The Military Wallet» Retirement

How Military Service Affects Your Social Security Benefits

Ryan — Tue, 16 Mar 2010 02:21:13 +0000

Did you know that your military service may affect your Social Security benefits? This is a little known benefit that affects many current and former military members. It’s important for every member of the armed forces to know how their military service affects their Social Security benefits—regardless of current age. This will help you better prepare for your retirement. Let’s consider what you’re eligible to receive and how military service will affect Social Security benefits for you and your family.

How Military Service Affects Social Security Benefits – service years 1940-1956

One of the biggest concerns people have is regarding their time served between 1940 and 1956. Social Security taxes weren’t automatically taken out of military paychecks at that time. But the government has worked out a plan that will pay you $160 for each month you served during those years. This applies to service from September 16, 1940, through December 31, 1956, as long as you meet certain requirements:

You must have been honorably discharged after you had served a minimum of 90 days: or
You were injured or were disabled in the line of duty and were released; or
You’re still active; or
You apply for survivor benefits because the veteran passed away during active duty.

There are other things that will be taken into consideration so be sure to ask the Social Security office for details.

How Military Service Affects Social Security Benefits – post 1956

The good news is that if you served in the military anytime after 1956, you paid the Social Security taxes, just like civilians do. There are credits you will receive if certain circumstances are met.

If you served between 1957 and 1967 you’ll receive extra credits when you apply for Social Security.
If you served between 1968 and 2001 these credits have been added to your record.
If you served after 2001 you won’t receive extra credits.

These extra credits are converted into money that you’ll receive in addition to your standard Social Security benefits. The income will range from $100 for every $300 in active duty pay you received up to $1200 for each year to $300 a quarter in which you served. This is based on the years you served.

The Social Security Administration should handle this process when you apply for Social Security Benefits when you apply, or your service may already be accounted for. However, it’s always a good idea to verify this information – and just one more reason why your DD Form 214 (record of military service) is so important!

Use this information to assist retirement planning

When you know how military service affects your Social Security benefits, you’ll feel more comfortable about retiring. You’ll also feel better about your family applying for survivor benefits when you pass away.

When you become of age to start drawing Social Security, not only will you receive your normal Social Security benefits, you’ll also receive added benefits for serving in the military if you served in the years mentioned above. Remember to verify you are receiving this additional benefit. You should also double check for this benefit when applying for Social Security survivor benefits to make sure survivors are receiving the additional military service credits.

Having the added Social Security benefits in addition to military retirement pay or other retirement investments such as the Thrift Savings Plan or a Roth IRA can help you secure your finances and afford to live a comfortable retirement.

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Is Military Retirement Pay Enough to Retire On?

Ryan — Wed, 10 Mar 2010 14:55:38 +0000

Military retirees have one of the best pension plans in the US. After only 20 years, military retirees can retire with 50% of their basic pay, full medical coverage, and a slew of other benefits that will stay with them throughout the remainder of their lives. It is not a stretch to say that a military retirement is worth millions over the life of the retiree.

Considering that one can begin receiving retirement benefits around age 40 and potentially receive the benefits for another 40 years or more, this is an extremely good deal. But is it enough to live off for the rest of your life?

Can you live off military retirement?

For most people retiring from the military services after 20 years, the answer is most likely “no.” 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, especially for many retired enlisted military members who bring in $20,000-$30,000 per year.

Living on military retirement pay becomes even more difficult if you have a mortgage, credit card debt, a car loan, and other regular payments. I many cases, a military pension is a great financial blessing, but it may not be enough to live on.

Making it work – living off military retirement pay

Not everyone can make a living from a military pension, but there are some people who are able to do it. One example is a couple who both retired from the military and had their story featured in CNN Money. They both are military retirees who will receive a combined $58,500 per year in military retirement pay, in addition to other military retiree benefits such as medical care. This is not a bad sum of money for not doing anymore work for the remainder of their lives!

Even with their retirement pay and health benefits, there are some potential roadblocks to their plan not to work anymore. Their retirement pay currently covers their fixed costs including their mortgage and other regular bills. But it won’t give them a lot of freedom if they need to support their children through college, or have many unexpected large expenses arise. Even something like taking a family vacation will need to be carefully planned.

I think it may be possible for them to do it, but I imagine that after awhile they will want to find some source of work to keep them occupied. It may not be a traditional 9-5 job, but it may be a part time job, or a hobby that provides them income.

The most important thing about their situation is this: their military retirement pay and benefits are giving them the option and freedom to decide whether or not they work. The freedom of bringing in $58,500 per year without doing anything else gives them the opportunity to work, or choose more rewarding work if they decide to do that. That is a beautiful thing!

