MILITARY ~ Honor, Duty, Country

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Why U.S. soldiers may want to start brushing up on investing

MARKETWATCH 9:34 AM ET 3/9/2017

A big change is coming to military recruits' retirement savings

The life of a military service member has never been an easy one, but one perk has been the guaranteed pension after 20 years of service. That's about to change.

Incoming servicemembers next year won't get the same retirement benefit options as their more seasoned counterparts, but that isn't necessarily a bad thing.

The "Blended Retirement System", (http://militarypay.defense.gov/BlendedRetirement/) which begins Jan. 1, 2018, will lower the defined benefit income servicemembers get by 20% upon retiring and instate a mandatory defined contribution system. This will replace the "Thrift Savings Plan," the current defined contribution plan that military members could participate in voluntarily. For incoming servicemen, the government will match 1% of the funds they invest for two years and then up the match to 5%. Those who have served less than 12 years have until Dec. 31, 2018 to opt in. The default is to stay in the old system.

Perhaps the best part of this system switch is that all military retirees will be able to take their defined contribution plan with them, no matter how many years they've served. Previously, only servicemembers who stayed in the military for 20 years were able to receive the defined benefit plan after retirement. Only about 17% of the military makes it 20 years, according to the Military Compensation and Retirement Modernization Commission (http://thehill.com/ blogs/congress-blog/homeland-security/265093-reforms-to-military-retirement-will-pay-off-for-troops).

Spencer Reese, who is on active duty in the U.S. Air Force and runs the Military Money Manual blog (http:// militarymoneymanual.com/), plans to make the switch. He says taking the chance with a mandatory defined contribution plan is worth the reduction of the defined benefit portion of his retirement income because he will have money to take away if he doesn't remain for 20 years in the service (http://militarymoneymanual.com/should-i-opt-in-to-the-new- military-blended-retirement-system/). "If you want the flexibility and don't want to be married to the military to receive a pension, than the new system offers you flexibility," Reese said.

Though servicemembers will get less money from the defined benefit portion of their retirement benefits, there are ways they can end up breaking even -- or having more -- upon retirement if they save appropriately: namely, starting right away, said Mike Meese, chief operating officer of the American Armed Forces Mutual Aid Association in Washington, D.C.

The change comes at a time when more workers across all industries are being transitioned from traditional pensions or defined benefit plans, to self-directed accounts like 401(k) plans or IRA accounts. Since 1979, the number of workers participating in defined-benefit plans has dropped to 2% from 28%, while defined contribution plans have grown to 33% from 7%, according to the Employee Benefit Research Institute (https://www.ebri.org/publications/benfaq/index.cfm?fa= retfaq14). "Servicemembers today need to be much more well-informed and take charge of their financial future from the first day they are in the military," Meese said.

Education on the changes and how to save are crucial to the success of a military retiree's future savings, Meese said, especially now after President Trump's proposal for a $20 billion increase in military spending (https:// www.wsj.com/articles/donald-trump-to-propose-54-billion-increase-in-military-spending-1488210593) means more military members will join. The government has been providing education with online resources such as courses and calculators for current members to understand the system and how to best take advantage of it.

The legacy system, called High 3, provides annuity benefit computed as 2.5% of the number of years a servicemember served and their pay base at retirement, according to the Uniformed Services Blended Retirement System Powerpoint presentation on the government's website. The new system will provide the automatic contribution from the government as well as the defined benefit plan of 2% of the number of years served and last three year's pay base.

There are risks, of course.

For starters, the defined contribution plan is tied to how well, or poorly, the stock market is doing, said Marc McMenamin, first lieutenant at the U.S. Army based in Fort Drum in upstate New York. Servicemembers must also rely on themselves to save, and run the risk of not contributing and meeting the match, Meese said. Young members may also not be aggressive enough in their investing, and miss taking advantage of growth over the long-term (http:// www.marketwatch.com/story/millennials-face-a-depressing-conundrum-is-it-worth-saving-5-a-month-for-retirement-2017-02- 24).

The defined contribution does have low expense ratios, however, more so than many others, McMenamin said -- he enjoys analyzing funds and the market. He's looking forward to opting in, and thinks overall it is a good change for his colleagues. The government's matching is essentially free money not to be ignored, he added.

-Alessandra Malito; 415-439-6400; [e-mail]

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