Financial Readiness Planning
First term soldiers get financial readiness training at their first duty station. Most installations also offer financial readiness training to other soldiers upon request, usually through the Army Community Service (ACS) or Community Service Center (CSC). Many units also have appointed a command financial NCO (CFNCO) who conducts training and financial counseling for assigned soldiers. The training you receive helps you manage your finances while in the service and can help you plan for the future as well. Training Circular 21-7, Personal Financial Readiness and Deployability Handbook, is a good reference for more details.
Financial readiness for AC and RC soldiers means ensuring you and your family are provided for within the limits of your income. The reason it is a readiness issue is that soldiers with money problems may be unable to focus on their mission, especially if deployed. Training in financial matters can help you gain control over your finances and manage your money more effectively. The goal of the training is to provide you with the tools to handle your money wisely and to make informed purchasing decisions so you are better able to concentrate on your duties.
The Consumer Affairs and Financial Assistance Program (CAFAP), offered through ACS, can train soldiers and spouses in money management, proper use of credit, basic financial planning, deployment, transition and relocation, insurance options, and check writing principles. If you don’t already know how, CAFAP counselors and the CFNCO can teach you about budgeting. Budgeting can prevent financial difficulties before they arise.
Service in the Army helps to save money. For example, shopping at the Commissary is usually less expensive than off-post. The MWR facilities on base are nearly always a better value than similar businesses in the civilian community. You also have access to free legal assistance that in the civilian world could cost hundreds or even thousands of dollars. Your health care costs very little in comparison to that of civilian workers. But you should take positive steps to ensure expenses don’t exceed your income. One of the best tools is to create a budget. A budget is a list that shows your expected income and expenses on a periodic basis, usually monthly. The goal is to track your expenses and learn the discipline to spend money when you planned to.
The key is discipline. Eating out less saves money immediately. If you are considering the purchase of a vehicle, make sure beforehand that the payments fit in your budget-and don’t forget the insurance and operating costs. Save ahead of time for big purchases like TVs or appliances so you don’t have to pay interest on credit cards or loans. These few little tips can help keep you on budget. Set financial goals that are reasonable and then make a plan for reaching them. Stay on budget by avoiding unnecessary expenses and smart purchases. It isn’t easy, but soldiers have performed much more difficult tasks.
it shouldn’t be any surprise that it’s important to plan for the future financially. The trouble is soldiers often don’t think of it until late in their careers. Our commitment to the Army, our fellow soldiers, and to our families occasionally leave little time for thinking about financial goals. However, someday you will leave the service and start a new career and someday you will also leave the civilian work force. The sooner you plan for that day, the more likely you will attain the goals you set.
In basic terms, there are three areas to consider: retirement planning, emergency savings, and insurance. Retirement planning is a long-term savings process to prepare for the day you are no longer in the work force or earning a regular paycheck. You should also try to save enough now to cover emergencies or unforeseen opportunities. That means having enough money in the bank, for example, to pay the deductible on your car insurance in case of an accident or to get home on emergency leave. Finally, life insurance is money that, in the event of your death, helps your family or beneficiaries get back on their feet.
Servicemembers’ Group Life Insurance
Soldiers are involved in a dangerous profession in a dangerous world. As in civilian life, soldiers often purchase life insurance to protect their families in the case of the soldier’s death. Since World War I the government has provided insurance of some type to all members of the Armed Forces. The origins of SGLI date back to the Vietnam War. As the Armed Forces began to suffer significant casualties, the private life insurance companies were unwilling to underwrite the coverage for members of the service. This created the need for a government sponsored life insurance program to cover soldiers placed in harms way. Servicemens’ Group Life Insurance (SGLI) was instituted in 1965 to meet this need. The name changed in 1997 in recognition of the increasing numbers of women who serve in the Armed Forces.
