Veterans Guide to Retirement Savings and Investments

When it comes to saving for retirement, service members can go the traditional route or invest in accounts specifically tailored to them.

Under the Blended Retirement System and the High-3 system, veterans qualify for a retirement pension after having served for a certain amount of time. But many may be interested in diversifying their retirement portfolio. Similar to a 401(k), military retirement pay is tied to the fluctuating market, and benefits depend on the veteran’s base pay during service. In other words, the money that veterans receive after they retire may not be enough to support a comfortable lifestyle.    

Younger generations are already experiencing stress and anxiety over the uncertain modern retirement landscape. Military service members may have additional financial stressors such as medical bills that might prevent them from spending freely on other necessities, which is why they must be more cautious when it comes to saving for retirement.

For military personnel who are not sure what accounts they should put their money in or where they should invest, a little research can go a long way to help you learn about saving for retirement and get started building up your nest egg.

Setting Retirement Goals for You and Your Military Family

Starting with a plan is essential when you’re saving for retirement. Setting clear retirement savings and investment goals is the first step in creating a strategy for your money. Before you begin investing or saving, sit down and create an actionable financial plan. Be sure to set specific benchmark goals with achievable time frames.

Having milestones in place will keep you motivated and help you when you need to make difficult decisions. These decisions include when and how much money to allocate towards investments and savings in particular categories.

Military members have some additional items to consider regarding retirement planning. They may have more debt than the average person, and they may be leaving behind a spouse and children in the event of their service-related death.

Additionally, members of the military also need to take into consideration base pay and allowances for housing and food, which can vary from location to location. These factors will all play a role in determining how much money a servicemember needs for retirement.

Federal Military Retirement Plans

Military retirement benefits are complex because they depend on several factors. Often, the type of retirement you choose will be contingent on these. Aspects of service that affect retirement pay include:

• Rank;
• Years of service;
• Percentage of disability;
• Family status.

Military retirement benefits are available to all military personnel who complete 20 or more years of active-duty service. Retirement pay is based on the number of years you have served and your final average salary.

You can compute your basic military retirement pay by multiplying 2.5% by your years of service, then multiply that number by your base salary rate at the time of retirement, which would include any special pay added to base salary during the last 12 months before retirement. However, you’ll want to pay special attention to the retirement plan you choose.

Thrift Savings Plan (TSP)

The TSP is a federal government-sponsored retirement savings and investment plan available to all service members and full-time federal employees. It is similar to the 401(k) plans from private industry.

To qualify for military TSP benefits, you must be enrolled in the Department of Defense’s Blended Retirement System (BRS). You also have to contribute at least 5% of your salary to your TSP every year. Your service will match up to 5% of your contribution, but if you choose to contribute more than 5%, your contributions are 100% invested with no matching funds.

Individual Retirement Accounts (IRA)

Individual retirement accounts (IRAs) are savings plans that allow you to set money aside in anticipation of expenses in retirement. They’re similar to the TSP but with added flexibility in withdrawals and taxation. If you withdraw the money before age 59-and-a-half, it may be subject to a 10% penalty. Many service members use an IRA to supplement their retirement benefits.

Blended Retirement System (BRS)

The Blended Retirement System (BRS) is a new retirement system for all military personnel active on or after January 1, 2018, which is when the system went into effect. The BRS builds on the current High-3 retirement plan (more on that below). 

There are multiple enrollment contingencies for the BRS:

• If you began service after the system went into effect, or are currently beginning service, you are automatically enrolled.
• If you had less than 12 years of service by December 31, 2017, you were allowed to opt into the BRS by December 31, 2018. If you didn’t opt-in, you remained on the High-3 plan.
• If you’re an Active Component Service member who had 12 or more years of service before December 31, 2018, you’re still on the original military retirement plan.

It’s important to note that your contributions to TSP under the BRS will be limited to traditional basic pay until you reach the minimum military retirement age (whatever age you are after 20 years of service). Once you reach the minimum retirement age, any additional money will go towards tax-exempt Roth TSP contributions.

High-36

The High-36 or High-3 retirement plan is the traditional military retirement system that allows personnel to retire after 20 years of service, regardless of their final average salary. To calculate your benefit, you would use 2.5% times your highest 36 months’ base pay (including special pay), divided by 12 and multiplied by the number of years served.

REDUX

REDUX is a voluntary military retirement plan that usually provides lower benefits than High-36 or BRS and is available only for those who served before January 1, 2018. To qualify under REDUX, you must have at least 20 years of service. This plan is optional for active-duty members who served on or after August 1, 1986. 

Although REDUX’s monthly retirement pay is lower than the other two systems, it does provide a $30,000 Career Status Bonus after you serve for 15 years, as long you agree to serve for a total of 20.

