Military Retirement

January 31, 2022

9153 / What is the legacy retirement system for active servicemembers?

<div class="Section1">To participate in the legacy retirement system, both reserve and active component servicemembers must complete of 20 years of qualifying service.<a href="#_ftn1" name="_ftnref1">1</a> Active duty servicemembers must complete 20 years of honorable service to qualify for retirement. Upon qualification for retirement, the servicemembers can calculate their retirement pay by determining which of the three active duty, legacy pay structures they fall under. The first legacy retirement pay plan is called the Final Pay plan. This plan pays a pension to the servicemember of 2.5 percent times the number of years of service times the servicemember’s final basic pay on the day of retirement. The Final Pay plan is only available to servicemembers who entered service before September 8, 1980.The second legacy retirement pay plan is called the High-36. The High-36 pays a pension to the servicemember based on a formula. That formula equals (1) 2.5 percent times the number of years of service (2) times the average of the member’s highest 36 months of basic pay. The 2.5 percent multiplier is increased as the servicemember continues to serve beyond 20 years and caps at 41 years of service. At 30 years of service, using any of the three retirement pay plans, servicemembers receive 75 percent of their base pay. The High-36 is the most widely seen for servicemembers who are entered service between 1980 and 2017. A lesser-known retirement plan option for servicemembers who entered service after July 1986 but before January 2018 is the REDUX plan. REDUX allowed, until January 2018, servicemembers to opt for a career status bonus of $30,000 in a lump sum payment at their 15th year of service with an obligation to serve at least another five years. Upon retirement, the servicemember then has their defined benefit pension pay at 2.5 percent the number of years of service times the average of their highest 36 months of basic pay, but the multiplier is reduced by 1 percent for each year less than 30 years of service until age 62. After age 62, the retiree receives the full multiplier, 2.5 percent. The lump sum payment can be contributed to the servicemember’s thrift savings plan or receive the distribution outright.<a href="#_ftn2" name="_ftnref2">2</a> Upon retirement, active duty servicemembers are entitled to receive their defined benefit pension payments. <hr> Planning Point: For a typical active duty servicemember who retires after 20 years of service, this means that they begin to receive their pension somewhere between the ages of 38 to 42 assuming that they enter active duty shortly after high school or upon graduation from an undergraduate program. Assuming a life expectancy of 80 years of age for retirees, the active duty veteran must make a pay plan decision at retirement that will serve as the foundation of over 40 years of retirement pay. Justin L. Baker, JD, MBA, Army Reserve Lieutenant Colonel, Candidate for LLM in Wealth Management and Masters in Strategic Studies at the U.S. Army War College;https://www.bakerwealthstrategies.com/welcome/ <hr> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.“Military Pay.” Military Compensation, militarypay.defense.gov/Pay/Retirement.aspx <a href="#_ftnref2" name="_ftn2">2</a>.Department of Defense Factsheet on Career Status Bonus, Department of Defense, 2013: 26 </div></div>

January 31, 2022

9157 / What types of disability benefits are available to retired servicemembers?

