The 1.4 million men and women serving in the U.S. armed forces have the gratitude of their countrymen. But they can’t spend goodwill—and many end up in financial trouble during active duty and beyond. The military is trying to change that through a new pension system and a dose of financial education.
More than 80% of those in the service leave without any retirement benefits and 55% of veterans feel unprepared for a financial emergency, according to a recent National Financial Literacy survey. Such figures prompted the federal government to order all branches of the military to take steps to improve the financial capability of service members so that they can better adapt when they are civilians.
This makes a lot of sense. The government makes many financial decisions for those who serve—insurance, saving, investing—so that they can concentrate on protecting the nation. Many are unable to manage their own finances when they return to civilian life, and by then they may be in a big debt hole.
“Some people get into a lot of debt and are hesitant to report it to superiors,” Michael Meese, chief operating officer of the American Armed Forces Mutual Aid Association, a non-profit organization dedicated to helping service members with financial issues, told Right About Money. “When I was battery commander in Germany, soldiers were purchasing encyclopedias and $2,000 washer-dryers. Then they return home to a pile of debt and lack of financial preparedness.”
An estimated 5% to 10% of service members experience serious financial problems, says Meese, a retired brigadier general who headed President Trump’s veterans affairs transition team. The challenge, he says, is to teach soldiers how to anticipate changes in spending patterns when they are deployed and effective budgeting strategies. Service members should also understand their death benefits. And for their spouses at home, who may be stressed, lonely and dealing with children, greater financial literacy can ease the transition when a partner returns home.
These are some of the goals baked into the first sweeping change in the military’s pension system since World War II. The centerpiece is a modernized retirement and saving plan that takes effect Jan. 1, 2018. Under the new Blended Retirement System, authorized through the National Defense Act of 2016, 85% of those serving will receive a portable retirement benefit when they leave the service.
The new retirement system combines the military’s old defined-benefit retirement plan with a modern 401k-style Thrift Savings plan that includes a matching contribution. While the old system generously rewarded “lifers” that served 20 years or more, the new plan rewards those with much less service. All service members receive a military contribution of 1% of their annual pay into their saving account as soon as they sign up, and are fully vested after two years.
“It’s a good system because it takes care of those who don’t stay for retirement,” says Meese. “It doesn’t have the golden handcuffs that were typical of 1950s and 1960s retirement plans.”
Most importantly, the new plan ensures that most service members get a retirement benefit, an incentive to help recruit Millennials who are less likely to want long-term military careers. The new system cuts benefits by 20% to those who have served more than 20 years.
All told, the military can be rewarding and financially lucrative, says Meese. Service members don’t get rich but they can enjoy a comfortable living, put kids through college and retire with a good pension if they have some degree of financial literacy. And with the new blended retirement and saving plan—and stepped up financial education—men and women in the armed forces can retire with the financial well-being they deserve.
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