How to Choose the Best Retirement Plan for Military Members
How to Choose the Best Retirement Plan for Military Members
Choosing the right retirement plan is crucial for securing your financial future. For military members, this decision becomes even more significant due to unique benefits and options available. Understanding these can help you maximize your retirement savings.
Understand the Basics
The first step is to understand the basics of military retirement plans. There are primarily two types: the legacy High-3 system and the Blended Retirement System (BRS).
High-3 System
Service members who joined before January 1, 2018, are eligible for the High-3 system. It calculates retirement pay based on an average of the highest 36 months of base pay. The retirement pay is 2.5% times the number of years served. For example, 20 years of service would yield 50% of the High-3 average.
Blended Retirement System (BRS)
Those who joined on or after January 1, 2018, are enrolled in the BRS. This system blends the traditional pension with contributions to the Thrift Savings Plan (TSP). Service members receive automatic and matching TSP contributions from the government. Under BRS, the retirement multiplier is reduced to 2.0% per year of service.
Consider Your Career Path
Evaluate your career goals and how long you plan to stay in the military. If you’re considering a long-term military career, the lifetime annuity of the High-3 system might be appealing. For those who might leave before 20 years, the TSP benefits of the BRS could provide better financial security.
Review Thrift Savings Plan (TSP) Options
Regardless of your retirement system, the TSP is an essential component. It’s a defined contribution plan similar to a 401(k). Understanding your TSP options can significantly influence your retirement savings.
Fund Choices
- G Fund: Government Securities Investment Fund, low-risk, stable growth.
- F Fund: Fixed Income Index Investment Fund, U.S. bond market investment.
- C Fund: Common Stock Index Investment Fund, matches the S&P 500 index.
- S Fund: Small Capitalization Stock Index Investment Fund, investment in small to medium U.S. companies.
- I Fund: International Stock Index Investment Fund, investment in international markets.
Contribution Matching
Under BRS, the government matches your TSP contributions up to 5%. Take advantage of this free money by contributing at least that amount. The government starts with an automatic 1% contribution and matches up to 4% more, based on your contributions.
Roth vs. Traditional TSP
Decide between Roth and Traditional TSP based on your tax situation. Roth TSP contributions are made with after-tax dollars, leading to tax-free withdrawals in retirement. Traditional TSP contributions are pre-tax, reducing your taxable income now, but you’ll pay taxes upon withdrawal.
Evaluate the Blended Retirement System’s Continuation Pay
The BRS offers a one-time continuation pay at 12 years of service for members who commit to serve for four more years. This bonus is typically 2.5 to 13 times your monthly base pay, varying by branch and career field. Factor this into your long-term financial planning. The continuation pay can provide a significant boost at a mid-career point, helping with major expenses or additional investments.
Understand Disability Retirement
Some military members may end their careers due to service-related disabilities. Disability retirement is separate from the High-3 and BRS systems. It provides benefits based on the severity of the disability and years of service. Ensure you know your eligibility and the process for applying for these benefits.
Calculate Your Retirement Pay
Use the online retirement calculators provided by the Department of Defense. Input your service details to estimate retirement pay under both systems if you’re eligible for both. These calculators can help to forecast your future finances more precisely.
Seek Professional Advice
Financial literacy is essential, but don’t hesitate to seek professional advice. Military financial counselors can provide free, unbiased guidance. They can help you understand your options and devise a robust retirement strategy tailored to your career and personal financial situation.
Stay Informed
Keep abreast of changes in military retirement policies. Benefits can evolve due to new legislation or military regulations. Staying informed ensures you make decisions based on the most current information.
Consider Post-Military Employment
Many service members pursue civilian careers post-retirement. This income can complement your military retirement pay and TSP withdrawals. Factor potential civilian earnings into your retirement planning. Research careers with strong post-military employment opportunities and align them with your skills and interests.
Review Survivor Benefit Plan (SBP)
The SBP provides ongoing income to your beneficiaries if you pass away. Eligible retirees can elect to cover their spouses or children by paying monthly premiums. Understanding SBP options ensures your loved ones are financially protected.
Choosing the right retirement plan as a military member involves evaluating multiple factors. Understanding your options and how they fit with your career plans can ensure a secure financial future.