On Jan. 1, 2018, active duty personnel, reservists, and new recruits will see the first major changes to military pensions since World War II. Bean-counters have tweaked the retirement calculation to drive down costs. Under the current system, veterans with 20 years of service receive a pension based on 2.5 percent of the average of their 36 highest paid months, essentially 50 percent of highest average salary. The new plan reduces the 2.5 percent factor to 2 percent, lowering the pension of a 20-year veteran to 40 percent of highest average salary upon retirement. All troops entering service before 2018 have the option of keeping the legacy retirement benefit.
The government will offset the lower pension by increasing matching contributions to a participant’s Thrift Savings Plan (TSP). In a nutshell, they are making the pension less attractive but sprucing up the TSP; a federal 401K-type account offered to civilian and military workers. Under the new rules, all participants will receive a 1 percent government contribution along with up to 4 percent in matching contributions. All contributions vest after two years for new recruits and immediately for anyone with two years of service.
Taking a cue from Noble Prize winner Richard Thaler’s work, 3 percent of pay will be deferred automatically into their TSP account. If they choose to opt-out, the next year they are re-enrolled at 3 percent. Thaler found forcing participants to opt-out increased retirement plan involvement. Inertia, Sir Issac Newton’s First Law of Motion, affects retirement planning, too. The new system could prevent saving for retirement from becoming an afterthought or being ignored.
Now, absent a medical discharge, retiring without serving 20 years means no pension. The TSP enhancements could be an excellent starting point for anyone who doesn’t plan a military career. The TSP is unquestionably the best retirement savings vehicle available. Unfortunately, single men statistically make the worst financial decisions. An unsophisticated investor with a large retirement account could be a target of opportunity.
Further complicating matters, The House of Representatives budget resolution (HR 71) reduces the rate of return of the G Fund, a TSP investment option. The government uses a blend of US Treasury interest rates, currently 2.25 percent, for the G fund’s yield. An option in the House proposal whacks the G Fund almost two-thirds to the three-month US Treasury bill rate, now .84 percent.
All active duty and reservists have the option of switching to the new system or continuing with their current set-up. Military personnel should go to militarypay.gov/BlendedRetirement to evaluate their options. Put all the lipstick on it you want, but the tricked-out TSP is a defined contribution (DC) plan. Even though the TSP is exemplary, DC plans shifts investment risk to participants. During bad markets the acronym DC can mean defined chaos.
You can’t always get what you want, but Buz Livingston, CFP can help figure out what you need. For specific recommendations, visit livingstonfinancial.net or come by the office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.