<div class="Section1">Some retirees from the armed services also receive compensation from the Veterans Affairs Administration for disabilities related to their military service along with traditional retirement pay. There are a variety of service-related disability programs within the VA system, but the scope of this paper will cover those that coincide with traditional retirement pay.Historically, a retiree’s monthly pension benefit was docked by the amount the veteran received in service-related disability pay by the VA.<a href="#_ftn1" name="_ftnref1">1</a> This was referred to as the VA waiver program.<a href="#_ftn2" name="_ftnref2">2</a> The premise of the VA waiver program was that receiving pay for a disability incurred during military service and receiving retirement pay for military service was a prohibited form of double-dipping from government compensation. The phaseout of that aspect of the VA waiver program began in 2004, and it was completely phased out in 2014. There are two primary systems that disabled retirees can use to receive their full retirement defined benefit as well as VA disability pay concurrently. The first system is the Concurrent Retirement and Disability Pay (CRDP) program, and the other system is the Combat-Related Special Compensation (CRSC) program. The programs have several similarities, and veterans can qualify for both, but they may only participate in one.<a href="#_ftn3" name="_ftnref3">3</a> As the names indicate, CRDP allows retirees who receive both traditional retirement pay and VA disability pay at the same time. To be eligible for the program, a veteran must be eligible to receive traditional retirement pay from his or her branch of service. Additionally, the veteran must be rated as 50 percent or more disabled by the VA.<a href="#_ftn4" name="_ftnref4">4</a> If a veteran is eligible for only CRDP, then he or she will be automatically enrolled in the program. If a veteran is eligible for both, then he or she must select which program to participate in.<a href="#_ftn5" name="_ftnref5">5</a> As an example of how the CRDP program works, a retired veteran who was diagnosed with sleep apnea requiring a CPAP machine is generally entitled to a 50 percent disability rating which triggers enrollment in CRDP. If the retired, disabled veteran has a 50 percent disability rating, a spouse, and two minor children, then he would receive $1,086.43 in disability pay from the VA that is not subject to federal income taxation.<a href="#_ftn6" name="_ftnref6">6</a> The veteran would also receive his full monthly retirement pay, and it would be fully taxable for federal income tax purposes. The CRSC program is similar to CRDP, but it has some key differences. The first is that the retired veteran must be at least 10 percent disabled from combat-related injuries, as determined by the VA.<a href="#_ftn7" name="_ftnref7">7</a> Only the combat-related portion of the overall disability rating is eligible for CRSC. For instance, if a veteran had an overall disability rating from the VA of 70 percent, but only 40 percent of the rating was due to combat-related disabilities, then the veteran would be eligible to have 40 percent of his disability pay included. Like the CRDP, the veteran must be eligible to receive traditional retirement benefits from the armed services. Rather than supplanting the VA waiver, the CRSC reimburses the veteran for the amount that the VA waiver reduces the veteran’s regular retirement check. The reimbursement through the CRSC is with federal income tax-free dollars.<a href="#_ftn8" name="_ftnref8">8</a> The veteran in this scenario receives three monthly checks. The first check is from the VA for the disability pay. The second check is from the Defense Finance and Accounting Service (DFAS) for the monthly retirement benefit minus the VA waiver deduction for the disability pay. The third check is from the CRSC program with a federal income tax-free reimbursement of the VA waiver deduction.<a href="#_ftn9" name="_ftnref9">9</a> As an example of how the CRSC works, a retired veteran who has a 50 percent combat-related disability with a spouse and two minor children receives $1,086.43 in VA disability benefits that are free from federal income tax. If the veteran was entitled to $3,000 per month in traditional retirement pay benefits, then his check from DFAS would be $1,913.57 ($3,000-$1,086.43), and it would be countable as ordinary income for federal income tax purposes. The veteran would also receive a check from the CRSC for the VA waiver amount of $1,086.43 that is also free from federal income taxation. The CRDP and CRSC programs are available for both active and reserve component retirees. CRSC must be applied for by the servicemember and approved by the service branch. The CRDP is an automatic enrollment for eligible retirees. Reserve component retirees begin their participation when they reach their full retirement age, presumably age 60 but may be sooner if active duty reductions apply. Active duty retirees begin their participation when they begin receiving their defined retirement benefit pay. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.Defense Finance Accounting Service (DFAS), www.dfas.mil/retiredmilitary/disability/crdp/ <a href="#_ftnref2" name="_ftn2">2</a>.“CRDP Resources.” MOAA, 19 Sept. 2019, www.moaa.org/content/benefits-and-discounts/pay-and-benefits/military-pay-benefits/crdp/ <a href="#_ftnref3" name="_ftn3">3</a>.Defense Finance Accounting Service (DFAS), www.dfas.mil/retiredmilitary/disability/comparison/ <a href="#_ftnref4" name="_ftn4">4</a>.“CRDP and CRSC: Concurrent Receipt Explained.” CCK Law, 9 May 2020, cck-law.com/blog/crdp-and-crsc-concurrent-receipt-explained/ <a href="#_ftnref5" name="_ftn5">5</a>.Defense Finance Accounting Service (DFAS), www.dfas.mil/retiredmilitary/disability/comparison/ <a href="#_ftnref6" name="_ftn6">6</a>.“2020 Veterans Disability Compensation Rates.” Veterans Affairs, www.va.gov/disability/compensation-rates/veteran-rates/. <a href="#_ftnref7" name="_ftn7">7</a>.Defense Finance Accounting Service (DFAS), www.dfas.mil/retiredmilitary/disability/comparison/. <a href="#_ftnref8" name="_ftn8">8</a>.United States Army, https://myarmybenefits.us.army.mil/Benefit-Library/Federal-Benefits/Combat-Related-Special-Compensation- (CRSC)-?serv=128 <a href="#_ftnref9" name="_ftn9">9</a>.“MOAA’s CRSC Guidance.” MOAA, 19 Sept. 2019, www.moaa.org/content/benefits-and-discounts/pay-and-benefits/military-pay-benefits/crsc/ </div></div>

January 31, 2022

9155 / What is the blended retirement system that is available for military servicemembers?

<div class="Section1"> The Department of Defense instituted a new retirement plan that started on January 1, 2018 called the Blended Retirement System (BRS).<a href="#_ftn1" name="_ftnref1">1</a> BRS is a combination of defined benefit and defined contribution pension plans. This new retirement plan is mandatory for active and reserve component servicemembers who entered the military on or after January 1, 2018.<a href="#_ftn2" name="_ftnref2">2</a> BRS was available to opt into for active duty servicemembers who had less than 12 years of service on December 17, 2017 and for reserve servicemembers who had fewer than 4,324 retirement points as of December 17, 2017.BRS combines familiar aspects of the legacy retirement plans’ defined benefit pension calculation but also provides for defined contributions into the Thrift Savings Plan (TSP). The defined benefit calculation for active and reserve components uses the High-36 calculation for Basic Pay times the 2.0 percent multiplier (rather than the 2.5 percent multiplier) times the creditable years of service. This means that a servicemember who completes 20 years of military service will receive 40 percent of his or her High-36 Basic Pay upon eligibility for retirement benefits. The defined contribution calculation is based on a combination of guaranteed contributions by the government to the TSP and matching contributions made by the servicemember to the TSP. The government agrees to contribute 1 percent of the servicemember’s base pay upon entry into the military. The servicemember is automatically enrolled to contribute 3 percent of his or her base pay upon entry. Upon completion of two years of service, the government will match up to 4 percent of the servicemember’s contribution and continue to contribute the automatic 1 percent. This means that a servicemember could contribute 5 percent of his or her base pay, receive the obligatory 1 percent and matching 4 percent from the government and put a total of 10 percent of the base pay in the TSP for an annual, tax-deferred retirement contributions. In addition to the defined benefit pension and contribution plans, the BRS offers retiring servicemembers the option to take a lump sum payment of retirement pay of 25 percent or 50 percent. The lump sum payment is reduced to present value using published DoD annual rates. Selecting the 25 percent or 50 percent lump sum payment reduces the retiree’s monthly pension payment by the lump sum percent selected (i.e. 25 percent or 50 percent) until the veteran reaches 67, the full Social Security retirement age. The monthly pension payment returns to 100 percent after the retiree reaches the Social Security full retirement age, which will presumably still be 67. The payments may be made in up to four consecutive annual installments. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.The National Guard - Official Website of the National Guard, https://www.nationalguard.mil/ <a href="#_ftnref2" name="_ftn2">2</a>. “Military Pay.” Military Compensation at militarypay.defense.gov/Pay/Retirement.aspx </div></div>

January 31, 2022

9159 / What are some of the risks that members of the armed services should be aware of when planning for retirement?