The REDUX retirement pay calculation is complicated since, at age 62, your payment amount will be readjusted to match High-3, and you’ll receive a cost-of-living adjustment (COLA). After that, the COLA reverts to a lower number. Head to the REDUX military pay calculator to find out exactly what your retirement pay will be under REDUX.

Service members can supplement REDUX, High-36, or BRS with a traditional retirement account, or may even rollover their retirement account into their military account, and vice versa.

Savings Accounts for Military Members

Military members have access to special savings accounts that offer tax-free interest, making it easier for you to save money. It will be important to know your options, but understand that each has its purpose.

Savings Deposit Program (SDP)

An SDP is similar to a traditional savings account, but some special rules are associated with it. For example, you can deposit up to $10,000 into your SDP account and earn a generous 10% monthly compounding interest rate (but only on a balance of $10,000 or less).

Under normal circumstances, you will not be charged a monthly fee, and only a $5 minimum balance is required. You must be in a combat zone and deployed for 30 days or one day for three consecutive months to be eligible.

Military Savings Accounts

You can open a military savings account with your bank or credit union. These savings accounts are for service members and their families and offer reduced fees and higher interest on deposits. Savings are not limited (as in the case of an SDP), and you can make deposits and withdrawals freely.

Taxable Investment Accounts

A taxable investment account is one that’s governed by the tax code. This means you are required to pay taxes on your capital gains when you sell an investment. The liquidity of these accounts makes them advantageous for military members who are in between jobs or transitioning to civilian life. Also known as a brokerage account, this type of account allows you to invest in stocks, bonds, exchange-traded funds (ETFs), and index funds.

When deciding which investment account will be best for you when you get out of the military, consider your needs and future plans and how much time you have until retirement age. As a general rule, if you are unsure about what kind of income needs you may have in the future, it’s usually better to go with a Roth IRA because withdrawals are tax-free after age 59-and-a-half (with exceptions). However, typically, there are no age restrictions on taxable investments. If you are interested in this type of account, speak to your broker.

Traditional Retirement Accounts and Investment Options

While military members can open accounts that give them unique benefits, they also can go the more customary route for their retirement. Traditional retirement accounts (401(k), 403(b), and traditional IRA) are usually encouraged for those who see themselves retiring at age 65 or older. These accounts allow citizens to contribute a certain amount of money per year without paying taxes on their contributions; withdrawals are taxed during retirement.

Retirement Savings Accounts

When it comes to something as foundational as retirement, service members should not exclude the possibility of traditional retirement accounts. Sometimes, military members have other plans that will require them to work well beyond 65. If this is the case, they should consider saving money in a conventional retirement account.

The IRS taxes withdrawals from traditional accounts but does not tax withdrawals from Roth accounts because it has already taxed contributions. Every retirement account has advantages that may attract a service member, but they can also come with pitfalls.

• Traditional IRA: A traditional IRA is a retirement savings account that allows you to make tax-deductible contributions up to a specific limit each year. The money you contribute grows tax-deferred until you withdraw it in retirement, and then it’s taxed as regular income. Traditional IRAs also have a limit of total contributions per year. You cannot contribute more than $6,000 (or $7,000 if you are 50 or older).
• Roth IRA: A Roth IRA is a retirement savings account that allows you to make contributions with after-tax dollars. Your contributions grow tax-free, and you do not have to pay taxes on withdrawals as long as you are over the age of 59-and-a-half. The main advantage is that after you’ve had the account for at least five years you can withdraw your contributions at any time without penalty.
• Simplified employee pension IRA (SEP-IRA): If you’re self-employed, you can open a SEP-IRA and contribute up to 25% of your earnings each year. Your contributions are tax-deductible and your withdrawals are taxed after retirement. The maximum contribution is $61,000 as of 2022, which is quite a bit more than a traditional or Roth IRA, allowing you to sock a lot away for retirement. Another bonus is that should you decide to expand your business, you can include employees in this plan and deduct your contributions.
• Solo 401(k): This is a combination of a traditional and Roth IRA that is designed for self-employed individuals with no employees. With a one-participant 401(k), you can invest up to $61,000 as of 2022; if you’re over 50, you can invest an additional $6,500 as a catch-up contribution.
• Health savings account (HSA): You can set aside money tax-free to cover qualified medical expenses with a health savings account. You could invest your HSA funds in stocks and bonds or keep the money in cash — whatever works for you. The main benefit is that withdrawals from your HSA are entirely tax-free as long as they go toward qualified medical expenses.
• Taxable brokerage account: You can invest your money in stocks and bonds if you have a separate brokerage account at a bank or financial services firm. You will be taxed when the gains are withdrawn, but there is no limit on the amount of income you can accumulate annually in a taxable account.

Service members and civilians will need to take one or more of these retirement savings accounts into consideration to make an intelligent decision for their retirement. 

