Data and Research

Service Members Need Nudging with New Retirement System

Retirement outcome success with the new military retirement system will depend much on participants making best savings decisions.

By Rebecca Moore | March 02, 2016
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Look for the new military retirement system to bring considerable financial uncertainty to the next generation of career military, with many service members and their families facing a potential future of smaller monthly retirement checks than under the current traditional pension program, according to a new white paper by First Command Financial Services, Inc.

Service members who enter military service on or after January 1, 2018, will face a new military retirement system that replaces the traditional 20-year pension with a blended program that includes a reduced pension in exchange for a lump-sum bonus and a new matching funds program through the government’s Thrift Savings Plan (TSP). A previous study by First Command found service members who expect to make a career out of the military prefer to stick with a traditional pension rather than opt for the retirement reforms recently proposed by Congress.

Based on a detailed analysis of the future finances of two hypothetical career military members (one enlisted, one officer), the white paper projects that service members who fail to save a sufficient portion of their basic pay and all of their lump sum bonus—and invest both in recommended fund offerings through the TSP—are at risk of receiving monthly retired pay that could be considerably smaller than the size of monthly paychecks under the current 20-year pension.

In one example, First Command projects that a service member who does not take the necessary actions to earn matching contributions and save the lump-sum bonus is at risk of receiving monthly retired pay that could fall 18% short of what it does under the current pension system. Overly conservative investment choices and lower-than-anticipated stock market performance are among additional factors that could reduce the size of monthly retired paychecks.

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