<div class="Section1"> The National Debt and Taxes Having reviewed the main retirement income benefits available to retirees of the armed services – defined benefit pension plan with a survivor benefit option, service-related disability benefits, and the Thrift Savings Plan – it follows that an analysis of risks to that income receive some consideration. The first risk to consider is the role of federal income tax. Since the inception of a federal income tax, the highest marginal rates have historically ranged from 94 percent to 28 percent, while effective tax rates have ranged from 82 percent to 18.6 percent.<a href="#_ftn1" name="_ftnref1">1</a> The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the top marginal tax bracket to 37 percent and raised the income limits that put individual and married taxpayers in that bracket. The standard deduction was doubled for taxpayers as well. The TCJA is scheduled to sunset on December 31, 2025, and the federal income tax rates in place and standard deductions prior to the enactment of the TCJA will resume.<a href="#_ftn2" name="_ftnref2">2</a> Additionally, the TCJA could be repealed prior to its sunset based on changes in political control. Adding to the likelihood of a higher federal income tax rate in the future is the burgeoning national debt. As of 2023, the national debt was recorded at about $32.6 trillion.<a href="#_ftn3" name="_ftnref3">3</a> This figure does not account for unfunded obligations such as government pensions, Social Security, interest on the U.S. debt, Medicaid, and Medicare.<a href="#_ftn4" name="_ftnref4">4</a> Several noted certified public accountants and PhD economists agree that the current debt trajectory will lead to a future requirement for the federal government to both reduce spending and increase revenue. In 2010, Admiral Michael Mullen, former Chairman of the Joint Chiefs of Staff referred to the national debt as “the most significant threat to our national security.”<a href="#_ftn5" name="_ftnref5">5</a> Janet Yellen, the former Chair of the Federal Reserve and U.S. Treasury Secretary, commented in an interview that if she “had a magic wand, she would raise taxes” to address the national debt.<a href="#_ftn6" name="_ftnref6">6</a> David Wessel, Director of the Hutchins Center on Fiscal and Monetary Policy, cited Congressional Budget Office reports on projected debt levels to argue that both an increase in federal taxes and a decrease in spending obligations are necessary to stem the tide of further insolvency.<a href="#_ftn7" name="_ftnref7">7</a> A panel of economists, national security experts, and other subject matter experts including, among others, Madeleine Albright, James A. Baker, Henry Kissinger, George P. Shultz, Robert M. Gates, and Paul O’Neill recommended that federal taxes be increased as part of any plan to reduce the national debt.<a href="#_ftn8" name="_ftnref8">8</a> David Walker, a CPA and the former United States Comptroller General, said in an interview on National Public Radio, “[t]here’s absolutely no question that taxes are going to have to go up.”<a href="#_ftn9" name="_ftnref9">9</a> Walker argues that, absent significant action on spending and revenue, the math does not support the United States’ economic viability.<a href="#_ftn10" name="_ftnref10">10</a> To that end, he estimates that “federal taxes could double . . .”<a href="#_ftn11" name="_ftnref11">11</a> Retiree Base Pay and Income Tax If federal income tax rates increase significantly, retirees who rely on defined benefits pension plans and tax-deferred retirement plans risk seeing their after-tax income reduced and retirement savings depleted sooner than expected. Since a retiree’s base retirement pay is taxed as ordinary income, he or she will get to keep less of that pay. Unless the retiree’s cost of living is reduced by an equal amount, then the retiree will have a deficit that must be made up by withdrawals from his or her TSP. This decreases the principal of the TSP faster than contemplated and may lead to the retiree running out of savings during life. Further exacerbating the income tax problem is that the retiree will likely have fewer deductions in the latter years of retirement. If the standard deduction reverts to pre-TCJA levels, then itemizing deductions becomes more appealing. At issue for many retirees is that the popular itemized deductions are state and local taxes, charitable contributions, interest paid, and unreimbursed expenses.<a href="#_ftn12" name="_ftnref12">12</a> While people who are financially charitable during their working years are likely to still be charitable in retirement, it is entirely likely that a retiree may find that he or she has more time than money to donate to charity of their choosing. The IRS does not provide a deduction for a taxpayer’s donated time. Additionally, many retirees have either paid their mortgages off prior to retirement or are primarily paying principal on the loan rather than deductible interest. Since they are no longer working, it logically follows that they do not amass unreimbursed expenses of note. State and local taxes, as well as medical expenses, may make itemizing expenses advisable for some retirees, but the benefit will not be as substantial as it was during their working years. In sum, retirees could have the same income in retirement as in their working years yet find themselves in a higher tax bracket, with the concomitantly reduced spending power, due to having fewer itemized deductions. Social Security and Income Tax Retirees from the Armed Services are entitled to receive Social Security benefits. While the calculations for benefits and age of eligibility to receive benefits are the same for military and civilian retirees, it is still relevant to the tax rate risk analysis of a military retiree to assess how the benefits may be taxed in retirement. Taxation of Social Security benefits may also have an impact on the retiree’s available funds in retirement. The Social Security Administration determines the taxability, if any, of Social Security benefits by calculating what it refers to as provisional income. Provisional income is determined by first calculating a taxpayer’s modified adjusted gross income (MAGI) plus tax-free interest on municipal bonds. The taxpayer’s MAGI plus tax-free interest is then combined with one-half of the taxpayer’s Social Security benefits to arrive at the taxpayer’s provisional income. If provisional income exceeds certain thresholds, then up to 85 percent of the taxpayer’s Social Security benefits are taxed at the taxpayer’s marginal income tax rate.