SGLI initially covered only active duty personnel, but it has expanded over the years to cover certain reserve component soldiers. The maximum amount of protection has increased significantly since the program started. Originally, the coverage was limited to $10,000, but it has gradually increased over the years through legislation to its current maximum coverage level of $250,000. All eligible soldiers are automatically covered by SGLI for the maximum amount unless they decline or reduce the coverage in writing. The very low cost of SGLI makes it a wise choice while on active duty or in the reserve component.
The coverage expires 120 days after separation from the Army. Soldiers may continue the coverage for two reasons. First, if, upon separation, a soldier is not able to work due to disability, a disability extension of up to one year of free coverage is available. Second, any soldier can convert their SGLI coverage to either Veterans’ Group Life Insurance (VGLI) or to a commercial life insurance policy. Both the disability extension and the VGLI conversion options require an application to the Office of Servicemembers’ Group Life Insurance (OSGLI). Find more information on the VA Insurance website at www.insurance.va.gov.
Family coverage, which took effect on 1 November 2001, provides automatic coverage of $100,000 (or the SGLI coverage level of the soldier, whichever is less) on SGLI-insured soldiers’ spouses. As with the basic SGLI, soldiers may in writing decline or reduce spousal coverage. Dependent children are also automatically insured, at no cost to the soldier, for $10,000 per child.
If you wish to increase your total life insurance coverage to more than that provided by SGLI, commercial life insurance in various forms is available. Some insurance products cover you for a specified period or term and are usually the least expensive initially. Permanent insurance (for example, Whole Life) is designed to last a lifetime and may provide a cash value after a few years but is generally the more expensive option at the time of purchase. There are a number of variations of each as well. But look before you leap-make sure you really need it, can afford it, and understand what you’re paying for! For example, any insurance you purchase should have no restrictions as to occupation, aviation status, or military status (active or reserve) in peacetime or war. Read the fine print and ask questions.
As you progress in your career or even after you leave the Army, you should reevaluate both the amount and type of insurance you carry. Events such as the birth of children or buying a house may change the amount of insurance with which you want to protect your beneficiaries. It depends on what your beneficiary will need. For example, let’s say a soldier wants her spouse to be able to pay off the house and still have money available to pay for four years of college for their three children. They would add the balance of the home loan to the expected cost of the tuition, then subtract any amount the government pays in the event of the soldier’s death (so they don’t pay for more insurance than they need). A single soldier paying child support or a soldier who designates his parents as the beneficiaries each would similarly calculate how much money would be needed in the event of the soldiers’ death and insure for the amount they desire.
Soldiers who complete at least 20 years of military service can receive outstanding retirement benefits, including retired pay. Military retired pay has a long history that is often misunderstood. It is not a pension. Pensions are primarily the result of financial need. Military retired pay is not based on financial need, but is regarded as delayed compensation for completing 20 or more years of active military service. The authority for nondisability retired pay, commonly known as “length-ofservice” retired pay, is contained in Title 10 of the US Code.
The military retirement system has four basic purposes:
- To provide the people of this nation a choice of career service in the armed forces that is competitive with reasonably available alternatives.
- To provide promotion opportunities for young and able-bodied members.
- To provide some measure of economic security to retired members.
- To provide a backup pool of experienced personnel in case of national emergency.
If you decide to make the Army a career, you will retire at a relatively young age so you will probably begin another career. In fact, the leadership abilities and experience gained in the Army often make former soldiers highly valued employees. Even former soldiers who start their own businesses have a unique edge-they are confident, smart, and have outstanding initiative.
Active Component Retirement
For soldiers who retire from active duty, your retirement system is determined by your DIEMS, or date-initially-entered-military-service. Soldiers with DIEMS before 8 September 1980, receive a percentage of their final basic pay, calculated by multiplying 2.5% by the number of years of service. Those with DIEMS on or after 8 September 1980, receive a percentage of the average of their highest 36 months of basic pay, referred to as the high-three formula. Soldiers with DIEMS after 31 July 1986 may choose between the high-three formula and the Military Retirement Reform Act of 1986 (commonly called REDUX) formula.
