At first glance, the military’s new blended retirement system (BRS) looks like a win for military families.
With lump-sum bonuses and 401(k)-style automatic and matching contributions, even service members who don’t serve to retirement will walk away with some savings. Unfortunately, career service members and their families will have to shoulder increased financial decision-making which could leave them facing a much less secure future.
The BRS’s 20% Problem
Under the new system, guaranteed retirement income will be reduced by 20%. Matching Thrift Savings Plan (TSP) contributions and lump-sum continuation bonuses (distributed between the 8th and 12th years of service) are designed to offset the loss of income.
Still, 20% is a huge shortfall, and the service member family will have sole responsibility for making up the difference. Now, more than ever, practicing smart, consistent financial behaviors is essential to securing the comfortable retirement our military families deserve in return for their commitment and sacrifice.
Matching TSP Contributions Can Fill the Gap
Under the BRS, uniformed service members can take advantage of matching TSP contributions from the DoD, similar to what non-uniformed federal employees have enjoyed for years. Of course, it doesn’t take a math whiz to understand that contributing 1% of your pay won’t leave you with very much in the way of retirement savings, even if the DoD matches that contribution.
A (Not-So-Secret) Strategy for Success
Several obstacles stand between you and a comfortable retirement, but it’s within your power to set yourself and your family up for success. My best advice:
Opt In Early
If you plan to opt into the BRS when it goes into effect January 1, 2018, enroll as early as possible and start contributing to the TSP immediately. This will allow you to maximize matching DoD contributions for a full calendar year. Waiting to make the decision means you’ll miss out on months of free money in the form of matching dollars.
Contribute 5% to Your TSP
Automatic and matching contributions are a key feature of the BRS. To take full advantage of the DoD’s matching dollars, you’ll need to contribute 5% of your pay to the TSP. Contributing anything less is almost like leaving free money on the table.
Make Peace with Your Monthly Budget
Learning to live and spend in a way that allows you save that 5% is critical. Create a monthly budget you can stick to, avoid making purchases on credit, and find ways to enjoy family time together without overspending. Practicing conservative financial behaviors every day is a cornerstone of long-term financial health.
Invest in Funds that Match Your Goals
When you start contributing to the TSP, you are automatically enrolled in a default investment fund. Unfortunately, the current default fund tends to be very conservative and may not keep up with the rate of inflation (meaning less retirement income for you).
The default fund for new investors is changing in 2018 and may better align with your retirement goals, but for those who already have TSP accounts established it will not automatically change. Instead of sticking with the default fund, work with a knowledgeable financial planner who can help you figure out which funds best match your goals and risk tolerance.