<a href="#_ftn13" name="_ftnref13">13</a> If a single taxpayer has a provisional income below $25,000, or $32,000 for married filing jointly, then none of their Social Security is taxed. If a single taxpayer has provisional income between $25,000 and $34,000, or between $32,000 and $44,000 for married filing jointly, then 50 percent of their Social Security is taxed. If a single taxpayer’s provisional income exceeds $34,000, or $44,000 for married filing jointly, then 85 percent of their Social Security is taxed.<a href="#_ftn14" name="_ftnref14">14</a> By receiving a pension, DoD retirees are essentially guaranteeing they will always pay tax on their Social Security benefits. As a result of these provisional income thresholds remaining unchanged since their inception in 1984, a greater percent of retirees are paying income tax on their Social Security income today than in 1984.<a href="#_ftn15" name="_ftnref15">15</a> It follows then, that an even greater percent of retirees will pay income tax on their Social Security income in the future than do today. Retirees, military or civilian, will again have to evaluate the balance between reducing their cost of living requirements and withdrawing more from available, tax-deferred retirement accounts such as the TSP in order to make up for the increased tax burden. The issue may become even more troublesome as the Social Security trust fund becomes more and more depleted. The Social Security Administration currently projects that it can pay full benefits for the Old Age and Survivors Insurance (OASI) only through 2034 with current funding. At present funding and projected contribution levels, benefits are projected to be provided at 76 percent of OASI scheduled benefits beginning in 2035.<a href="#_ftn16" name="_ftnref16">16</a> Receiving a quarter less of expected benefits and having 50 – 85 percent of those benefits taxed at increased level could clearly have a compounding effect on a retiree’s usable income in retirement. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.Here's the US tax rate on your income for every year since 1913, https://qz.com/74271/income-tax-rates-since-1913/ (last accessed Aug. 23, 2023). <a href="#_ftnref2" name="_ftn1">2</a>.How did the Tax Cuts and Jobs Act change personal taxes?, https://www.taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-personal-taxes (last accessed Aug. 23, 2023). <a href="#_ftnref3" name="_ftn1">3</a>.National Debt. (n.d.). Retrieved August 9, 2022, from https://www.justfacts.com/nationaldebt (last accessed Aug. 23, 2023). <a href="#_ftnref4" name="_ftn1">4</a>.Your Pension Is a Lie: There's $210 Trillion Of Liabilities Our Government Can't Fulfill, https://www.forbes.com/sites/johnmauldin/2017/10/10/your-pension-is-a-lie-theres10-trillion-of-liabilities-our-government-cant-fulfill/ (last accessed Aug. 23, 2023). <a href="#_ftnref5" name="_ftn1">5</a>."Mullen: Debt Is Top National Security Threat." CNN, Cable News Network, 27 Aug. 2010, www.cnn.com/2010/US/08/27/debt.security.mullen/index.html (last accessed Aug. 23, 2023). <a href="#_ftnref6" name="_ftn1">6</a>.Imbert, Fred. "Yellen Says Rising Deficit Is Unsustainable: 'If I Had a Magic Wand, I Would Raise Taxes'." CNBC, CNBC, 31 Oct. 2018, www.cnbc.com/2018/10/30/yellen-says-rising-us-deficit-unsustainable-if-i-had-a-magic-wand-i-would-raise-taxes.html (last accessed Aug. 23, 2023). <a href="#_ftnref7" name="_ftn1">7</a>.Wessel, David. "How Worried Should You Be about the Federal Deficit and Debt?" Brookings, Brookings, 12 Nov. 2019, www.brookings.edu/policy2020/votervital/how-worried-should-you-be-about-the-federal-deficit-and-debt/ (last accessed Aug. 23, 2023). <a href="#_ftnref8" name="_ftn1">8</a>."Group of Distinguished Defense, Economic and Foreign Policy Leaders Identify the National Debt as the Single Greatest Threat to U.S. Nation-al Security." Peter G. Peterson Foundation, 4 Dec. 2012, www.pgpf.org/press-release/2012/12/group-of-distinguished-defense-economic-and-foreign-policy-leaders-identify-the-national-debt-as-the-single-greatest-threat-to-us-national-security (last accessed Aug. 23, 2023). <a href="#_ftnref9" name="_ftn1">9</a>.Amos, Deborah. "Walker: Growing Deficit Threatens Our Future." Morning Edition, National Public Radio, 11 Jan. 2010. <a href="#_ftnref10" name="_ftn1">10</a>.Walker, David. "MY VIEW: David Walker." Committee for a Responsible Federal Budget, 5 Oct. 2012, www.crfb.org/blogs/my-view-david-walker (last accessed Aug. 23, 2023). <a href="#_ftnref11" name="_ftn1">11</a>.Gross, Terry. "After Financial Ruin, Plotting America's 'Comeback'." Fresh Air, National Public Radio, Mar. 9, 2010. <a href="#_ftnref12" name="_ftn1">12</a>.Greenberg, Scott. "The Most Popular Itemized Deductions." Tax Foundation, Tax Foundation, Feb. 29, 2016, taxfoundation.org/most-popular-itemized-deductions/ (last accessed Aug. 23, 2023). <a href="#_ftnref13" name="_ftn1">13</a>.Pattison, David. 1994. "Taxation of Social Security Benefits Under the New Income Tax Provisions: Distributional Estimates for 1994." Social Security Bulletin 57(2): 44. <a href="#_ftnref14" name="_ftn1">14</a>."Social Security." SSA, www.ssa.gov/benefits/retirement/planner/taxes.html (last accessed Aug. 23, 2023). <a href="#_ftnref15" name="_ftn1">15</a>.Purcell, Patrick J. 2015. "Income Taxes on Social Security Benefits." Issue Paper No. 2015-02 (released Dec. 2015). <a href="#_ftnref16" name="_ftn1">16</a>."The 2020 OASDI Trustees Report." Trustees Report Summary, www.ssa.gov/OACT/TRSUM/index.html (last accessed Aug. 23, 2023). </div></div>