Under the high-three formula, monthly retirement pay is the average of the highest 36 months of basic pay, multiplied by 2.5 percent per year of service, up to a maximum of 75%. For example, a soldier who serves 24 years would receive monthly retirement pay of 60% of the average of his highest 36 months of basic pay.
Soldiers who choose the REDUX option receive a $30,000 careerstatus bonus (CSB) during their 15th year of service and agree to serve five more years. Retired pay then equals the number of years of creditable service multiplied by 2.5 percent, minus 1 percent for each year of service under 30, multiplied by the average of the soldier’s highest 36 months of basic pay. If you stay in for 30 years, the retirement pay will be the same as the high-three formula. The $30,000 CSB is taxable. At age 62, retired pay is recomputed under the high-three formula but will not be retroactive. Under REDUX, the longer one stays on active duty, the closer the percentage multiplier is to what it would have been under the high-three formula, up to the 30-year point at which the percentage multipliers are equal. Look for more details on active component retirement on the Army G1 website at www.armyg1.army.mil.
In addition to retirement pay, soldiers may also participate in the TriCare for Retirees health care plan and the Delta Dental for Retirees plan. For low premium rates, Army retirees can continue to receive the same level of care they and their families enjoyed while on active duty. See Section VIII for more on these programs.
Reserve Component Retirement
Reserve component soldiers may also retire after 20 years of service. Reserve soldiers earn “retirement points” that are used to calculate the amount of retired pay in the following ways:
- Inactive duty for training (IDT) points earned as a troop program unit (TPU) member or as an IRR/IMA soldier attached to a TPU.
- Active duty (AD).
- Active duty for training (ADT).
- Annual training (AT).
- Active duty for special work (ADSW).
- Correspondence course points.
- Funeral honors duty.
- Points-only (non-paid) status (reinforcement training unit soldiers).
As an RC soldier, you must earn at least 50 retirement points in a year for that year to count toward retirement. You may request retirement after you have 20 of these “good” years toward retirement. You will be eligible for a number of benefits but a monthly retirement check won’t be one of them until you turn age 60. At that time you will receive retirement pay based on the highest rank you held, the number of qualifying years of service, the pay scale in effect at age 60, and the number of retirement points you earned. More detailed information is available on the Army Reserve Personnel Command website at www.2xcitizen.usar.army.mil.
Section 3991, Title 10 United States Code provides that enlisted retirees may receive an additional 10% in retired pay (not to exceed 75% of active duty basic pay) if they are recipients of the Medal of Honor, Distinguished Service Cross, or the Navy Cross. In the case of retired Medal of Honor (MOH) recipients, this is in addition to the special pension of $1000 per month paid to all MOH recipients.
Whether you stay in the Army or not, you should think now about that inevitable day in the future when you are out of the workforce. If you stay in the Army long enough to retire, that is part of the answer. Social Security payments won’t start until you are about age 67. But even then, these together may not be enough to live on. Either way you should consider a strategy that will provide an income.
Your installation’s Consumer Affairs and Financial Assistance Program (CAFAP) counselor or your unit’s CFNCO can describe some of the tools available to accomplish this. Some of those tools are traditional individual retirement accounts (IRA), Roth IRAs, 401(k), savings incentive match plan for employees (SIMPLE) IRAs, annuities, US savings bonds, Thrift Savings Plan (TSP), stocks, bonds, and mutual funds. The CAFAP counselor and your unit’s CFNCO are not professional investment advisors, but they are able to give generic information on investing. They are not able to advise you on a particular investment or course of action. Those decisions are yours to make. Learn as much as you can and if you want professional investment advice, seek it from licensed professionals.
An investment program is not necessarily a luxury or even expensive. The key to investing is to start early and then stick with it. For example, let’s assume you can afford to invest $25 per month and you invest in a long term tool like an IRA. Let’s further assume that IRA averages a 10% rate of return per year. If you were to start this at the age of 20, by the time you were 65 you would have $227,000. Different investments have historically provided different returns so do a little homework before choosing one.
