As part of the MCRMC report back in 2015 that advocated what we now know as the Blended Retirement System (BRS), the commission also recommended creation of more military financial education opportunities. This was to not only help servicemembers understand the new BRS, but also to help combat the troubling challenge of financial illiteracy that often has a negative impact on servicemembers’ personal lives and often spills over into professional duties. Given the lack of such financial education that most Americans including servicemembers receive, this requirement has the potential to be among the most impactful if it can help create lasting change that will stay with the servicemember their entire life!
Up to this point, the military provides only general financial advice, recognizing that unscrupulous financial salesmen would attempt to pressure young and financially inexperienced servicemembers into inappropriate financial products. While this issue is not without precedent, reality dictates a more hands-on approach is desperately needed. The most recent Blue Star Family survey reveals the serious financial concerns that servicemembers and their families have.
As previously investigated in a Financial Planning article, financial stress can often tragically be a major contributing factor into servicemembers’ suicides. Improving financial literacy can hopefully have a profound effect to help reduce these stressors.
The NDAA of 2016 lists many “financial literacy skills” upon which servicemembers are to be educated and trained at intervals during their Active and Reserve Component duty. The DoD refers to the intervals at which the education and training is to occur as “touch points.” Many of these as well as new training will now also cover the elements of the BRS.
I serve as a volunteer financial counselor and educator at my base and help to teach many similar classes already. They can be an incredible free resource to help educate you about financial topics and set you on the path to financial independence. If your location doesn’t already advertise about these classes contact your respective branch’s Financial Readiness Program offered through your base. There are both paid and volunteer financial counselors whose only job is to help you!
Note that many of these mandatory training events have not yet been put into effect, but should be rolled out this year and into 2018. Most of this data has come from the BRS Financial Counselor/Educator Course Financial Literacy Touch Points Resource Paper.
Initial Entry Training
For most new servicemembers, this training will take place during basic training or during OTS/ROTC/Service Academy. Many newly joined servicemembers are receiving their first pay check. The objectives of the initial training are to set the basic foundation for careful money management, prudent use of credit, and an early understanding of the concept of investments, especially the potential reward and the sources of risk. The servicemember must also learn about MyPay, the Leave and Earnings Statement (LES), and the TSP website. For many servicemembers, this training may very well be the very first time that they’ve been taught about these topics. The objective is that these servicemembers can learn more about this at the start of their careers, they will be better set up for financial success the rest of their life.
First Permanent Duty Station
The next touch point is when the servicemember arrives at their first permanent duty station. This career milestone comes as they now have a predictable routine and an environment for managing living expenses, saving (and investments), and credit while understanding the relationships between financial goal setting, budget planning, and budget execution. Servicemembers are in the optimum stage of life here in which financial literacy training can be delivered, and just as importantly, acted upon!
This training will focus on helping the servicemember build a statement of net worth and truly develop an appropriate budget given the cost of living at that assignment. Using those skills as a foundation, this touch point will also teach about the importance of savings, credit reporting, credit scoring systems, and understanding the mechanics of installment loans and revolving credit to include how interest is calculated on monthly payments. Also as part of the ongoing review of the BRS, this training will review the TSP including both the traditional and Roth options while covering the structure of index mutual funds, their historical rates of return, and their performance behavior across successive U.S. business cycles. In addition, servicemembers will be familiarized with the time value of money, investor time horizons, investor risk tolerance, and dollar cost averaging.
Finally, this touch point offer the chance to educate the servicemember on some of the life planning aspects covering the financial responsibilities of renting or buying a home off base, analyzing their current insurance coverage and needs, as well as understanding the financial implications of planned life events, especially marriage, having children, or purchasing big ticket items. Since these situations often occur during or close to arrival at that first assignment location, the goal is to maximize this training when its content is most likely to be applicable in the short term.