How to stretch your military retirement pay

The key to being able to retire on your military pension is paying off as many loans and credit cards as possible before you officially retire from the military. Debt is the quickest way to enslave yourself and tie up your future pension checks. But eliminating your debt gives you the opportunity to use your money for more important things, such as your regular living expenses, vacations, and other enjoyable activities.

Another important factor in military retirement is the addition of other sources of retirement funds, especially those which will be available to you later, when inflation erodes the relative value of your military retirement pension. That is why it is important to open a Roth IRA, Thrift Savings Plan, or other investments. You can open a TSP account through your military pay unit or you can check out the best IRA brokerages for good places to start your civilian retirement plan.
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Choosing Between a Roth IRA and a Traditional IRA

Ryan — Sat, 07 Nov 2009 16:53:14 +0000

Opening an IRA is a great way to save for retirement because it gives you the opportunity to make tax advantaged contributions which may produce larger gains than investing in an account without similar tax advantages (where are the best Roth IRA rates?). Most people are eligible to open Traditional and Roth IRAs, and depending on your financial situation, one of the two may be better than the other.

Comparing Traditional and Roth IRAs

Both a Traditional IRA and Roth IRA have certain tax advantages that make them good options for your retirement investments. The main difference is that a Traditional IRA is a tax deferred retirement plan, and a Roth IRA is a tax exempt retirement plan.

How Traditional and Roth IRAs work

The main difference between the two individual retirement plans is when you pay taxes on the money and when/if you are required to make minimum distributions.

How Traditional IRAs Work. Traditional IRA contributions are made with pre-tax money which will grow without taxes until you make withdrawals in retirement age, or under certain circumstances. The tax benefit will be recorded when you file your taxes next year, usually by reducing your taxable income by the amount of the contribution if you are eligible to contribute to a tax deductible Traditional IRA based on your income.

To find out if you are eligible for tax deductible contributions check out the 2009 IRA contribution limits, or 2010 IRA contribution limits. Withdrawals from Traditional IRAs are taxed at the time of distribution. Traditional IRAs are also subjected to required minimum distributions starting at age 70½, regardless of whether or not you feel the need to make withdrawals.

Beware of early withdrawal penalties. Making withdrawals before you reach retirement age may subject you to early withdrawal penalties, which can cost you a 10% penalty and you have to immediately pay taxes on the amount you withdraw. So you can end up losing a large portion of your retirement fund by making early withdrawals.

How Roth IRAs Work. Roth IRA contributions are made with money that has already been taxed and contributions are not tax deductible when you make them. However, since the contributions were made with money that has already been taxed qualified distributions can be made tax free. There are no required minimum distributions for Roth IRAs, which gives you more flexibility in retirement. Please see the links above for Roth IRA income and contribution limits for more information about Roth IRA eligibility. Early withdrawal rules still apply, however, there are certain other tax rules that permit withdrawals for events such as buying your first house, paying for college and certain other events. Please visit the IRS website or contact a tax professional for more details.

Which is better Traditional or Roth IRA?

Investing with a Traditional or Roth IRA gives you the opportunity for tax diversification and more flexibility in retirement. There are many factors to consider when comparing Roth and Traditional IRAs, including your current tax bracket and your expected tax bracket in retirement. You also need to consider current income, Roth or Traditional IRA eligibility, contribution limits and required minimum withdrawal requirements. Tax free Traditional IRA contributions phase out at lower income levels than Roth IRAs, so you may consider a Roth if you cannot receive the tax deductions from a Traditional IRA. There are also minimum withdrawal requirements for Traditional IRAs, while Roth IRAs do not have a required minimum distribution.

Opening an IRA. Here is more information about what to look for when opening an IRA, and where to open an IRA.

Which is better? Many financial experts recommend Roth IRAs if you are eligible because they offer tax free withdrawals and other benefits such as higher income levels for eligibility and no required minimum distributions. Overall, they offer more flexibility than Traditional IRAs.
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Should I Make an Early Withdrawal from My Retirement Account?

Ryan — Mon, 21 Sep 2009 11:56:42 +0000

Balancing long term and short term financial goals can be difficult – something always pops up. Whether it’s debt, a major purchase, or an unexpected expense, it can be tempting to dip into your retirement savings for the cash to take care of your new expense. The problem is unless you are at retirement age, you actually don’t get the amount that is in your retirement account because taxes and penalties will eat up a large portion of that. You are also hurting your long term financial plans.

