Essay On Military Retirement & Supplementary

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Military retirement and supplementary

There is a need to ensure that one is financially prepared to exit the workforce. To do this, a person should take the necessary steps during employment to ensure that indeed he or she lives a comfortable life after retirement. Knowledge is power, and this certainly holds true when it comes to retirement planning. It is critical to understand that retirement planning often involves much more than finances and most of the factors depend largely on the income one expects in his or her retirement years.

The Military retirement system can be described as arguably one of the best retirement deals that exist in the country. It is critical to understand that unlike most retirement plans, the Armed forces offers a pension, with benefits that often start the day one retires, and this is despite the age. It is important to note that indeed as an officer in the military, one often contributes a very large portion of their pay towards a thrift saving plans. In fact, it can be argued that indeed the retirement savings plan is similar to the 401k and the 403b. If one has served in the military for over forty years, one might receive 100 percent of the pre-retirement base salary. It is critical to understand that although these are often payments that are large, there is no military retirement plan that can be said to qualify as a nonqualified deferred compensation plan.

The service members that remain on active duty or serve in the reserves of the guard for a sufficient period (usually a minimum of twenty years may retire and subsequently receive their pay. On the other members that become disabled while on duty may be medically retirement and they are entitled to a disability retirement. It is critical to understand that there are often four basic retirement plans that exist in the military. They consist of the final pay, the high 36-month average, the REDUX as well as the disability retirement plan. All the retirement plans, therefore, determine the initial month retired pay by being able to take the member’s retired pay base and subjecting it to a percentage multiplier.

Therefore, in this case the retirement options for the person in question is that he is 33 years of age and wishes to retire after 21 years of active military duty and will retire at the rank of either Major, Lieutenant Colonel or that of Colonel. The main aim of this paper is to supplement the retirement with other different options for the person to reach the goal of $1 million by the age of 60 years.

In order to make this happen, there is a need to ensure that the military retirement is well supplemented and that there are different strategies that are carried out to ensure that one can get the milestone that he or she requires. This paper calculates the military pay for the individual and the different supplements that can be used to reach the individual’s target. It also looks at several policy issues in the retirement of the military and makes several recommendations.

Statement of the Problem

To better understand the problem, there is a need to understand the military retirement system. The military retirement system can be described as a cliff vesting 20 years defined benefits plan that often provides a monthly pension payment immediately after one retire from the active component. The monthly pension is often determined by three methods, and they are based on the date a service member first entered service. In effect, retirees who have 20 years of service often receive monthly allotment that is equal to around 50 percent of their base pay while in uniform. On the other hand, the 30-year retirees often receive the maximum allotment that often equals 75 percent of their base pay.

For those that have been in service for less than twenty years, their calculation rather than using the final base pay, the pension is often determined based on the average of the highest three years of service pay and it is often known as the High three. Lastly, it is critical to understand that for those that entered service and have served only for a few years can either chose the aforementioned high three or they can often opt for a $30,000 bonus for fifteen years of service as well as tiered retirement pension which often pays out one percent less for each year of service under thirty years when under the age of 62 and high three rates after.

This system is often known as Redux and those with twenty years of service often receive a pension that is equal to forty percent of their high three service pay until the age of 62. After this, there is a return to fifty percent at 62. The Redux it is important to note is the least popular retirement plan, and this is because there are less than one percent of current retirees in the United States that select this option. On the other hand, the disability retirement is often available for the persons that qualify. A service member that is retired for disability might often choose a retirement plan that is based on the different years of service or based on the severity that comes with the disability.

It is critical to understand that indeed service members can decide to participate in a federal thrift saving plan, which can be defined as a plan similar to that of the private sector 401 k. However, it is critical to understand that in this plan, unlike that of the private sector, the government does not offer matching contributions. It is of the essence to note that indeed the participation in the program often varies depending on the service as well as the different pay grade.

In this case, the serviceman is 33 years of age and will have clocked 21+ years of active military duty. Therefore, it is important to understand that indeed the serviceman is eligible for the final pay upon retiring. This is because the serviceman will have stayed in active service for more than 20 years, and is, therefore, eligible to receive a pension that is based on the percentage of basic pay. It is critical to ensure that there are enough supplements for the serviceman to have reached the $1 million mark at the age of 60 years old.

For this to happen, there is a need first to examine what the serviceman is entitled to in the final pay retirement system. Further, there is a need to look at the current pay regarding servicemen that are in the rank of lieutenant colonel. The different investment options that will be taken into consideration include the use of real estate trusts, annuities, and direct investment plans. It is critical to understand that these will supplement the military retirement and will be extremely important in ensuring that the individual hits the $1,000,000 mark at the age of 60 years.