January 31, 2022

9161 / What should retired servicemembers understand about expenses related to medical care and long-term care?

<div class="Section1"> The longer a retiree lives, the more likely it becomes that healthcare costs will increase while retirements savings decrease. As retirees age, they are more likely to face ever-increasing healthcare and long-term care (LTC) costs. Additionally, retirees will have used up more of their retirement savings, if any, regardless of changing income tax rates, due to the number of years they have drawn on the savings. The primary concern for retirees regarding longevity is running out of savings and impoverishing a well spouse with the cost of one’s LTC driven by Alzheimer’s disease, dementia, or another serious disease. Medicare and Tricare for Life Like civilians, military retirees are entitled to Medicare. They are also entitled to receive Tricare for Life. Having served for a qualifying period prior to retirement, the military retiree receives Medicare Part A for life with no monthly premium. Medicare Part B premiums, assuming income of $182,000 or less for a married couple filing jointly, cost about $164.90 per month in 2023.<a href="#_ftn1" name="_ftnref1">1</a> Enrollment in Medicare Parts A and B is a requirement for enrollment in the Tricare for Life program. The Tricare for Life (TFL) program is an entitlement benefit for military retirees from the active and reserve components that is provided with no monthly premium and a $150 deductible. TFL is administered by the Department of Defense and is not associated with Medicare.<a href="#_ftn2" name="_ftnref2">2</a> TFL generally covers the medical costs of retirees associated with medical care that Medicare Parts A and B do not fully cover such as doctor visits, urgent care, emergency room visits, and inpatient services. Medicare is billed first and then TFL covers the remaining portion not covered by Medicare. TFL also covers or substantially reduces the cost of prescription drugs for retirees.<a href="#_ftn3" name="_ftnref3">3</a> Long-Term Care Paying for care in a long-term care facility is a separate challenge. Neither Medicare nor TFL cover the costs of LTC, and the VA has limited ability to house most veterans who do not meet VA disability and financial qualification requirements.<a href="#_ftn4" name="_ftnref4">4</a> LTC costs can vary widely, but the national monthly average is currently $6,844 per month for a semi-private room and $7,698 per month for a private room in a nursing home.<a href="#_ftn5" name="_ftnref5">5</a> <hr> Planning Point: For most retirees, a $7,000 monthly expense would have a a serious impact on retirement savings. Learning that Medicare, TFL, and the VA do not cover that expense at the time assistance is needed could be financially devastating to the veteran and spouse. A military retiree’s pension, Social Security benefits, and TSP savings may be enough to offset or materially blunt the cost of LTC, but it leaves nothing for a well spouse to live on. Justin L. Baker, JD, MBA, Army Reserve Lieutenant Colonel, Candidate for LLM in Wealth Management and Masters in Strategic Studies at the U.S. Army War College; https://www.bakerwealthstrategies.com/welcome/ <hr> The VA does provide Aid and Attendance benefits for some qualifying veterans and their spouses of around $2,000 per month who meet financial needs, wartime service and medical needs requirements.<a href="#_ftn6" name="_ftnref6">6</a> For the majority of military retirees who do not meet the criteria for VA Aid and Attendance, the options are to privately pay, use some form of LTC insurance coverage, or Medicaid. As noted above, private pay is a suboptimal solution for those who cannot afford to fund the high cost LTC. Medicaid is a federal welfare program, administered by the states with significant financial needs requirement.<a href="#_ftn7" name="_ftnref7">7</a> Paying out of pocket for an extended LTC scenario may well lead to unintended Medicaid qualification. Considering that private pay and Medicaid both have fairly dire financial implications, LTC coverage is a viable option to help military retirees buy down the risk associated with LTC costs. One way to provide for coverage in the event of LTC event is with a traditional LTC insurance policy. LTC insurance policies provide a guaranteed benefit for LTC costs in exchange for a monthly premium. They are “use it or lose it” proposition with increasing premiums as the insured gets older, and they have generally fallen out of favor in the market due to other available options to cover LTC costs.<a href="#_ftn8" name="_ftnref8">8</a> One of the other options that has emerged on the market is a hybrid, asset-based product that provides LTC coverage, a cash surrender value, and a death benefit for any unused benefits. They are typically funded through permanent life insurance policies or annuities and have a variety of options available to mitigate the risk of LTC costs.<a href="#_ftn9" name="_ftnref9">9</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.“Medicare Costs at a Glance.” Medicare, www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance <a href="#_ftnref1" name="_ftn1">1</a>."Medicare Costs at a Glance." Medicare, www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance <a href="#_ftnref2" name="_ftn1">2</a>."TRICARE for Life Handbook, February 2020." Tricare, https://www.tricare.mil/Publications: 4. <a href="#_ftnref3" name="_ftn1">3</a>."Home." TRICARE, www.tricare.mil/Costs/HealthPlanCosts/TFL/Retiree_Rates (last accessed Aug. 23, 2023). <a href="#_ftnref4" name="_ftn1">4</a>."Options for the Those Who Need Assisted Living." Air Force Medical Service, 12 Sept. 2016, www.airforcemedicine.af.mil/News/Display/Article/940791/options-for-the-those-who-need-assisted-living/ (last accessed Aug. 23, 2023). <a href="#_ftnref5" name="_ftn1">5</a>.Costs of Care. (2017, Oct. 10) at https://acl.gov/ltc/costs-and-who-pays/costs-of-care <a href="#_ftnref6" name="_ftn1">6</a>."Eligibility for Veterans Pension." Veterans Affairs, www.va.gov/pension/eligibility/ (last accessed Aug. 23, 2023). <a href="#_ftnref7" name="_ftn1">7</a>."Medicaid: Medicaid." Medicaid.gov: the Official U.S. Government Site for Medicare, www.medicaid.gov/medicaid/index.html <a href="#_ftnref8" name="_ftn1">8</a>.Stark, Ellen. "5 Facts You Should Know About Long-Term Care Insurance." AARP, 1 Mar. 2018, www.aarp.org/caregiving/financial-legal/info018/long-term-care-insurance-fd.html (last accessed Aug. 23, 2023). <a href="#_ftnref9" name="_ftn1">9</a>.Marvin, Elaine. "Long-Term Care Solutions with Hybrid Products." National Tax-Deferred Savings Association, Mar. 30, 2014, www.ntsa-net.org/long-term-care-solutions-hybrid-products (last accessed Aug. 23, 2023). </div></div>

