When you serve your country as a career servicemember or become disabled while on active duty, you may be entitled to a military pension. Having a pension puts you ahead of the game when it comes to retirement planning because you have reliable income. By looking into ways to save even more and supplement your pension, you’re making great strides in reaching the kind of retirement lifestyle you want and deserve.
In general, you can retire and start receiving pension benefits immediately, regardless of your age, if you serve at least 20 years. The amount of a military pension is based on a number of factors, including:
- when you enlisted
- the number of years served
- your final pay upon discharge or the average of the highest 36 months of basic pay, depending on the plan
- the type of discharge
For more information, visit the U.S. Defense Department’s Military Pension site. You may also want to check out the Department of Defense retirement calculators to help estimate future pension payments.
Regardless of whether you become eligible for a military pension, you may be able to start saving for retirement on your own with a thrift savings plan (TSP).
Understanding Your TSP
A TSP is similar to a 401(k) plan in the private sector, but is available to government employees, including servicemembers. It's known for its low administrative fees, which help keep your money working for you.
A TSP gives you several options for investing your contributions, depending on your goals, risk tolerance and timeline.
You can choose to make pre-tax contributions to a traditional TSP or after-tax contributions to a Roth TSP. Earnings in both accounts grow tax-deferred. With a traditional TSP, you pay tax on your withdrawals in retirement. With a Roth TSP, withdrawals are tax-free as long as you've held the account for at least five years and are 59½ or older when you take distributions.*
In 2021, you can contribute up to $19,500 to a traditional or Roth TSP, or any combination of the two. Servicemembers age 50 years old or older can contribute an additional $6,500 catch-up amount for a grand total of $26,000.
*Withdrawals at retirement from a traditional TSP will be taxed at ordinary income tax rates. Qualified withdrawals at retirement from a Roth TSP are tax-free. Non-qualified withdrawals from a Roth TSP are subject to income tax on the earnings. In addition, non-qualified withdrawals from either type of TSP may be subject to a 10 percent tax penalty. Talk to your tax advisor for more information.
Additional Tax Advantages for Servicemembers
Servicemembers may be eligible for additional tax breaks for retirement savings.
Combat pay is free of federal income taxes. (It is, however, subject to Social Security and Medicare taxes.) If you receive tax-exempt combat pay and invest it in a Roth TSP, then you’ll have the opportunity to grow your money completely tax-free. You can contribute your tax-exempt pay, it grows tax-free and you can withdraw it without tax. A win-win-win!
Even though combat pay isn’t included in taxable income, you may consider that income when determining how much you can contribute to an IRA.
To learn more about taxes for servicemembers, read IRS Publication 3: Armed Forces’ Tax Guide.
Planning for Military Retirement/Second Career
Trading in your uniform for civilian clothes may be far in the future, but time goes quickly. You’re smart for thinking about it now.
Retiring from the military may present financial and emotional challenges. Being aware of these challenges and how to address them may help you prepare for the future with a fresh sense of adventure as well as financial readiness.
Factors to Consider
Your next steps will depend on whether you plan to retire fully or go on to a post-military civilian career. However, there are a few considerations that apply to almost anyone retiring from the military:
- Housing costs. You may be receiving a housing allowance during your service. Be sure to consider the cost of housing in the future.
- Health insurance. You may be able to obtain health insurance through an employer if you decide to pursue a second career. Otherwise, check into health insurance available through insurance exchanges, TRICARE® and your spouse or partner. Keep in mind that most people aren’t eligible for Medicare until age 65.
- Taxes. Some of your housing and food allowances, as well as certain combat pay, may be free of federal taxes. Talk to a tax advisor or attorney about how your tax situation may change in the future.
Show Me the Money
Considering that servicemembers tend to retire at a much younger age than the general population (47.7 versus 62), you may want to contemplate a second career. By relying on a new job to cover living costs, you could consider putting all or part of your military pension and other retirement assets into savings for the future.
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