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NDAA FY2016 Changes to Military Retirement

Spekkio

He bowls overhand.
Any idea what the changes to TRICARE are going to be? You keep saying it's not pretty but what is "it"?
What was proposed by the commission that did the study on shifting retirement to a 5% match is that the mil pays out a BAHC, which is recouperated entirely if you elect to have your family use the MTF. If not, you can use your BAHC to purchase privatized health insurance. BAHC would only cover something around half of your expected private medical insurance premium.
 

Spekkio

He bowls overhand.
Basic math skills.
Maybe you are talking about something different, but I was responding to your comment about what his funds will make between mil retirement mid 40s and collecting at 60. That number is going to be near zero (adjusted for inflation) for most people who heed the status quo advice to move most if not all of their retirement to bonds and treasuries at that point in their lives.

The calculus changes if he wants to retire later and expose his funds to more risk for longer, but that has no guarantee of a positive return.
 

Spekkio

He bowls overhand.
So doing a really quick spreadsheet on this:

An officer who retires at 20 and contributes 6% of his pay toward TSP will have contributed roughly $82-83k in $2015 (assuming current in-zone promotion timeline and the member promotes in September). With a 5% match and 5% average growth based on a portfolio of 20% allocated to bonds and 80% allocated to stocks and a 6-7% historic stock growth rate (using the crappy method so it's an over-estimate), the fund expects to be worth ~$235,000-237,000 at military retirement, which includes the $68.5k matched by the gubment.

During the next 20 years using a more conservative 2% growth the fund expects to grow to roughly $350,000, after that we assume the person retires and places all of his money into bonds/treasuries so it earns 0% above inflation.

This profile costs a retiree roughly $9,800 a year in the first 20 years of retirement (roughly) and $1,800 per year in retirement collection thereafter when you subtract the $82-83k contributed by the member. This assumes the 3% withdrawal rule, which seems to be in vogue now.

The total it costs an officer who retires at 20 and croaks at age 60 is $197,000. The amount it costs an officer who retires at 20 and croaks at 80 is roughly $380,000. The way the market performs is inversely related to the cost of the servicemember; that is, a great market will reduce the overall difference in retirement benefits.

Much more difficult to do with enlisted Sailors since their promotion timelines are much more volatile.
 
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Tycho_Brohe

Well-Known Member
pilot
Contributor
The calculus changes if he wants to retire later and expose his funds to more risk for longer, but that has no guarantee of a positive return.
And it changes again if he has a pension and Social Security, in the example of the O-5. If he has a substantial monthly income even before tapping his retirement funds, he can afford to be more highly allocated towards stocks closer to retirement.

Of course, the other problem is, even for people who want to work for 20+ years and get the full pension, there's no guarantee you'll be able to serve that long, considering what has been happening at the O-4 boards lately. Probably the best thing to do (for people like myself just starting out) is to take the match, do the best you can to get some EP's, and if you make it to 20 and get the pension, that's just gravy. Really really good gravy.
 

robav8r

Well-Known Member
None
Contributor
Rob, does that mean we can plan on equal big big changes to Medicare and Medicaid or is the military going to take it in face because there's nothing we can do about it?

Not a shot at you just tired of our benefits being messed with but not seeing a corresponding change in anyone else's.
My comments are based on pure economic data and forecast. Information publically available to all. The economic (macro) health of our nation sucks. Add to that the negative effects of the boomer generation retiring at the rate they are and you get a pretty bleak picture. As for healthcare - stay as healthy and for as long as you can !!!
 

Maxillarious

Registered User
pilot
I'm using TD Ameritrade, they have a list of about 100 ETF's that you can buy commission-free for your IRA, including about 30 Vanguard funds. No complaints about them so far, I've been there about three years or so. Like Ektar said, the TSP still has the lowest expense ratio, the lowest one on the commission-free ETF list is 0.05% for the Vanguard Total Stock Market Index. But obviously the IRA offers more choices in terms of diversifying.

Just a word of caution, but careful putting your nest egg into ETFs unless you're familiar with rollover and contango...
 

Tycho_Brohe

Well-Known Member
pilot
Contributor
Just a word of caution, but careful putting your nest egg into ETFs unless you're familiar with rollover and contango...
When you say rollover, do you mean turnover? As in how often the fund manager buys and sells positions in the portfolio? I usually don't stray outside of index funds, so that usually isn't a big deal. As for contango, I wasn't aware that was a thing outside of futures.
 

Flash

SEVAL/ECMO
None
Super Moderator
Contributor
Maybe you are talking about something different, but I was responding to your comment about what his funds will make between mil retirement mid 40s and collecting at 60....

I believe we are.
 

Maxillarious

Registered User
pilot
When you say rollover, do you mean turnover? As in how often the fund manager buys and sells positions in the portfolio? I usually don't stray outside of index funds, so that usually isn't a big deal. As for contango, I wasn't aware that was a thing outside of futures.

