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The following is a guest post from Jerry Quinn, Chief Operating Officer of the American Armed Forces Mutual Aid Association.
The new year is always a great time to set personal and professional goals for yourself, but did you know it’s a good time to set financial goals too? For military members, new years often mean new beginnings, new roles, stations, and assignments. It’s time for you and your family to think about what 2022 has in store.
Are you preparing for a permanent change of station (PCS) this year? Are you anticipating pay or benefits changes? Are you starting to think about retirement?
In the military, we are taught to always think and plan ahead for the unforeseeable future. Planning for your financial future, accounting for known events as well as creating flexibility for surprises, is just one way you and your family can begin the new year off on a positive note. Here are a few tips to help with budgeting and making sure you’re maximizing eligible benefits in 2022 and beyond:
The holiday season is usually a time of spending money on gifts for cherished family members and friends, but it’s also important to make sure you and your family are living comfortably within your means. If you find yourself scrambling to find money for gifts each year, one benefit to consider is maxing out your Thrift Savings Plan (TSP) contributions.
If you create a plan that allows you to max out contributions for each year in October, allowing any increases in take-home pay for the remainder of the year can be directed into a ‘Christmas account’ for funding gifts. However, in general, it’s a good rule of thumb to spend less money each month than you earn. While life doesn’t always work out this way and unanticipated expenses like home repairs or medical bills will come up, it’s always a good idea to familiarize yourself with your family's recurring expenses and develop healthy spending habits.
It might seem obvious, but breaking down monthly expenses will help you better understand where exactly your money is going. Is most of your money going towards expenses like rent/mortgage payments or a child's school tuition? What new expenses or changes to recurring ones can you expect to have after your PCS or transitioning to civilian life?
By having the full picture of your current budget and anticipated shifts that could come up, you can better understand exactly how much money you need to be saving each month. Taking time to write out your budget also helps identify small recurring expenses you can save on, like monthly subscriptions. Through having the full picture of where exactly your money is going, you can decide which ones you need to have, and which ones you should cancel or cut back on.
Take the time to research different resources like budgeting templates or spending calculators available to military members to help save money. Many of these are free, simple templates to help plug in information and break down finances. However, this shouldn’t be viewed as a “one and done” transaction. To keep yourself accountable, make sure to update your budget as your needs and circumstances change, whether that be quarterly, ahead of a PCS, or following a promotion.
A few of my favorite resources include Military OneSource, MilSpouse Money Mission, and MilCents. By grasping a better understanding of your financial situation, you can determine how to better save money as you prepare to embark on whatever the new year holds.
Assessing pay and benefits
Accessing supplementary pay when you need it is a great way to help prepare for a PCS or retirement. If you were previously deployed to a designated combat zone and have money deposited in the DOD’s Savings Deposit Program, you can begin to withdraw money if your account balance is over $10,000 on a quarterly basis.
Investing in supplemental or third-party life insurance is also a wise move to make at this time. If you’re thinking about retirement, military members often decide to enroll in the Survivor Benefit Plans to ensure spouses and families are protected with long-term survivor benefits.
At retirement, all service members lose government-provided Service Group Life Insurance, but if you have pre-existing health conditions, it might be beneficial to enroll in Veterans Group Life Insurance (VGLI). One thing to consider is VGLI premiums can increase rapidly with age and are often more expensive when compared to offerings from private and third-party providers.
Working with a financial advisor who is well versed in military benefits helps make sure you’re using all the benefits you’re eligible for. Military benefits received upon retirement vary in variety and time of accessibility. Some benefits can be claimed right away, while others take years, or even after the retiree passes away to enact. If retirement is on your radar during 2022 or even in the next few years, it’s never too early to start the process of understanding your benefits so you can adjust your budget to bolster savings accordingly.
There are currently two retirement systems available for veterans. The legacy retirement system, which was introduced after WWII, is a defined benefit plan that offers a pension to service members who complete 20 years of service. The pension starts at 50% of the veteran’s 20-year salary and increases to 75% after 30 years. All veterans who retired prior to 2017 or had 12 years or more of service by January 1, 2018, were grandfathered into this legacy system.
The other benefit to be aware of is The Blended Retirement System (BRS). This system was approved by Congress in the 2016 National Defense Authorization Act. All servicemembers with 12 or fewer years of active duty service in 2017 had to choose between the BRS and remaining with the legacy system. All veterans who retired in 2018 or later automatically are enrolled into the BRS.
The BRS has three parts:
- A “defined contribution,” similar to a 401k in the private sector, which includes an automatic contribution amount by the military of 1% of a servicemember’s base pay to their personal Thrift Savings Plan account. Servicemembers can also make contributions to this account from their base pay, with the military matching up to 5% of these contributions. The plan has a two-year vesting schedule. This means that after serving two years, servicemembers who chose to leave the military can take their savings and matching contributions to their next job.
- A continuation pay “bonus” after 12 years of service. Those who commit to serving an additional four years will receive a bonus of at least 2.5 months' pay. This was introduced as an incentive to retain experienced officers and noncommissioned officers.
- A 20% reduction of the pension paid after 20 years. By reducing the lifetime pension of the retiree, the government is creating cost savings that support funding the contributions and bonuses in the first two parts of the BRS.
For retirees enrolled in the BRS, making the maximum contribution you can to your Thrift Savings Plan is highly encouraged, to bolster your retirement savings and take advantage of the government match. Giving yourself ample time to prepare and save allows you to not only meet with a financial advisor to explore your options and eligibility but also not feel overwhelmed during this time of change.
Preparing for military retirement in 2022 and beyond
As mentioned previously, planning ahead is key to a smooth transition to civilian life. Ahead of retirement, take advantage of pre-transition seminars and courses, even if you aren’t planning on retiring for a few more years.
It’s wise to increase contributions to savings accounts during this time to help cushion transition expenses including moving, homebuying, or for lapses in employment. Pre-transition planning is a great time to start thinking about long-term financial goals and research investing or wealth management options, so you can start taking steps to achieve them.
In general, it’s beneficial to discuss retirement plans with your family or spouse well ahead of time, as this often is a decision the whole family needs to make collectively. Many of the military’s education sessions and retirement planning seminars have become available to spouses as well, so it’s wise to have them attend events with you to help you both better understand benefits you're eligible for, and consult with professionals who are well versed in military benefits.
A PCS or retirement from the military can be both an exciting and overwhelming time for you and your family. Whether your PCS is somewhere near or far, or you’re retiring this year or are planning to retire in the next few years, it’s always beneficial to start earlier and consult with a financial advisor who is well versed in military pay structures and financial products to make sure you are maximizing benefits.
Jerry Quinn is a Lieutenant Colonel, U.S. Army Reserve & Chief Operating Officer of the American Armed Forces Mutual Aid Association (AAFMAA), our nation’s longest-standing military financial services and not-for-profit organization.