The current generation of military service members have pensions worth millions and they don’t even know it. Many are unaware of how much their monthly retirement check will be and never calculate the total cumulative value of their pension over their expected lifespan. The pension of someone who retires at age 40 after serving 20 years can easily reach $1.5 million by the time they turn 80, while the pension of an officer is often north of $2 million. Combined with other military-related income, such as disability payments from the Veterans Administration, that number can rocket even higher.
Protecting this unexpected retirement wealth can be a challenge, as many who were in the military joined young and did not receive a solid financial education during their years of service. New retirees are faced with an unfamiliar patchwork of programs and products, which can lead to many missed opportunities to protect or grow wealth in their post-military years.
Most recently, to the advantage of military spouses, the "Widows Tax" was axed.
If the focus is to maximize income, civilian life insurance is often a more viable option if the Veteran’s health allows them to qualify for coverage. While there is still a monthly premium with life insurance, the policy’s beneficiary would have the option to receive their payout as a tax-free lump sum. If this nest egg were invested wisely, it could provide a monthly income for the family left behind, and the bulk of it still be passed to the next generation.
Some retirees opt for Veterans Group Life Insurance (VGLI), which does not require a medical screening as long as you apply for coverage within 240 days of your date of separation. However, the monthly premiums dramatically increase with age, to the point of being unaffordable for many. A 50-year-old who has premiums of $144 per month for $400,000 of coverage will see those jump to $920 at age 70. By age 75, the premium has doubled to $1,840 per month. Again, civilian life insurance may provide more affordable options, even if the Veteran isn’t in the best of health.
Benefits to Veterans separating or retiring from the military are also often underutilized. Most former service members, after years of strenuous physical work or combat, qualify for tax-free VA disability payments, boosting their income for life beyond the value already provided by their pension. For example, a former enlisted member with a lifetime pension value of $1.5 million would see that rise to $2.8 million if declared 100% disabled. A former officer in the same circumstance could see a boost from about $2 million to $3.8 million. Even if a 100% disability rating is not warranted, a disability rating of any percentage will increase their overall income. Although the application process with the VA can be time-consuming and complex, one of the largest hurdles often comes from a different corner. Some Veterans find it extremely hard to be forthcoming about the various pains, ailments, and wear and tear on their bodies.
Thrift Savings Plan (TSP) is another wealth-building vehicle that is often not maximized to its full extent by service members. Similar to how a 401(k) would be structured by a civilian employer, employee contributions (plus any match) can be invested in a handful of funds. By default, TSP money is invested in the G Fund, composed entirely of U.S. Treasury securities and that has a 10-year rate of return of 2.30%. TSP participants must deliberately opt into any other fund, something that frequently escapes the notice of young recruits just joining the service. Had those same young servicemembers opted into the C Fund, which attempts to mimic the S&P 500 and has a 10-year rate of return of 13.17%, they might have seen substantially higher growth in their TSP accounts by the time they are ready to retire.
TSP participation also does not interfere with the ability to contribute to a traditional IRA or Roth IRA. Many service members miss out on these opportunities, especially the tax-free growth of Roth IRAs, because they do not realize that TSP is not their only option for retirement savings. Here is where working with a financial professional can be valuable in helping to manage money and make informed decisions, especially a professional who has strong experience in working with Veterans.
With millions of dollars of income potential in retirement, how this generation of Veterans leverages and uses the opportunity can not only affect them and their loved ones, but if managed wisely, can also enable them to leave a legacy to the next generation.
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