I would like to take this opportunity to focus on the brave men and women who selflessly dedicate your lives to protecting the freedoms that we all enjoy as American citizens. Growing up in a military family myself, I feel privileged to have the opportunity to show my gratitude for your sacrifices, by supporting you with your financial concerns and helping you plan for your futures.
As a member of the military, you may have some special opportunities, and challenges, when preparing for retirement. It is important for the spouse, as well as the service member, to understand your benefits, and to be involved in the long-term planning process.
MILITARY PENSION OPTIONS
Generally, service members who serve a sufficient time on active duty, or in the Reserves or Guard, may receive retired pay. Generally, if you serve at least 20 years, you may be eligible for a pension that is a percentage of your base pay. This military pension is guaranteed for life, adjusted for inflation, and immediately available upon retirement from military service, regardless of your age. In addition, service members who become disabled, while on active duty, may receive medical disability retired pay.
There are four basic retirement plans: Final Pay, High-36, or Career Status Bonus/REDUX (CSB/REDUX), and Disability. Each plan determines monthly retired pay based on a percentage of the service member’s retired pay base. Retirement pay and how it’s calculated differs depending on the plan. The Final Pay plan is available to service members who entered service before September 8, 1980; High36 is the plan for members entering service between September 8, 1980, and July 31, 1986; and members beginning service on or after August 1, 1986, can choose between the High-36 or CSB/REDUX plan upon reaching 15 years of service. Service members who have been determined to be unfit for duty with a disability may be eligible for Disability retired pay. For more information on military retirement plans, go to militarypay.defense.gov.
Even if you have a pension and/or Social Security, like most civilians, it might not be sufficient to meet your retirement income needs. That’s why it’s important to save for retirement on your own. To help maximize your chances of attaining a financially confident retirement, start with a realistic assessment of how much you’ll need to save. Estimate your annual retirement expenses by using your current expenses as a starting point, realizing that your retirement expenses actually may differ quite significantly. For instance, you may have a mortgage now, but not when you retire, and your health-care expenses may increase during your retirement years.
Next, you will need to determine your resources for estimated future income. Sources of income may include Social Security, military, and private pensions. If your estimated annual retirement expenses exceed your estimated retirement income, the shortfall will have to come from personal savings.
When you know roughly how much money you’ll need, your next step is to map out a savings plan that works for you. As an active service member, you can contribute to the government’s Thrift Savings Plan (TSP). The TSP is a retirement savings plan for federal employees, including military service members. When you make traditional contributions to the TSP, you get the same types of savings and tax benefits as you would if you contributed to a 401(k). It’s simple to contribute; your regular contributions are deducted from your paycheck before taxes, and your contributions and any earnings accumulate tax deferred. You can also opt to make after-tax Roth contributions. They won’t reduce your current tax liability, but qualified withdrawals in retirement will be tax free (assuming IRS requirements are met).
You can enroll, change, or cancel your contributions whenever you’d like. You can contribute as little as 1% or as much as 100% of your basic pay (or a designated dollar amount) each pay period, up to what’s called the elective deferral limit for the year. You may also contribute a percentage of your incentive pay, special pay, bonus pay (but you can’t make catch-up contributions from these types of pay), or tax-exempt pay during deployment, subject to contribution limits.
Withdrawals from a Roth account prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth accounts. Their tax treatment may change.
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