Data & Research March 2, 2016

Service Members Need Nudging with New Retirement System

Retirement outcome success with the new military retirement system will depend much on participants making best savings decisions.
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Look for the new military retirement system to bring considerable financial uncertainty to the next generation of career military, with many service members and their families facing a potential future of smaller monthly retirement checks than under the current traditional pension program, according to a new white paper by First Command Financial Services, Inc.

Service members who enter military service on or after January 1, 2018, will face a new military retirement system that replaces the traditional 20-year pension with a blended program that includes a reduced pension in exchange for a lump-sum bonus and a new matching funds program through the government’s Thrift Savings Plan (TSP). A previous study by First Command found service members who expect to make a career out of the military prefer to stick with a traditional pension rather than opt for the retirement reforms recently proposed by Congress.

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Based on a detailed analysis of the future finances of two hypothetical career military members (one enlisted, one officer), the white paper projects that service members who fail to save a sufficient portion of their basic pay and all of their lump sum bonus—and invest both in recommended fund offerings through the TSP—are at risk of receiving monthly retired pay that could be considerably smaller than the size of monthly paychecks under the current 20-year pension.

In one example, First Command projects that a service member who does not take the necessary actions to earn matching contributions and save the lump-sum bonus is at risk of receiving monthly retired pay that could fall 18% short of what it does under the current pension system. Overly conservative investment choices and lower-than-anticipated stock market performance are among additional factors that could reduce the size of monthly retired paychecks.

NEXT: Outcomes depend on savings behaviors

“The matching funds and lump-sum bonuses of the new military retirement system offer valuable and portable benefits to our non-career service members, but those who expect to serve out a 20-year career face a more clouded future,” says Scott Spiker, CEO of First Command. “Our next generation of career service members will receive fewer government guarantees, namely smaller pensions. That means they face a future that will require greater reliance on long-term investment growth as well as their own savings behaviors and investing acumen.”

Spiker adds, “Success will depend on adopting the types of strong personal financial choices and behaviors that often run counter to the temptations of our instant-gratification society. Our analysis clearly demonstrates the importance of service member contributions in the new retirement system. Earning matching funds and saving continuation pay is critical to success. If a service member does not participate in the TSP, then they forego matching contributions made by the defense department. And without those matching contributions, they accept a less valuable retirement plan. Our conclusion is that any behavior by the service member that is less than ideal will result in reduced retired pay.”

First Command notes that the new retirement system features financial education as an important element of preparing service members to take a stronger role in pursuing their financial security in retirement. But the company also stresses the critical role that professional financial advice can play in shaping the savings and investing behaviors of service members.

“Our marketplace studies have consistently shown that partnering with a financial adviser has a positive relationship with confidence in one’s ability to retire comfortably,” Spiker says. “Financial education and professional financial advice represent two different but complimentary approaches that can help America’s career military families make the most of their government benefits. Both approaches will be critical to helping these families take responsibility for and successfully pursue their own paths to long-term financial security.”

Data & Research March 2, 2016

Financial Advisers Increase Retirement Income Confidence

A survey reveals lessons from retirees for planning to pay expenses in retirement.
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One question employees should ask before deciding to retire is “How will I pay for my living expenses after I stop receiving a paycheck?” Research from Ameriprise Financial finds retirees have addressed this question more so than pre-retirees.

The Pay Yourself in Retirement study found that the overwhelming majority of retirees (85%) say they have a plan in place to pay themselves in retirement, which may include calculating expenses, identifying investments that generate income, and determining which assets to draw down first. Having taken steps to prepare, these retirees report being more at ease with their finances. Compared to pre-retirees—only about half of whom (52%) say they’ve developed a retirement income plan—retirees are nearly twice as likely to say they feel completely confident they’ve saved enough money to last their lifetime.

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While the study uncovered differences between retirees and pre-retirees, both groups say they define paying themselves in retirement as having enough cash flow to maintain their independence and lifestyles in retirement. The two groups do have similar worries: Nearly two-thirds of all respondents cite health care expenses (63%) and protection from market volatility (64%) as concerns.

NEXT: Lessons from retirees

Retirees have started off this new chapter of life feeling optimistic about their ability to pay themselves in retirement, Ameriprise says. One reason may be their reliance on guaranteed sources of income like company pensions. The overwhelming majority of retired Boomers (71%) are relying on pension plans to help fund their retirement and have focused on making investments expected to generate additional income (41%). In addition, nearly two-thirds (65%) have identified the assets they plan to draw down first in retirement.

Among this group of Baby Boomers, 77% named tax treatment of investments as one of the most important considerations when deciding how or when to draw income. As Boomers reach their 70½ birthdays, Required Minimum Distributions (RMDs) will kick in and dictate how much money they must withdraw from their retirement accounts annually. If not taken or calculated incorrectly, retirees could be facing penalties because of RMD requirements. Therefore, Ameriprise suggests, it is very important for Boomers to consider these tax rules when formulating their retirement income plans so that they aren’t surprised.

Overall, it appears that retired Boomers’ retirement income plans are working well. Only 10% report they have needed to make significant adjustments like reining in their spending habits.

The top three takeaways from retirees are:

  • Start planning your retirement income early;
  • Decide which assets you will need to draw down first;
  • Consider tax implications that could affect your income down the road.
NEXT: Not too late for pre-retirees

While more than half of pre-retirees (53%) have not thought about their retirement income plan or feel it will be difficult to map out, the majority (73%) say they plan to transition into retirement at age 65. With the clock ticking, many report feeling overwhelmed and anxious, with more than half (55%) expressing concern about the possibility of using their money too quickly in retirement.

For this group of Boomers, it may be particularly important to start planning now. In a shift from older generations, today’s pre-retirees are relying less on pensions and more on 401(k)s and IRAs, which means the burden is shifting from employers to individuals to fund their own retirement, Ameriprise notes. It’s likely the next wave of Boomers to retire will need to spend more time than their older peers calculating optimal withdrawal rates and exploring guaranteed sources of income.

A majority of Boomers surveyed relied on financial professionals to design their retirement income plans. The study showed that retirees and pre-retirees who have worked with a financial adviser on a plan are more confident about their retirement income. In fact, the majority (98%) of Boomers who work with an adviser have talked with them about strategies for income in retirement.

“Figuring out how to recreate a ‘paycheck’ in retirement can be one of the most daunting challenges investors face,” says Marcy Keckler, vice president of financial advice strategy at Ameriprise. “Add to it recent market volatility and it’s easy to see why pre-retirees who have not developed a retirement income plan feel less confident that they’ll have the money they need to cover their expenses. The good news is that they still have time to take action. By putting a plan in place now, while they’re still earning a traditional paycheck, they may be able to achieve similar levels of confidence as their older peers.”

The Pay Yourself in Retirement study includes responses from 1,305 Americans ages 55 to 75 with investable assets of at least $100,000, who were surveyed online from November 16 to 22, 2015. More information is here.

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