Enlisted Face Retirement Challenges

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BOSTON (TheStreet) -- On the surface, it might seem that crafting a retirement plan for military personnel would be fairly straightforward.

Under current guidelines, enlisted personnel can collect 50% of their pay after 20 years of service (additional years of active duty add another 2.5%, up to 75%). Because many military members enlist right out of high school, they can complete their uniformed career before turning 40, with plenty of time to start a new career and supplement those monthly checks.

While serving, they can tuck extra money into the federal government's Thrift Savings Plan, its variation on the standard 401(k) offered by private companies.

Unfortunately, these options are far from that simple or straightforward.

To start with, financial planners traditionally suggest an average person will need to generate upward of 80% of the income from their working years to maintain a comparable lifestyle. Because the overwhelming majority of enlisted men and women retire in their 21st year of service, this means a military pension needs to be supplemented by more than 30% when accounting for loss of housing and other military subsidies, as well as the potential for added health care costs.

As for the TSP, while it may be an effective way to benefit from compound interest, there is a crucial drawback for the enlisted: Unlike many other government workers, as well as private-sector employees with a direct contribution plan, military personnel get no matching contributions.

The number of military personnel that eventually collect a pension is also relatively low. According to a recent report by the Defense Business Board, convened by Defense Secretary Robert Gates to evaluate budget reductions, 47% of new officers will collect on a nondisability retirement; only 15% of all other enlistees will hit the 20-year mark.

There are also concerns that the military pension system is taxed to its limits. The amount paid out each year has grown from nearly $22 billion in 1990 to an estimated $47 billion this year. Projections call for an increase to $59 billion by 2020. An increase in the number of years needed to collect a full pension is among the ideas that have long been considered.

Other military retirement benefits are threatened by efforts to trim the federal deficit.

A draft proposal, released Wednesday by the National Commission on Fiscal Responsibility and Reform -- a bipartisan comission tasked with shrinking the federal deficit -- calls for $200 billion in budget reductions, including $100.1 billion from defense spending, by 2015.

One potential move is to establish Veterans Administration health co-pays for vets who don't have service-connected disabilities. Another option would raise premiums and co-pays by smaller amounts than in previous proposals, but reduce costs for the government by requiring that employers reimburse the government for the employer share of health care costs of working age retirees who opt for Tricare -- the military's health care program -- instead of relying on another employer's policy.

Roth vs. TSP
The prominent retirement savings vehicles for those in the military are the TSP and Roth IRA.

A Roth IRA -- available to those with a modified adjusted gross income of less than $120,000 or married couples filing jointly with less than $176,000 -- taxes contributions up front, rather than at the time of distribution. Because the Thrift Savings Plan taxes disbursements after the portfolio has grown, a Roth may seem more attractive.

But the TSP shouldn't be so easily dismissed, according to Joseph Montanaro, a certified financial planner practitioner with USAA, which specializes in financial products and services for military personnel and their families. Before entering the financial services industry, Montanaro served in the U.S. Army for six years and last year retired as a lieutenant colonel in the U.S. Army Reserve.

"TSP participation rates on the military side are awful," he says. "I think the last number I saw was like 37%," he says. "But I always try to start there because, in my mind, if you can do something that's easily ramped up and automatic, then you are going to do something that is sustainable. I like the TSP a lot even though it isn't matched, and it offers some unique advantages when personnel are deployed -- which in today's environment is all too often."

Among the advantages is that, while serving in combat, all contributions are tax-free. There is also a far greater contribution than the standard $5,000 limit in a Roth.

"The limit for contributions goes all the way up to $49,000," Montanaro says. "In past years, that wasn't so attractive for retirement purposes, because once you got out and decided to roll your TSP into an IRA they would just cut you a check for that tax-free money that went into it. Now, with the pension protection act of 2006, they have the ability to take that money and roll it into a Roth IRA. Then, all of a sudden, you've got some real momentum as far as savings go."

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