January 31, 2022

9152 / What types of retirement benefits are military servicemembers generally entitled to receive?

<div class="Section1">Historically, the perceived generous retirement benefits of a military career are a compelling reason for a servicemember to continue service beyond his or her initial enlistment and to stay for a career either on active duty or in reserve system. However, historically, over 80 percent of servicemembers who enlist do not make it to the full 20 years for a retirement. Military servicemembers who qualify for retirement have many types of retirement benefits they may qualify for, choices to make on how to receive retirement benefits, and risks to their retirement income. Active and reserve component retirees even have different rules between when their retirement eligibility begins and how much their pensions will pay. The advent of the Blended Retirement System, with its new benefits, adds yet another set of calculations for current and prospective retirees. Those servicemembers with Veteran's Affairs rated disabilities have some additional calculations to make. While all of this information is available through a labyrinth of government websites, it is not easy to aggregate or calculate with the degree of certainty one might like when planning a retirement income roadmap. <hr> Planning Point: Military retirees also contend with the traditional risks associated with running out of money in retirement. Those risks include a significant increase of federal income taxation, outliving their retirement savings, and paying for the costs of long-term care. Without careful analysis and professional guidance, a servicemember could make mistakes in the present that will not manifest themselves until retirement. Justin L. Baker, JD, MBA, Army Reserve Lieutenant Colonel, Candidate for LLM in Wealth Management and Masters in Strategic Studies at the U.S. Army War College; https://www.bakerwealthstrategies.com/welcome/ <hr> Retirement Benefits Generally Members of the armed services can qualify for Department of Defense (DoD) retirement benefits after completing a satisfactory period of service. The amount of benefits depends primarily on whether the servicemember receives an active duty retirement or reserve retirement. Several other factors are considered in determining a servicemember's eligibility for retirement, variety of retirement benefits, the age at which benefits begin, whether the plan is a defined contribution or defined benefit plan, and how much the pension pays. Additionally, any service-related disabilities factor into the determination of benefits that a veteran is entitled to receive. In January of 2018, the DoD rolled out a new program called the Blended Retirement System to provide a benefit to those who missed out on the traditional 20-year, cliff-vesting program. For more information on the legacy retirement system, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>- Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the Blended Retirement System. </div>

January 31, 2022

9156 / Do military retirees have the option of selecting a survivor benefit plan?

<div class="Section1">The DoD retirement plans come with the option to select a survivor benefit plan (SBP) for surviving spouses of retired veterans. The SBP provides up to 55 percent of a retiree’s monthly pension payment to the surviving spouse or qualifying child upon the death of the retired veteran.<a href="#_ftn1" name="_ftnref1">1</a> The program requires the retiree to decide to participate or not to accept this benefit at the time of retirement. The cost of this plan is 6.5 percent of the base benefit amount. For example, if a retiree has a defined pension benefit amount of $5,000 per month and decides to cover 100 percent of that amount through the SBP, then surviving spouse would receive $2,750 per month for life, indexed to inflation. The cost of the coverage is 6.5 percent of the $5,000 base pay or $325 per month. The premiums for the SBP come out of the retiree’s pension pay before taxes, so the effective cost, at the 28 percent tax bracket, is $234. After 30 years of paying premiums and attaining the age of 70, the policy is considered paid up. <hr> Planning Point: There are some options the retiring servicemember should consider prior to opting for the SBP. The first is what other options exist for the cost of the premium. The term “retiree” generally connotes a person in his or 60s or 70s. However, military retirees are generally healthy and in their 40s when they retire from the armed services. Permanent life insurance could be a viable solution for some retirees in lieu of the “use it or lose it” SBP. Additionally, several whole life and indexed universal life policies come with long-term care riders that help buy down the risk of a long-term care stay as a result of Alzheimer’s or other serious diseases. It is also possible that the cash value built up in the policy over 20 to 30 years in retirement could provide a source of tax-free income later into retirement to help offset rising inflation and medical care. Justin L. Baker, JD, MBA, Army Reserve Lieutenant Colonel, Candidate for LLM in Wealth Management and Masters in Strategic Studies at the U.S. Army War College; https://www.bakerwealthstrategies.com/welcome/ <hr> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.Herndon, Molly. “The Survivor Benefit Plan: Pros and Cons.” Military Families Learning Network, 4 Aug. 2017, militaryfamilieslearningnetwork.org/2017/08/04/the-survivor-benefit-plan-pros-and-cons/ </div></div>

