How to Plan For Military Retirement
Military retirement planning can seem daunting. Coming up with a precise number is nearly impossible, and that’s okay. An educated estimate can set you on the right path to future financial security.
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It seems like such a daunting task. The mountain climb to the summit of retirement is quite the hike, with many obstacles that can send you tumbling down the trail.
Knowing you might need to save $1 million, $5 million, or more can make saving for retirement seem impossible.
This is why the earlier you begin planning for retirement, the better. In fact, military members should start planning as soon as possible since, by itself, a military pension might not be enough money for retirement, especially for Reserve Component members, who may be retirement eligible close to age 40 but may have to wait until age 60 to receive retirement pay.
Whether you’re planning to use a military retirement plan or shifting to the civilian sector, the following tips can help you understand how to plan for retirement and maximize your military benefits.
Step 1: Determine Your Retirement Income Needs
When your retirement date is several decades away, it can be challenging to know your future income needs. You have to estimate future lifestyle requirements, factor in inflation, rising TRICARE costs and health expenses, and various other factors.
Still, an educated guess can serve as a helpful saving guide. We’ve created an example you can easily adjust based on your information.
If you want to maintain a similar quality of life in retirement as you have now, start by using your current income and then adjust for inflation.
Inflation erodes the purchasing power of money over time, meaning that the same amount of money won’t buy the same goods and services in the future as it does today. This impacts the ability to maintain your standard of living during retirement.
Calculate Inflation Adjusted Income
You can use the following equation to adjust your current yearly income for inflation:
Inflation Adjusted Income = Current Yearly Income * ((1 + Inflation Rate)^Number of Years to Retirement)
Example:
You currently make $50,000 per year, you have 20 years before retirement, and the projected rate of inflation is 3%.
You would calculate $50,000 * (1.03 ^ 20) = $90,305 (rounded).
This means that accounting for inflation, you will need to plan for approximately $90,305 per year to maintain the same standard of living in 25 years as you enjoy now. To put this in perspective, say you retire at 50 and expect to live until 85. You would need to save approximately $3,200,000 to maintain the same standard of living until death.
Remember, this number is only valid if you wish to uphold the same quality of life that you currently maintain. Many retirees have lower income needs because their children can support themselves, or they decide to downsize their home.
Keep this in mind when you’re calculating your future retirement needs.
Step 2: Account for Retirement Accounts and Investments
You also need to account for your retirement income, such as Social Security benefits and your military or private pension(s). Once you have this number, subtract it from your projected annual income of $90,305.
For example, if you anticipate your military pension and Social Security Benefits to be worth $50,000 per year. You would subtract $50,000 from $90,305 to find how much additional savings you will need to maintain your future quality of life. In this example, you would need an additional $40,305 per year.
Remember to factor in all forms of retirement and investment income you will have access to. Military members have access to the Thrift Savings Plan (TSP), similar to a civilian 401(k) plan.
Like a 401(k) plan, the TSP offers military members a way to make tax-deferred investments – meaning you don’t have to pay taxes on earnings or contributions until the funds are withdrawn. There is also a Roth version of the TSP, giving military members another retirement account option.
Once you have a good idea of how much you will earn from your pensions, retirement accounts, and other investments, you can subtract these numbers from your annual income requirements to get a better idea of how much more money you need to save for retirement. This will be your savings goal.
Step 3: Maximize Post-Military Employment and Investments
Many military members are eligible to start earning a military pension in their late 30’s or early 40’s, which is young enough to begin a post-military career.
In some cases, veterans can earn enough service time to gain another pension from a private company or a different government organization. The possibility of multiple pensions, in addition to Social Security Benefits, can significantly increase your quality of life in retirement and potentially allow you to retire more quickly than anticipated.
Even if you aren’t able to receive another pension from your post-military employment, you can do your best to increase your savings in retirement accounts such as the TSP if you remain in government service or through a Roth IRA or 401k. Contributing as much as you can to these retirement accounts will help provide you with the retirement income you need to maintain a comfortable quality of life in your retirement years.
Step 4: Take Advantage of All Benefits Available to You
There are a variety of state and federal benefits available to veterans, including health care, base and commissary privileges, educational benefits, and more. There are also unique ways to save, like retiring in a state with income tax exemptions on military retirement pay.
It is highly recommended to meet with an accredited veterans benefits advisor in your local area who can help you better understand what benefits are available to you and how to qualify and apply for those benefits.
This guide covers a few basic assumptions and should only be a rough guide for do-it-yourself investors. It is highly recommended that you meet with a professional financial planner before making the final decision to retire. If you are younger, you should meet with a financial planner every few years to ensure your retirement plan is on track.