There is risk involved. Just because a particular mutual fund, for example, had a high rate of return for the last ten years does not mean it will for the next ten. Less risky investments may not keep up with inflation. Professional investment advisors can help if you need more details. But it’s your future, your money, and your decision.
Thrift Savings Plan (TSP)
The Thrift Savings Plan (TSP) is a retirement savings and investment plan created by Congress in 1986. Participation in the TSP is optional and is offered as a supplement to the traditional military pension benefit plan. TSP offers the same savings and tax advantages that 401(k) plans provide employees of private sector companies.
Some of the benefits of contributing to the TSP are the following:
- Immediate tax savings that reduce your taxable income by the amount contributed to the plan.
- Easy to start retirement savings plan for all members of the Army regardless of number of years of service.
- Ability to transfer or rollover IRAs, 401(k), or other eligible employer plans into TSP.
All soldiers, both active and reserve component while in a paid status may contribute to the TSP. An initial opportunity occurs within the first 60 days of becoming a member of the Army. After the initial opportunity ends, you may elect to start or change contribution amounts during designated TSP “open seasons.” Also, members of the ready reserve can change or start their contributions when changes in military status occur such as transferring from the IRR to active duty, into a troop program unit (TPU), or becoming an individual mobilization augmentee (IMA).
The TSP is a defined contribution plan governed by Internal Revenue Service (IRS) codes that prohibit withdrawals of TSP money while still in the Army. The only exception to this rule is when certain types of financial hardships occur in a soldier’s life or after a soldier reaches the age of 59½. A soldier may borrow money from his TSP account after obtaining a balance of a $1,000. Loans must be paid back with interest by allotment. Both the principal and interest are returned to the soldier’s account.
After leaving the Army you have several options for withdrawing money from your TSP account. You can leave your balance in the TSP where it will continue to grow. You might decide to receive a single payment or transfer all or part of the account to other eligible employer plans or traditional IRAs. You might also decide to receive monthly payments in the amount you request or by the IRS life expectancy tables. In any case, the IRS requires that withdrawals from the account must start no later than age 70½.
Your personnel office and Army Community Service (ACS) representative can provide basic information regarding this program. However, soldiers should read the Summary of the Thrift Savings Plan for the Uniformed Services before deciding whether or not to enroll. The TSP also provides booklets on specific program features including the investment funds and loan and withdrawal programs. These booklets, along with informational fact sheets, can be viewed and downloaded on the TSP website at www.tsp.gov. The TSP website also has forms, calculators, current information on changes to the program, updates on rates of return, and access to options in your TSP account.
Survivor Benefit Plan
Congress established the Survivor Benefit Plan (SBP) to provide a monthly income to survivors of retired soldiers when retirement pay stops. The plan also protects survivors of soldiers on ac tive duty who die in the line of duty. Soldiers on active duty pay nothing for this benefit. The benefit is paid to the beneficiary of a soldier who dies in line-of-duty (LOD) and is not yet retirement eligible (has not accrued 20 years of service) on the date of death. The beneficiariy receives 55 percent of the retirement pay the soldier would receive if retired with a total disability rating on the date of death. This means that if you died while on active duty and in the line of duty, your spouse will receive a monthly check of 41.25% (55% X 75%) of your pay at the time of your death. But Dependency and Indemnity Compensation (DIC) payable by the Department of Veterans Affairs (VA), reduces a spouse’s SBP annuity dollar-per-dollar.
Retirees pay for their survivor benefits in SBP. The cost varies with the amount the retiree elects to provide the spouse. The retiree may elect to provide up to 55% of his retired pay to his spouse. For those about to retire, this is an important decision because without SBP, the surviving spouse of a retiree no longer receives the monthly retirement check. Find out more at the website of the Army G1, Retirement Services Directorate.