Investment Accounts

Service members should also look at traditional savings accounts when planning for retirement. Often, you might find that these accounts are better for your finances, carry no penalties for withdrawal, or have better interest rates on your savings.

• High-yield savings accounts: A high-yield savings account is a bank account that offers a higher interest rate than a regular savings account. High-yield savings accounts usually require a minimum deposit to open, and the interest rates vary depending on the bank.
• Certificates of deposit (CDs): A certificate of deposit, or CD, is a savings certificate that offers fixed interest rates for a set period. Banks and credit unions offer CDs. They are federally insured for up to $250,000, depending on the institution you choose
• Money market funds: A money market fund is a collection of short-term securities such as Treasury bills, commercial paper, and certificates of deposit. Money market funds are considered among the safest investments because they invest in ultra-short-term debt that can be easily bought or sold.
• Government bonds: Government bonds are a type of security issued by the Treasury or other government agencies. It’s an IOU from the government, and it will pay interest every six months until the maturity date arrives when you get your initial investment back. Bonds are considered very safe because the U.S. government backs them.
• Corporate bonds: A corporate bond is a debt security issued by a corporation. The issuer promises to repay the loan and pay interest at regular intervals for a specific time, called the maturity date. The issuer will return your initial investment on the maturity date as well.
• Mutual funds: A mutual fund is an investment vehicle that pools money from many investors to purchase a group of securities. The goal is to provide diversification and professional management while earning more than you would in a regular savings account.
• Index funds: An index fund invests in a collection of securities that match an index, such as the S&P 500. Other funds can be run by active managers who select from a larger group of assets. The idea with both types is to provide superior returns compared with traditional savings accounts.
• Exchange-traded funds (ETFs): Exchange-traded funds are similar to mutual funds but trade like stocks. They can be traded at any time during the day and can also be sold short when you bet that a share price will go down. ETFs may offer lower fees than mutual funds because they don’t need to account for management or research expenses.
• Dividend stocks: Dividend stocks are stocks in a company that pays dividends to shareholders. Dividends are a portion of the profits distributed to shareholders, and they’re generally paid quarterly. 
• Individual stocks: Some people prefer to invest in individual stocks or portions of a company. This provides the potential for better returns but with greater risk because you are responsible for doing your research and making your own investment decisions. Generally, if you buy individual stocks, it is best to write down your reasons for investing in that stock.

Military members and civilians can both use these accounts to set themselves up for a sound financial future.

Alternative Investments

Alternative investments are investments other than stocks, bonds, and cash. Examples include hedge funds, commodities, foreign currency, or physical assets such as real estate and infrastructure. Approach these with caution and understand the risks and benefits involved. The government may not regulate alternative investments, so you may lose most or all of your money if something goes wrong. However, alternative investments can negate losses due to inflation.

• Precious metals: Precious metals, such as gold or silver, can be a good investment. Historically, precious metals have been used for this purpose. You can easily invest in a gold or silver IRA to diversify your portfolio and offset any losses from your other investment accounts. Many people purchase bullion coins — a coin made of precious metal or other material with a set weight and purity — and store them safely. The Federal Reserve Bank does not offer insurance on bullion coins.
• Real estate: When you invest in real estate, you own an equity position in the property. This means that if the property’s value goes up, so does your investment. If the value goes down, so does your investment. Generally, this type of investment is illiquid because it can take months or even years to sell a stake in a piece of property.
• Cryptocurrency: A cryptocurrency is a digital or virtual currency that uses cryptography for security. Think of it as internet cash. The government does not regulate it, so you cannot declare a loss if it drops in value.
• Invest in startups: If you don’t want the responsibility or time commitment of owning a business but still want to get in on the ground floor of an exciting new concept, this could be the option for you. You’ll want to do plenty of research into the company and industry before you buy in because startups can fail.

Additional Retirement and Investment Resources for Military Members

Multiple organizations are dedicated to helping military members make smart choices in their investments, avoid common scams, and set themselves up for retirement and a financially sound future.

• Investor.gov: This site offers information on investment choices and financial planning. It also links to key reports, news, and investor tools for military members.
• Military One Source: This page includes several retirement calculators and tips designed to help you plan your finances and save money. You can also find practical advice for investing in the civilian world while serving in the military.
• USAA: USAA has a special division dedicated solely to helping current and former military members make smarter financial decisions. From savings plans to college funds, they’re here to help you get started with an investment portfolio that works for you.
• U.S. Securities and Exchange Commission: The SEC is committed to helping you make sound financial decisions. They offer videos, news, and publications about investing and other forms of personal finance.
• Consumer Financial Protection Bureau: The CFPB is a government agency that acts as a watchdog to help protect consumers from unfair financial practices. This page offers advice and information for investing wisely in the civilian and civil servant sectors.
• Military Saves: This organization aims to help military members plan for retirement and take control of their finances. The site features a blog with articles on saving money and choosing suitable investments.