January 31, 2022

9154 / What is the legacy retirement system for reserve servicemembers?

<div class="Section1">The Reserve’s legacy retirement benefits qualification works off a combination of years to qualify for the pension and a points-based system to determine the amount of defined pension benefit.<a href="#_ftn1" name="_ftnref1">1</a> As with active duty retirement, a reserve retirement requires 20 years of qualifying service to be eligible for retirement. Generally, reserve retirement benefits begin when the retiree reaches the age of 60. Active duty service after January 28, 2018 can reduce the beginning age by three months for each cumulative period of 90 days of active service in a fiscal year. There are two retirement pay plan options under the legacy system for reservists, the Final Pay or the High-36.Generally, the formula to calculate the defined benefit pension payment is Retired Base Pay times the multiplier percent. The multiplier percent is calculated as 2.5 percent times the years of creditable service. Years of creditable service in the reserve system is where the points system comes into play. In calculating years of creditable service for retirement pay purposes, the servicemember’s total points at retirement are divided by 360 to calculate the years for the multiplier. Reservists earn points in one of three ways during each year and may earn up to 365 points each year.<a href="#_ftn2" name="_ftnref2">2</a> Reservists receive one retirement point for each day they serve on an active duty status, one point for each attendance at a drill period, one point each day for performing funeral honors, and 15 points each year for membership in a reserve component (unless on an active duty status). The 20 years of creditable service for reserve servicemembers is also calculated differently than their active duty counterparts. A retirement point year in the reserve component begins on the month and day anniversary that the servicemember joined the reserve component and ends 12 months later. This is wholly unrelated to fiscal or calendar years and is another year calculation that reserve servicemember must track. It is entirely possible for a reservist to have served in the reserve component for over 20 years but not have enough creditable years to qualify for retirement benefits. This happens when the servicemember is satisfactorily excused from attendance at a monthly assembly or annual training and fails to earn the requisite 50 points in his or her retirement point year. Conversely, it is possible for a reserve servicemember to accumulate far more retirement points than his or her contemporary yet have fewer creditable years for retirement purposes. One way this could occur is when one reserve servicemember served on active duty for several years prior to joining the reserve component. He or she would get credited 365 points for each year of active service. His or her reserve counterpart may take five years to earn 365 points while still completing creditable years for retirement. For a reservist, a qualifying year for retirement occurs when the servicemember has earned at least 50 points by his or her retirement point year end date. As mentioned above, points are earned by participating in the reserve component by serving on an active duty status (e.g. active duty for operational support, contingency operations - active duty for operational support, annual training, or active duty for training), inactive duty training such as monthly unit training assemblies, and performing funeral honors. In a given fiscal year, every reserve servicemember is entitled to 48-unit training assemblies (which equates to two days per month with one-unit training assembly equaling four hours of training), 14 days of annual training, and 15 membership points. If a reservist attended all unit training assemblies and completed annual training, which is the expectation of the reserve component, then he or she would earn 77 points toward retirement and complete a qualifying year. At the end of a 20-year career, the reservist would earn 1,540 points by completing the minimum requirements. Once the reserve servicemember completes 20 years of creditable service, he or she receives a letter from their component advising them that the criteria for retirement benefits has been met. After that, the servicemember no longer is concerned with creditable years for retirement purposes, but the servicemember does continue to add retirement points onto the total for retirement pay purposes. Retirement points are earned by reservists until they request and receive retirement orders. One last decision that reserve component servicemembers must make pertains to their status in retirement. Reservists can opt to be discharged entirely from the military in retirement. Choosing the option means that the retiree’s final base pay is calculated as of the day he or she separates from the service without cost of living adjustments or longevity increases in pay in the future.<a href="#_ftn3" name="_ftnref3">3</a> Alternatively, the retiree can choose to be placed in the Retired Reserve. This option means that the retired servicemember can be called back to service in the event of a national emergency such as the attacks of 9/11, the war in Iraq, or the COVID-19 pandemic. While that is likely the last thing that a retired reservist would like to do, it does keep the final base pay calculation increasing with cost of living adjustments and longevity pay increases until age 60. Depending on the age at which the servicemember retires, it could provide 15 to 20 years of increases in Final Base Pay for retirement pay calculations. This is not an insignificant swing in the defined benefit pension plan nor is it an insignificant commitment on behalf of the retiree who has seen a material uptick in events that warrant recall from the retired reserve in the past several years. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.“Reserve Retirement.” Military Compensation, militarypay.defense.gov/Pay/Retirement.aspx <a href="#_ftnref2" name="_ftn2">2</a>.“How To Calculate Reserve or Guard Retirement Points.” MilitaryBenefits.info, 31 Mar. 2020, militarybenefits.info/calculate-reserve-guard-points/ <a href="#_ftnref3" name="_ftn3">3</a>.Roler, Laura. “Retirement Options for the Reserve Component.” Military Saves, 26 Sept. 2014, militarysaves.org/blog/1204-retirement-options-for-reservists </div></div>

January 31, 2022

9158 / What is the thrift savings plan (TSP) option for armed servicemembers?