So should you make an early withdrawal from your retirement funds to pay down debt, finish a home improvement project, or take care of another expense? Let’s look at a situation and see how it works.

I am a self employed carpenter in a time when there isn’t much worse to be. I had started an addition to my home of 1500 sq ft. and got to the point of being within about 12 grand of finishing it. I can use the square footage to get a refi that would lower the overall payment quite a bit and pay off a card or two except that the house has to be finished to count.

I have a self employed retirement account with about 8000. in it. I have been in this account for about two years and am down about 800 bucks. In other words, no gains. I think that the prior account was a loser for me also. I want to take all but a grand out to finish the addition so I can get the refi loan which may save me near 600 a month. Will I have to pay fines on no gains? If so, would it be worth it to take the fines as the savings will be so good on the new refi?

Thanks, Peter

Should I Make an Early Withdrawal from My Retirement Account?

Peter, great question. Refinancing your mortgage to save about $600 per month is a great way to increase your cash flow and gives you the option to pay down your mortgage or other debts, increase retirement savings, or save for a rainy day. But withdrawing from your retirement account may not be the best way to do that.

Early withdrawal penalties and taxes. Making early withdrawals from a qualified retirement account can subject you to early withdrawal penalties, in addition to any taxes you may owe on the income (earnings for Solo 401k plans and SEP IRAs are contributed before paying taxes, as are contributions for an employer sponsored 401k plan). Basically, you are looking at having to immediately pay taxes and penalties on your withdrawal. For example, you could expect to pay anywhere from 15-25% taxes on the withdrawal, plus 10% penalties, for a total withdrawal of 25-35% less than face value.

So instead of withdrawing $7,000, you would only get $4,550 – $5,250. You would lose several thousand dollars in the process. Instead of being able to use that money to finish the repairs on your house, the money would go straight to the government.

Regarding investment losses in a retirement plan. I wouldn’t worry much about being down $800 right now. The markets have been through a rough time in the last year or two, and almost everything is down (almost directly due to the state of the economy). Over time your investments should regain their value, and hopefully continue to grow as you get closer to retirement. Remember, retirement investing is a long term goal. With your retirement accounts you should be thinking in terms of when you can withdraw them without penalties – usually around age 59 1/2.

Should you cash out? Between penalties and taxes, you would only be able to complete less than half your renovation job (it requires $12,000 and you would only get $4,550 – $5,250 from your withdrawal). You would be giving up a huge percentage of your retirement investments and you are also setting yourself back further when it comes to retirement planning.

How will you make up the difference in your retirement accounts? Will you be able to contribute more toward retirement if you are able to refinance your mortgage? If not, you may be setting yourself back several years and need to work longer because you can’t afford to retire.

I can’t tell you which decision to make – but I hope this article helps you make a decision. Best of luck.
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Is REDUX Retirement Worth it?

Ryan — Mon, 27 Jul 2009 02:50:38 +0000

I recently received a reader question regarding the CSB / REDUX Retirement System and whether or not it was worth it to take the cash and reduced retirement pay, or stick with the High 3 Retirement System. In almost every situation, the High 3 Retirement System results in a higher monthly pension for military retirees. But let’s break it down so you can learn how to make your own decision and decide whether you should choose the CSB / REDUX Retirement System or the High 3 Retirement System.

What is the CSB / REDUX Retirement System?

The CSB / REDUX Retirement System was created by the Military Reform Act of 1986, and applies to all military members who joined on or after August 1, 1986. The system was designed to save the government money when paying out military retirement pensions to the ever growing number of military retirees.

How REDUX works: The REDUX Retirement System pays out a $30,000 Career Status Bonus at the 15 year mark to military personnel who select the REDUX retirement plan. In addition to the $30,000 Career Status Bonus, military retirees will receive a reduced military pension compared to the High 3 retirement plan, and a lower annual Cost of Living Adjustment (COLA).

Cost of Living Adjustments (COLA) for retired pay are given annually based on the increase in the Consumer Price Index (CPI), a measure of inflation. Under REDUX, the COLA is equal to CPI minus 1%. Here are more details about the REDUX Retirement System.

REDUX Retirement system:

$30,000 Career Status Bonus.

40% monthly retirement at 20 years, plus 3.5% per additional year.

*Maximum monthly retirement benefit 75% of base pay at 30 years.

COLA = CPI -1%.

*Some military members may be eligible to retire at 100% base pay after 40 years of service, depending on high year tenure status, military needs, and other factors.