Rollover is how contracts are spread but yeah those things apply to commodities ... you can make a lot of money with those kinds of ETF's, but you can loose a lot too if you don't know how they work.

Anyway, I don't give free financial advice so if you want to know more you'll have to buy me a martini.
 

KilroyUSN

Prior EM1(SS) - LTJG - VP P-8 NFO COTAC
None
This could be great, think of all the people who hit 10 years, pick up Maj, LCDR, staff or CPO then generally suck for the next decade because if they leave they walk away with nothing. It may not solve the problem entirely but having some pocket money, (even just $50k-100k ) during transition may make leaving a better option than hanging around.

I think the issue is, many of the individuals who are "more lucrative / less lazy or scared to leave the military", now have a nice little nest egg to help make their decision to leave. I don't think it will remove the guys who hit 10 years and sit until 20, their incentives really haven't changed much, nor has their ability to find a job on the outside.
 

Spekkio

He bowls overhand.
And it changes again if he has a pension and Social Security, in the example of the O-5. If he has a substantial monthly income even before tapping his retirement funds, he can afford to be more highly allocated towards stocks closer to retirement.
All true, but the conventional wisdom I've read is do not invest in index funds unless your time horizon is greater than 10 years. Anything less than that and you expose yourself to mid term market fluctuations that cannot be recouperated by riding it out. It's one thing to invest and net a 5% return vice a 7% return on the market because it didn't play nicely with you; it's another to net a negative return on tens of thousands of dollars invested in the last decade when you are planning on retiring.
 

Spekkio

He bowls overhand.
I think the issue is, many of the individuals who are "more lucrative / less lazy or scared to leave the military", now have a nice little nest egg to help make their decision to leave. I don't think it will remove the guys who hit 10 years and sit until 20, their incentives really haven't changed much, nor has their ability to find a job on the outside.
I don't follow this line of reasoning. Do you not think that getting $18,600 a year to attend college + BAH + tuition assistance (because none of that actually counts as income) is enough of an incentive to leave after a single enlistment? If a Sailor is smart he won't blow all his paycheck on hooker and booze and will save at least $10-12k a year, giving him a nice liquid nest egg of about $30k by the time he is about to leave the service. Along those lines, I don't understand the logic that the retirement system should give more benefits on top of this to a member who plans to do a 4-and-out enlistment.

It's more that if a Sailor reenlists past that point, there's an incentive for him to stay that outweighs getting his free or drastically reduced college education and follow-on civilian career, whether that something is reenlistment bonuses, transferring the GI bill to children, healthcare/retirement benefits or *gasp* actually enjoying the job.

PS: The report on retirement reform said that the military won't match contributions during the first year or two of a member's service...you know, because they still have to learn to manage their money and matching that early wouldn't be conducive to it.

/BT

Ran the numbers with the average enlisted promotion timeline (retire at E-8). The new plan will cost that guy about $132,000. A typical E-7 retiree would lose about $114,000. I also realized I fat-fingered a number and the officer loses $210,000, not $380,000, over a 40 year retirement. So pretty much regardless of promotion structure it results in about a 10% loss in retirement if they live to see 80 years old with just contributing the 6% + 5% match, and the sooner a person passes away the more of a cut to retirement benefits they experience (about 15-17% if he passes away before 70, 20% obviously before 60).

This delta from the 70-80 years old range can be reduced to around 6% at the 70-80 year range if you withdraw the fund at a rate that it is depleted by 80, with the plan to just take the 20% hit after that.
 

SynixMan

HKG Based Artificial Excrement Pilot
pilot
Contributor
It's cool to see that we can cut benefits because they're getting expensive, since no one besides MOAA will really complain to the people making the decisions.

But if a gold plated acquisition program goes over, we can throw money at that!
 

KTBQ

Naval Radiator
pilot
All true, but the conventional wisdom I've read is do not invest in index funds unless your time horizon is greater than 10 years. Anything less than that and you expose yourself to mid term market fluctuations that cannot be recouperated by riding it out. It's one thing to invest and net a 5% return vice a 7% return on the market because it didn't play nicely with you; it's another to net a negative return on tens of thousands of dollars invested in the last decade when you are planning on retiring.

According to this "conventional wisdom", what would you invest in otherwise? Your risk profile is determined by your asset allocation (% stocks/bonds/cash), not the type of management (active or passive) you are employing.

FWIW, I've seen very little/no financial advice that would direct a retiree to invest in 100% treasuries/other fixed income. Given that a 65 year old retiree could easily live another 20-30 years, that's a great way to run out of money. 40-50% exposure to stocks is pretty common advice.

@Maxillarious: What you should say is be cautious of investing in ETFs that are exposed to commodities, futures, and other more exotic financial instruments. These are often thinly traded, hyper volatile, and poorly understood. Investing in widely traded (low bid/ask spread) stock and bond ETFs poses no additional risk over mutual funds investing in the same stocks and bonds. For a long term investor, there is no functional difference between VTSAX and VTI (both Vanguard Total Stock Market).
 
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