TSP Vesting — Occurs at Completion of Two Years of Service
For new accessions after 1 Jan 2018 that will be automatically enrolled in the BRS, they will vest the government’s 1% TSP contribution upon completion of two year of service. The amount that is vested is all of the government’s 1% TSP contribution that started after 60 days of service. For those that don’t know what “vesting” means, this term describes how the servicemember now “owns” all of the government money that has been accumulating in the TSP. If the servicemember had left the military prior to the 2 year vesting, they would hold no right to walk away with that money. It would revert back to the government.
This key touch point marks the start of the servicemember’s eligibility for government matching in the TSP so this is the major focus of this training requirement. If servicemembers enrolled in the BRS do not take advantage of the full match, they are leaving “free money” on the table and missing out on a guaranteed immediate 80% return.
Example: An O-1 contributes 5% of his pay which say for example = $152 a month and is matched by 4% [excluding the automatic 1% which happens no matter what]. That 4% match = $121 so the servicemember already made an 80% return [ 121 / 152 = 0.7961 ].
This training will also highlight the differing tax treatments of Traditional and Roth TSP account and cover appropriate asset allocations give the servicemembers’ goals and time horizons. Another key point that will be taught at this point cover TSP portability and options upon leaving the Active or Reserve Component which include:
- Leave the funds in the TSP.
- Roll the funds over to a civilian employer’s 401(k) plan.
- Roll the funds over to an individual retirement account (IRA).
- Cash out the funds (thereby incurring significant tax penalties on untaxed contributions and most gains due to the contributions).
Promotion
As servicemembers promote to the next rank, this touch point provides another opportunity to check in with the servicemember on their financial status. Once members are notified of their impending promotion, they can schedule an appointment with the base personal financial counselor to review individual or family current standard of living, as well as short-term, intermediate-term, and long-term financial goals.
Promotions increase monthly income, and taxes, but promotions also increase the potential for the individual or family to contribute at least 5% monthly to the TSP in order to achieve the DoD 5% matching contribution if they had not previously been doing so. This opportunity allows the servicemember to determine if he and his family can continue to live at their current standard of living, the increase in monthly net income can more easily be allocated to family financial goals.
Permanent Change of Station (PCS) Moves (E-4 and below and O-3 and below)
As servicemembers relocate between installations, these location changes can significantly alter income sources and monthly bills, depending on the locale-specific cost of living. Relocation can also generate unnecessary expenses if the servicemember and family do not plan carefully for the entire move. These career transition points also offer a great touch point as it is probably a few years since the last review that took place at TSP vesting or the last promotion.
As part of the out-processing checklist, the servicemember will contact the installation Personal Financial Manager (PFM) and Relocation staff for a consultation or class on making a smooth move. The primary purpose of this appointment is to project expenses before the move, expenses during transit, and expenses at the new duty station while also covering all of the applicable travel pay allowances authorized for the move, particularly for an overseas move
Major Life Events
Life happens, and these circumstances most always impact peoples’ finances. The DoD plans to use significant life events (i.e., marriage, divorce, birth of child, disabling sickness or condition, etc.) experienced by servicemembers may have implications or impact on short- and long-term personal financial goals, budgets, and reevaluate life insurance, car insurance, and as necessary, health and long-term care insurance needs.
When a servicemember makes the appropriate changes in DEERs, he will be prompted to schedule an appointment with the base personal financial counselor. This appointment will cover the impact on monthly and annual budgets as well as the impact affecting taxes in multiple ways, generally increasing or decreasing exemptions, deductions, or credits even creating a change in filing status. For servicemembers that experience a divorce, this appointment will cover all of the legal aspects concepts by which joint property and liabilities are split between each party and the ongoing financial impacts of the divorce settlement. The last major topic addressed is the importance of updating beneficiary designations and bequests on all depository accounts, deeds, titles, wills, and trusts through a follow-up appointment scheduled at the base legal office.
Pre-/Post-Deployment
As servicemembers deploy throughout their careers, this touch point provides the opportunity to leverage the financial benefits, but also offers financial challenges for families remaining behind. Deployment presents financial opportunities and challenges for them as they prepare to be away from home station, possibly in a combat zone, for an extended period of time, and upon returning home as some benefits end.