Methodology

To ensure that all the objectives are fulfilled, there will be a need to use a retirement planner that will be essential when it comes to computing the plan that maximizes the annual retirement spending. It is critical to understand that before retirement, the retirement planner will be able to note which retirement savings account that contributions should be made. After retirement, the plan will be important when it comes to the spreading of the different saving withdrawals across the term of the retirement.

Further, to supplement the retirement from the military, there will also be an investing in annuities that are contracts that exist between an individual and an insurance company. It is critical to understand that the annuities are important as they often provide an income stream during retirement. The annuity that will be invested in is the indexed annuities. In this annuity, the insurance company will be contracted to grow the investment at a specified interest rate and by a percentage of a particular index growth. In this case, there will be the use of S&P 500 composite stock price index. There will be the allocation of 20% to both the money market fund and two stock funds.

Secondly, there will be the use of a dividend reinvestment plan, often referred to as the DRIP which is a plan that often helps to automatically reinvest any cash dividends by purchasing additional shares as well as fractional shares on the dividend payment date. It is important to understand that in this method, instead of receiving the quarterly dividend check, the entity that is managing the DRIP will be able to put the money towards the purchase of additional shares. This will be important as it will offer a convenient method of reinvesting and the necessary math will be carried out to ensure that the cash flow from the dividends is well reinvested.

To better understand the money that will come from the military, there will be the use of final pay calculator. The use of this calculator will estimate the retirement pay flow under the final pay retirement system. It is critical to understand that this calculator will be used in the generation of charts as well as tables. Also, the calculator will take place several future economic assumptions such as the inflation rates. The years of service at retirement that are used in this paper is 21. The grade retirement that is used is that of a lieutenant colonel that is an O-5. The economic factors that assumed in the calculation are as follows, the inflation rate will be at 3.5%, the annual active duty raise will stand at 3.5%, and the tax rate will stand at 28%.

Data collection was analyzed using expressive tables and tools. This provided a more graphical depiction for data analysis. Bar graphs, pie charts, and tables were used for pictorial representation. After the tables are derived and interpreted, they were analyzed with allusion to the literature that was reviewed. Attempts were then made to illustrate relations as to whether a fastidious finding was supported or not by the reviewed literature.

One of the methods that will be used to supplement the military income is the acquisition of different assets in the asset allocation. The asset allocation can be described as the mix of events that one is required to have to diversify. In this case, there will be an investment in the real estate investment trust. There will be the purchasing of the shares directly on an open exchange and other funds will be invested in a mutual fund that specializes in public real estate.

Literature review

There is a need to look at the issue of interest rates and taxes as they are part and parcel of the plan. Monetary policy heavily relies on the interest rate targets. When considering issues such as investment, the level of unemployment and the rate of inflation, the interest rate targets of a country are vital. When Central banks of a country or their bank reserves want to increase investment, they opt to lower the interest rates. This also increases spending in the country economy. However, lowering the interest rate of a country can have diverse severe implications on the economy of a country leading to an economic bubble.

Studies have shown that the interest rate of a country does have a major impact on the retirement plans of an individual. In the United States, the federal government has a higher hand in controlling the interest rates. The retirement plans of individuals can be affected by changes in the interest rate. Interest rate affects the rate of inflation. When interest rate drops, the inflation rate rises and more often it outpaces the rate of interest. This means that individuals will be forced to dig deeper into their pockets thus exhausting all their savings leaving them with no future savings. This also translates to the fact that in the long run an individual will lose their spending power (Baker, Logue & Rader, 2005).

It is critical to understand that in the military, there is the presence of Retirement Cost of Living Adjustments. The cost of Living Adjustments (COLAs) are given annually based on the augment in the Consumer Price Index (CPI), a gauge of inflation. Under the Final Pay and High-3 Systems, the yearly COLA is equivalent to CPI. This is a dissimilar index than the one used for active duty annual pay raises. The index used for active duty pay raises are based upon standard civilian wage increases. Thus, retirement compensation COLAs and annual active duty pay raises will differ.

Often, people tend to forecast their retirement income requirements by considering the inflation rates and their mortgage charges. Retirement savings can be set aside by taking a portion of one’s monthly net pay and setting it aside in a personal retirement savings account. By doing this, one aspires to save sufficient money to meet their designed goal. Regrettably, when the interest rates decline, one forgoes some of their needs so as to try set aside more money than they were used to, so as to reach their retirement goal. Conversely, an individual can decide to let go of their savings plan so as to satisfy his needs fully.