The High 3 Average Retirement System

The high 3 Average retirement System pays an average basic pay for the highest 36 months of the individual’s career. The High-3 Average Retirement System does not come with a cash bonus, but base retirement pay and COLA accrue more quickly than under the REDUX plan.

Cost of Living Adjustments (COLA) are given annually based on the increase in the Consumer Price Index (CPI); under the High-3, the annual COLA is equal to CPI.

REDUX Retirement System:

50% monthly retirement at 20 years, plus 2.5% per additional year.

*Maximum monthly retirement benefit 75% of base pay at 30 years.

COLA = CPI.

*Some military members may be eligible to retire at 100% base pay after 40 years of service, depending on high year tenure status, military needs, and other factors.

Which military retirement plan is better – REDUX or High 3?

It is possible to receive the same percentage of your final pay with both retirement plans, however, you would need to serve 30 years under REDUX to receive the same amount as you would receive if you retire under the High 3 retirement plan. Retirees under the REDUX plan will accrue lower COLA increases to their retirement pay, so even if the retiree completed 30 years and ended with the same base pay they would have had under the High-3 retirement system, a gap will steadily grow between the amount they receive under REDUX vs. what they would have had under High-3.

REDUX Adjustment at Age 62. To counter the pay gap between the two retirement systems, retirees under REDUX receive an adjustment at age 62 to bring their retirement pay up to the level it would have been under the High-3 retirement system. However, the COLA remains at CPI – 1, and the gap begins to widen once again. Over the course of a lifetime, the difference can easily reach into the hundreds of thousands of dollars, and for higher ranking individuals, the difference can reach well into the million dollar range.

Military Retirement Calculators

I recommend visiting the DoD Retirement Calculators for additional information:

High-3 Retirement System.

CSB/REDUX Retirement System.

High-3 and CSB/REDUX Comparison.

When you compare the REDUX Retirement System to the High 3 retirement plan, you can see how the difference between the two plans can add up quickly. Unfortunately, the $30,000 bonus is sometimes enough money to entice many military members to mortgage their future pension.

Your situation may differ, so I encourage you to examine your situation, play with hte calculators, and speak with a professional advisor for more information.
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2009 Retirement Plan Contribution Limits

Ryan — Mon, 19 Jan 2009 10:09:02 +0000

The IRS has made a few changes to federal tax brackets and increased the maximum contribution levels of several retirement plans for 2009. The big changes came to employee sponsored deferral programs such as the Thrift Savings Plan and the 401(k) plan – and similar plans such as the 403b, 457, 401a Plans.

Retirement Plan Contribution Limits for 2009

401(k) contribution limits: $16,500 (under age 50); $22,000 (over age 50)

Roth and Traditional IRA contribution limits: $5,000 (under age 50); $6,000 (over age 50)

Thrift Savings Plan contribution limits: $16,500 (under age 50); $22,000 (over age 50)

Future retirement plan contribution limits will be pegged to inflation levels and raised in $500 increments.

Contribute as much as you can now

It’s best to contribute as much as you can contribute to your retirement accounts because that gives your money more time to grow via compound interest. If the current markets make you nervous, then consider placing your money in a high interest money market account or a CD until you feel more comfortable investing the money in equities. Most retirement accounts have a cash fund or cash equivalent, which leaves you no excuse not to start investing now!
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Ohio Military Retirement Pay Tax Exemption Bill

Ryan — Tue, 29 Jan 2008 12:12:17 +0000

Congratulations to all military retirees in the State of Ohio! Veterans who receive military pensions no longer will have state income taxes taken from their monthly retirement checks.

On 20 Dec 2007, Ohio Governor Ted Strickland signed legislation that exempts military pensions from state income tax. House Bill 372 allows tax exemption of military retirement pay, along with other benefits including prevention measures for discrimination against veterans.

Ohio joins a long list of other states that exempt some or all state income taxes for military retirement pay:

Alabama

Alaska

Arkansas*

Colorado*

Delaware*

Florida

Georgia*

Hawaii

Illinois

Indiana*

Iowa*

Kansas

Kentucky*

Louisiana

Maryland*

Massachusetts

Michigan

Mississippi

Missouri*

Nevada

New Hampshire

New Jersey*

New York

North Carolina*

North Dakota*

Ohio (tax year 2008)

Oklahoma*

Oregon*

Pennsylvania

South Carolina*

South Dakota

Tennessee

Texas

Washington

Washington DC *

West Virginia*

Wisconsin

Wyoming

*These states have some exclusions based on age, income level, or amount of military retirement pay excluded from taxes. For more information be sure to check with your state’s tax board.
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