Military Retirement Planning Tips

Our clients are often former military members, many officially retired after 20+ years of service. The military retirement system is unique - and uniquely complex. Here are a few key considerations to aid you in planning based on our experience:

1) Know Your Plan

There are three major military retirement plans that are utilized by the majority of current service members. Each has a defined benefit (pension or “retirement pay”) component. The new blended retirement system also includes participation in the Thrift Savings Plan (TSP), which is similar to a 401(k) with matching contributions. Knowing which plan you are eligible for is the first step to building your retirement program.

2) Review your basic vs. “enhanced” pay

Remember, each of the three retirement plans uses only your basic pay in its calculations. Many military members have been receiving a housing allowence and other additional pay increments for years. Those will not be included for determining your retirement pay.

3) Contribute to the Thrift Savings Plan

If you are relativly new to the military (since 2018), you are participating in the Blended Retirement System. This includes the Thrift Savings Plan, which is similar to a private sector 401(k). The government contributes 1% to start and will match your contributions up to 5% of your pay. Not contributing at least 5% means you are leaving money on the table! If you max out your contributions, you are saving 10% of your pay per year in addition to the defined benefit plan, which will set you up nicely for retirement down the road.

4) Optimize for low taxes long-term, not short-term

Typically, income and tax liability rise for military members post-retirement. When you are in the military, you may receive multiple forms of tax-fee income. Additionally, many veterens take jobs with higher compensation after retirement. A tax deduction now may feel good, but paying taxes now and making ROTH contributions to retirement accounts may be the best choice to minimize total taxes long-term.

5) Take advantage of unique programs while you are still on active duty

• The Guaranteed Return on Savings plan pays 10% annualized returns on up to $10,000 while you are receiving hostile fire pay. It’s one of the best low-risk returns in the world.

• Consider transferring your GI Bill for education benefits to your children if you are eligible.

• Sign up for inexpensive life insurance. Servicemembers have access to one of the lowest-cost life insurance programs available; regardless of your age, health or likelihood of being deployed.

6) Consider your state of residency

While you are serving on active duty, you have been able to maintain a state of residency in any of your prior stations. Many service members choose to declare residency in states with no income tax when stationed there. Once you retire, you will pay state income taxes again if you reside in a state that has an income tax.

7) Double check Social Security records

You may be eligible for additional earnings credits from 1978-2001. From 1978 through 2001, for every $300 in active duty basic pay, you should be credited with an additional $100 in earnings up to a maximum of $1,200 a year over the traditional plan. Its worth a look to ensure you are scheduled to receive the right amount of social security for the duration of your retirement.

8) Consider health care insurance coverage.

When you retire from the military, you may elect to remain part of the Tricare insurance system. You may also switch to insurance provided by another employer. Private sector health insurance may be more flexible than Tricare but will likely come at a higher price. Keep in mind that if you do not elect to remain part of Tricare initially, you may have to wait until annual enrollment to re-enroll, so carefully consider your decision to ensure you do not have a gap in coverage.

9) Sign up for Medicare.

Tricare for Life works WITH, not instead of, Medicare. Tricare for Life is for retired military members over age 65. Tricare for Life will supplement traditional Medicare to further reduce your out-of-pocket healthcare expenses. However, you still must sign up for Medicare several months ahead of your 65th birthday.

If you have questions about any of these topics, or would like to discuss retirement planning in more detail, you can schedule a quick intro call with us here.