, with income restrictions). As qualified retirement accounts, IRAs have restrictions and penalties regarding pre-retirement distributions.

If you want to invest, but don’t want to worry about paying penalties on pre-retirement withdrawals, you can save money in a non-qualified brokerage account. You can invest as much as you want without hitting income or contribution restrictions, as you would with a qualified account.

Military Retirement Calculator Example

Storjohann details a retirement budget calculation, based on an assumption that you can live on 60 percent of pre-retirement income in retirement. Her example considers a budget of $5,000 per month, or $60,000 per year. If you retire at age 63 and live to age 90, that’s 27 years of expenses, which requires a nest egg of $1,620,000, not accounting for taxes or inflation. Your military pension, TSP, or a combination of both, can contribute to this retirement income requirement.

Here’s the bottom line: commit to saving money and investing wisely for retirement. Your pension benefits will not likely provide enough income in retirement, so it is up to you to invest additional money.

When your retirement date is in sight, consider this coordinate with the Transition Assistance Program to work through the pre-separation requirements, including medical and dental exams, counseling appointments, and employment workshops. You’ve saved money and hopefully have earned nice returns on your investments. Start to consider the amount of income you’ll need. As you get closer to retirement, you’ll have a good idea of your living expenses, mortgage and other debt payments, and other special financial considerations. Familiarize yourself with the benefits you’ll receive as a retired military member, including healthcare (TRICARE), dental benefits, life insurance benefits, GI Bill benefits, home loans, and moving expenses.

Sovereign Wealth Management also stresses the importance of preparation for civilian life: “Retirement is the first step to your next successful life and career.” Consider the transition from the camaraderie of your military family and lifestyle to a civilian life and career. Take advantage of resources offered by the military during your transition. Additionally, find groups of ex-military members to build a civilian community with common connections.

Planning for retirement is a crucial task with numerous variables and considerations. Whether you spent all of your career years in service or began a civilian career after your military years, a financially-secure and enjoyable retirement can be yours with proper planning. You’re wise to consider investments and savings plans in addition to those offered by the military to account for whatever scenario you might encounter.

To speak to a professional Financial Planner on the topic, call (703) 310 7255, or email info@sovereign.global for a complimentary initial consultation.



Contact Information

Sovereign Wealth Management

8229 Boone Blvd. Suite 760

Vienna, VA 22182

(703) 310-7255


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