Baker (2005) states that prolonged low-interest rates will compel individuals to make complex decisions on choosing between inflation and principle risks. An individual can either choose to keep their retirement investment in accounts that have low risks and alternatively risk losing their spending power. On the other hand, one can risk investing in stocks that will gain minimal amounts when the rates are low. Faced with all this dilemmas due to the low-interest rates prevailing in the country, people tend to either put off retirement or when retirement is inevitable their only retirement benefit is financed through direct contributions.

A pension plan is a form of a retirement benefits scheme. It is usually outlined in the form of life insurance. These insurance contracts are called annuities. Considering the nature of one’s job and how long one has been in service, an income payment is guaranteed monthly. However, the insurance companies undertaking these plans must have sufficient funds so as to take care of this long-term costs. When the rates of interests are low, the insurance companies also lower their payments guarantees.

Pension plans are funded by the employees of a company. Employers sign contracts controlled by the public sectors and others by the private unions. This, therefore, means that it would be tricky or even impossible to cut pension benefits. Due to the low-interest rates, the contributions are either increased, or the benefits reduced. The pension plans that are vastly affected by the low-interest rate are the defined-benefit pension plans (Brigham & Houston, 2009).

Most insurers, whose annuities are essentially the savings accounts, constitute the life insurance companies do get their side hit by the low rates of interest. They mainly put their investments in bonds, expecting to earn high yields in high-interest rates. Others invest in mortgages and securities. Due to low interest, their yields decline worsening their portfolios and are thus forced to reduce the benefits they offer. Also, the policies they propose are tight-fisted and at times they also tend to raise prices.

Brigham & Houston (2009) suggest that Raising the premium prices and the lower yields realized on products can greatly impact on sales. This results to a drop in sales of insurance products. Insurance companies are susceptible to interest rates because the premiums that policyholders invest in them need to gain a decent return so as to cover future claims. As a result of prolonged low-interest rates, insurance companies are forced to withdraw from the market because the returns on premiums are very minimal barely covering their risks and profit margins. This will force an individual who was relying on insurance companies as part of their retirement scheme to go and try elsewhere.

Governments of a country raise money through the sale of Treasury bonds and securities. When individual want to invest, they will opt to choose the kind that will give them higher returns. Interest rates that are set by the federal government dictate on what kind of investment the investors will choose. Bonds prices and interest rates are inversely related. When interest rates decline, bond prices go up (Nawalkha, Soto & Beliaeva, 2005).

When the rate of interest decline, individuals can easily borrow money from banks. Demand for higher-yielding bonds rises, thus pushing up the bonds prices. Those that hold long-term bonds more so as a pension plan and the other investors tend to suffer. Bonds create fixed income, therefore when the interest rate falls, these bonds are worthless. The long-term bonds respond faster to changes in the interest as compared to short-term bonds. This would mean that individuals will shy away from investing in bonds . Thus their retirement fund will include less money earned from interest earning bonds.

As interest rates decline, most retirees who have mostly depended on interests earned from savings that have accumulated over the years won’t have enough money to last them through their retirement years. In this sense, the government has to come in and support these retired seniors. Hence they become sort of a burden to the government. Most governments have a fund allocated to the elderly, seeing that life expectancy is rising in most parts of the world, which is allocated in the annual budgets. This, therefore, costs governments in the long run (Nawalkha, 2005).

Low-interest rates bring about the diverse effect on people, insurance companies, and the government. Plans for the retirement benefits scheme are affected as individuals tend to shy away from interest-bearing investments such as bank account savings, pension plans offered by insurance companies and government bonds. The low-interest rates translate into low interests earned thus they are less attractive forms of investment for future gains.

Recommendations

Therefore, in order to be able to have $1,000,000 by the time of retirement, there will be the need to ensure that several options are taken into consideration in order to supplement the military retirement plan that is the main source of retirement funds. The first will be the use of annuities; secondly, there will be the use of real estate funds and lastly, the use of direct investment plans.

In regards to the current military system, there are several policy changes that are proposed and might take place in the future. Therefore, there is a need for a better understanding to calculate better the exact figures. In this, the researcher also makes several recommendations for a better military system and why it is important to have it.

The military retirement system involves several processes including the benefits and pensions paid to the retired officers. The system has been implemented for a long time now, but the government has considered changing the terms of the benefits. This has come as a result of reports which outlines that these benefits to the military retirees are more expensive and generous compared to people serving in private sectors. Therefore, the benefits have become unfair and unaffordable (Michel 2006).