During the pre-deployment training, the focus will be on understanding allowances and special pays which will be received during the deployment and knowing which pays are taxable and which are “tax-free.” The servicemember will be encouraged to set goals for the expected increase in savings over the deployment including options as the Savings Deposit Program (SDP) or contributing “tax-free” contributions to the TSP, and discuss how the gains will be used at the end of the deployment. Lastly, servicemembers will have to project major expenses that will be incurred by the family over the length of the deployment and plan for managing the expenses and ensure their families have appropriate access to all the financial resources they will need.
Following the deployment, the servicemember will receive training that helps review family financial goals, analyze the new monthly and annual budgets and the current balance sheet to add/delete expenses and assets, as appropriate. The servicemember is challenged to review the pre-deployment financial goals and follow through as appropriate. Finally, the training will ensure each servicemember knows how to close an SDP account and transfer saved funds to other savings/investment/credit accounts for which the savings were initiated.
Entitlement to Continuation Pay — Occurs at Completion of 12 Years of Service
The National Defense Authorization Act of Fiscal Year 2016 also included a continuation pay provision as a way to encourage Service members to continue serving in the Uniformed Services. Under BRS, Continuation Pay is offered to members at the completion of 12 years of service provided members sign up to complete an addition four-year commitment.
This touch point offers the final chance to help the servicemember understand that a decision to forego or choose Continuation Pay should be made only after a concerted effort to project retirement income that might result from following a civilian career path. For servicemembers that select Continuation Pay, the full tax implications of receiving the payment in one payment as opposed to 2 or 3 equal annual payments are covered as well as outlining the options for allocating continuation pay: spending, saving, investing, paying down debt, or charity.
Transition Out of the Military
The NDAA envisions three significant transition events relative to the BRS. Chronologically, the first is at separation when the servicemember faces a decision on the portability of the TSP. The second is when the servicemember transitions from the Active Component to the Reserve Component and needs to become familiar with RC provisions of the BRS. The third is when the servicemember retires and has the option of electing to take a lump sum payment of future retirement assets.
Transition ~ Separation
When a servicemember separates, this training will rehearse the four options for a TSP account at separation (Keep, Rollover to new 401(k), Rollover to IRA, Cash out) and the benefits and costs of each. The servicemember will also be reminded of the option of being able to roll a future 401(k) account back into a pre-existing TSP account. (Note: Eligible to do so only when leaving the company that sponsors the 401(k) plan.) Finally, this touch point will cover the tax penalties of having an unpaid balance on a TSP loan when separating from active Federal service.
Transition ~ Active Duty to Reserve/National Guard
Here the servicemember will be trained to understand the regulations and procedures by which Reserve Component (RC) Service members are credited with “good years” for retirement eligibility and with retirement points for actual retired annuity calculations while also now covering the difference with how Continuation Pay is calculated for RC Service members.
Transition ~ Retirement from Active Duty ~ Eligible for Lump Sum Payment
When a servicemember retires, they will be required to leverage the budgeting skills learned during the Transition Readiness Seminar, and project a 12-month budget using the revised monthly annuities from the 50% and 25% lump sum payments in order to project cash flow requirements after committing to the lump sum payment(s). The training will cover the differing ways the servicemember could use the lump sum payment and determine how the payment(s) will be applied. If all or part of the money will be invested, the counselor will demonstrate the effect the investment will have on the family long-range retirement plan. The servicemember will also have to calculate the additional amount of money to be invested each month in order to retire at the Standard of Living (SOL) projected in the most recent family long-range financial plan. Finally, the training will cover the tax implications of receiving payment in one total disbursement of the lump sum or in 2 or more equal annual disbursements.
As you can see, the DoD has some major changes ahead with all of these new and upcoming financial training requirements. While some of them may be converted into computer based training (CBT), many of them require the face-to-face counseling to fully model and understand some of the major implications for servicemembers and their families.
It will be interesting to what impacts these financial touchpoints will have on military personal finance, there families, and general military readiness!