<div class="Section1"> The thrift savings plan (TSP) is a retirement savings account similar to a 401(k). Members of the armed services can contribute up to the IRS limits of $23,000 in 2024.<a href="#_ftn1" name="_ftnref1">1</a> Servicemembers may make contributions to their TSP accounts using pre- or post-tax dollars. The Roth and traditional TSPs function the same as their 401(k) counterparts. For those enrolled in the Blended Retirement System, their contributions are matched up to 5 percent of their annual salary. For those in the legacy retirement system, there is no matching provision for contributions made to the TSP. The TSP does not require a servicemember to complete a full retirement to participate and save for retirement. Additionally, the TSP allows participants to choose from a selection of funds that have varying degrees of risk and expected returns on investment. In-service withdrawals are available for TSP participants who meet their program’s requirement. Loans from TSP accounts are also available for servicemembers. The participants may take either a general loan or a loan for the purchase or construction of a residence. Participants may only have one of each loan type open at any given time. The repayment terms are akin to a 401(k) plan with automatic payroll withdrawals and income tax penalty for failure to repay. Distribution rules from the TSP follow those of traditional and Roth 401(k)s or IRAs. For those participants who opt for a tax-deferred TSP program, they will pay tax upon distribution from the account and for those who opt for the Roth TSP, they receive their distributions tax free after 59½ year of age.<a href="#_ftn2" name="_ftnref2">2</a> Traditional TSPs cannot be converted directly to Roth TSPs, but in some instances, they can be converted to traditional IRAs and then converted into Roth IRAs. This requires the participant being aged 59½ or separating from the armed services.<a href="#_ftn3" name="_ftnref3">3</a> <hr> Planning Point: One unique area of planning that servicemembers should consider is the role of the Roth TSP and tax-free pay such as hazardous duty pay or tax-free base pay while in combat zones. These untaxed dollars can be contributed to a Roth TSP and they grow tax free. The distributions, after age 59½, are also free of federal income tax.<a href="#_ftn4" name="_ftnref4">4</a> While most people do not wish to be deployed to hazardous duty or combat zone pay areas, this is certainly a way to make the most of the additional compensation for retirement planning purposes. Justin L. Baker, JD, MBA, Army Reserve Lieutenant Colonel, Candidate for LLM in Wealth Management and Masters in Strategic Studies at the U.S. Army War College; https://www.bakerwealthstrategies.com/welcome/ <hr> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. Notice 2023-75. <a href="#_ftnref2" name="_ftn2">2</a>.Summary of the Thrift Savings Plan. 2019. https://www.tsp.gov/PDF/formspubs/tspbk08.pdf: 8 <a href="#_ftnref3" name="_ftn3">3</a>.Bobb, Brad. “The Time Is Now for Roth Conversions.” FedSmith.com, 6 Oct. 2018, <a href="http://www.fedsmith.com/2018/10/03/time-now-roth-conversions/">www.fedsmith.com/2018/10/03/time-now-roth-conversions/</a> (last accessed Aug. 23, 2023). <a href="#_ftnref4" name="_ftn4">4</a>.“Investor Alerts and Bulletins.” SEC Emblem, 27 Feb. 2015, <a href="http://www.sec.gov/oiea/investor-alerts-bulletins/ib_rothtsp.html">www.sec.gov/oiea/investor-alerts-bulletins/ib_rothtsp.html</a> (last accessed Aug. 23, 2023). </div></div>

January 31, 2022

9160 / What risks do retired servicemembers who rely upon thrift savings plans face?

<div class="Section1">Because their base retirement pay and Social Security are taxed at a higher rate than many anticipate, retirees could have to liquidate their TSP more quickly than planned to make up the difference between projected and actual available income. Without proper planning, this could have a significant impact on the longevity of the retiree’s TSP savings.If a retiree relies solely on a traditional, tax-deferred TSP for retirement savings, an increase in federal income tax rates will serve as a triple whammy. The first whammy is the increased amount that the retiree must withdraw due to an increase income tax on base pay. The second whammy is the increased amount the retiree must withdraw to make up for the increased income tax on Social Security benefits. The third whammy is the decreased amount available to the retiree in his or her TSP account since an increased income tax results in smaller share of available dollars in the TSP. Assuming no other retirement savings vehicle is available for the military retiree, the TSP is the obvious account of last resort to make up for the impact of an increased income tax on base pay and Social Security wages. In a tax-deferred, traditional TSP, the retiree knows how much he or she has in the account, but cannot always anticipate income tax liability. The amount that the retiree gets to keep is determined by the share that the government taxes at the time of withdrawal. The impact of relying solely on a tax-deferred TSP is a clear risk for military retirees. One way to mitigate this risk to a tolerable level is to consider funding a Roth TSP. Additionally, many military retirees continue employment in the civilian sector upon retiring from active or reserve service, so they can also fund a Roth 401(k) through a civilian employer. Moreover, the civilian spouse of servicemember could contribute to a Roth IRA if employed or the married couple could fund a Roth IRA for the non-employed spouse. Most reserve component servicemembers have civilian employment, so they can also take advantage of Roth 401(k)s and IRAs. Servicemembers have no control over what the federal income tax rates may be in the future, the taxability of their retirement base pay or Social Security, but they can regain some control by taking advantage of Roth contributions. </div>