However, the reduction of benefits for the retired military officers has raised concern to retirees and officers in service. They have to increase their savings to offset the loss of the benefits for retirement. The officers have to aim at having a firm for military families to cater for their financial needs.

The recommendations to reduce the retirement benefits have not taken into account the importance of the current system of retirement in maintaining the soldiers in the military. There are many soldiers who have multiple tours of duty that are double which requires them to have these benefits for them to operate (Mace 2010).

The retirees joined the army to serve their country, to get the job security and stay in the military for the pension plan. The benefits serve as the biggest rewards to the retirees after their service of diligence. The reduction of the benefits will affect the officers in service and the retired troops because they will be anxious. The soldiers may experience worries about the financial problems they might encounter in the course of their service and the effect this will have on the well-being of their families.

However, the proponents of the proposal point that the system of retirement for the military provides the members of military with half of their pay for a lifetime in exchange for service of 20 years. The percentage of money increases for those serving for a longer period than 20 years. This amounts to large sums of money required to maintain the system. The proposal of reducing the retirement benefits advocates for a 401(k)-type arrangement and establish a program that will pay benefits to the members after hitting the age of 60-65 (Lund 2004).

It is estimated that, through this plan, the government will save $250 billion over a period of 20 years. This is relevant in this period of economic crisis because the government is required to save a lot of money. The costs of maintaining the military retirement plan are growing fast which puts more pressure to reduce the benefits. The health care and pensions for military retired troops costs the government a $100 billion a year. There is an expectation of an increase with the increase in the life expectancy.

Also, the retirement system has been unfair to the younger troops who only serve in the military for fewer than 20 years. They do not receive retirements and are not accrued to get any benefits. Therefore, this system only provides benefits that are generous to the few members who stay for at least 20 years. The larger percentage of roughly 80% represents service members who only stay for less than 20 years.

Therefore, the proposal for the reducing military retirement benefits is effective because this will provide a sustainable financial system. The government predicts that the current benefits are unsustainable and should be reduced especially with the economic crisis. The proposal of the government to reduce the benefits should be taken positively because it provides for alternatives including the 401 (k) styles. The government has not advocated for the withdrawal of all the benefits but the reduction. The proposed system is sustainable for the government funding and is fair to all the officers. This includes those who stay longer in the service and the younger officers who may not serve for the longer period of more than 20 years (Asch 1998).

The proposal to reduce the benefits is effective as it serves to ensure that the soldiers manage their funds well. The savings and investments will support their families during service and in retirement. The sustainable system is effective because the government will not strain to maintain. This will reduce any chances of imposing heavy taxes on the citizens in support of the retirement system.

The new system cuts the cost of benefits through sharing where the government contributes 16.5 percent of the annual pay to the members. The members contribute $16,500 as the tax on their payments. There is a proposal for the retired military members to contribute towards the federal health care programs. This will generate a total of $20 billion savings for ten years. The current system of retirement is not sustainable because the military members start to collect the benefits after their 20years of service (Michel 2006).

Also, the retirement system should be re-evaluated for a change and benefits reduced. The current system was designed when the military payment was not competitive to the civilian pay. Also, the lifespan of that time was shorter, and the second careers were rare for service members (Lund 2004).

References

Asch, Beth J., Richard Johnson, and John T. Warner (1998). Reforming the military retirement system. Santa Monica, CA: Rand.
Baker, A. J., Logue, D. E., & Rader, J. S. (2005). Managing pension and retirement plans: A
Brigham, E. F., & Houston, J. F. (2009). Fundamentals of financial management. Mason,
fixed income valuation course. Hoboken, N.J: John Wiley.
guide for employers, administrators, and other fiduciaries. New York: Oxford
Logistics Management Institute. (2001). Estimating the military retirement health care liability. McLean, Virg: Logistics Management Institute.
Lund, John V. (1994). Military pay, benefits and retirement. New York: Nova Science Publishers
Mace, Don. (2010) 2011 FERS retirement planning guide for federal employees & retirees. Glen Allen, Va.: FEDweek.
Michel, Christopher P.(2006). The military advantage: a comprehensive guide to your military & veterans benefits. New York: Simon & Schuster Paperbacks.
Nawalkha, S. K., Soto, G. M., & Beliaeva, N. A. (2005). Interest rate risk modeling: The
Nordman, D. (2011). The Military Guide to Financial Independence & Retirement. Lanham: Impact Publications.
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