Classmates: Are you retiring from the Military this year?
If you are reading this article and getting ready to retire from the military, then congratulations and thank you for your service!!! Can you believe it has been almost 20 years since we graduated from West Point?? I applaud all of you who stayed the course and are soon to leave the military service and embark on your next adventure! Our country is proud of your service and so am I!!!
I left active duty service in July 2001, right before September 11th. Since 2002, I have been helping military men and women with their financial planning needs as a financial advisor. It is amazing how much has changed in my industry and how much has stayed the same in the last 14 years! There have also been some great changes to military benefits over the last 16 years! Most of these changes were to help better take care of the surviving spouses of those military members who made the ultimate sacrifice.
As you are preparing for retirement from military service you may be asking yourself these questions:
1. Should I replace my Servicemembers Group Life Insurance?
2. Should I take the Government’s Survivor Benefits Plan?
3. What should I do with my Thrift Savings Plan?
If any of these questions pertain to you, hopefully you will gain some insight from this article. I would love the opportunity to help you and your spouse with these major decisions.
Should I replace my Servicemembers Group Life Insurance?
The Servicemembers Group Life Insurance (SGLI) has increased from $150,000 when I was in the Army to $400,000 today. A serviceman or woman who leaves the military can convert their SGLI to Veterans Group Life Insurance (VGLI) without proof of good health. Coverage is available in $10,000 increments and it is a five year renewable group term insurance policy, with the rates increasing every five years until they max out at age 75. So if you are between the ages of 40-44 you would be paying $68 per month for $400,000 of coverage now. But it does increase every five years until you reach age 75 at which it maxes out at $1840 per month for the $400,000 of coverage. Once you have VGLI coverage, (which is available within one year and 120 days after leaving military service without providing proof of good health), you also have options to convert the policy with several insurance carriers into a permanent life insurance policy. Like all Term Life Insurance policies, you have to continue to pay your premiums each and every month. For more information visit: http://www.benefits.va.gov/insurance/vgli.asp
Let’s look at some comparisons between VGLI and commercial life insurance options. For all scenarios, we will assume a 42 year old male starts the insurance plan on his birthday and lives until his life expectancy of 84 years old. For all scenarios we will use the following assumptions:
-42 Year old Male
-1st insurance payment on 42nd birthday
-Last insurance payment is month before 84th birthday
-Dies at life expectancy of 8
-Assumes a $400,000 tax free death benefit
If the 42 year old chooses VGLI he would pay a total of $348,288. The first commercial option would be to buy a 30 year term insurance policy and converting it to a permanent life policy without having to show proof of health at age 71. His term insurance policy would initially cost $110.62/month assuming he was a standard non-smoker. At age 71, he would choose to convert to a universal life insurance policy costing $1262.14/month. Using the term insurance for the first 29 years and then converting to a universal life policy paying through age 83 would cost a total of $235,389 a savings of $112,898 vs. VGLI. Another option would be having the 42 year old purchase an indexed universal life policy (guaranteed permanent life) at $270.90/month, again assuming he is standard non-tobacco user. The total cost for this option would be $136,533.60, which is $211,757 less expensive than choosing VGLI!!! If the 42 year qualifies for the preferred rating the cost to age 84 would be $122,522, a savings of $225,765 vs. VGLI! The best health rating would cost the 42 year old male $111,333 to age 84, a savings of $236,954 compared to the VGLI program. Even a 42 Year old Tobacco user with Standard health would only pay $236,954 to age 84, a savings of $100,703 over VGLI. Female Servicemembers stand to benefit even further since costs of life insurance is traditionally less for women than their male counterparts. If we were to do the comparison for a 42 year old woman with standard non-tobacco ratings her cost to age 84 would be $188,510.56, a savings of $229,777 against VGLI!! If you are uninsurable then your best option would be to take the VGLI insurance as you exit the military; however, it is definitely worth the time and savings to look at a commercial alternative life insurance plan with us, even if you have health issues. We look forward to the call!
Should I take the Governments Survivor Benefits Plan?
Converting your SGLI to VGLI or some other type of life insurance is important; however, the BIGGEST decision you and your spouse will make is whether or not to enroll in the Survivor Benefits Plan (SBP) to protect your military pension. The bottom line up front is that you NEED TO DO SOMETHING!!! According to the US Army Website under MyArmyBenefits, “Military pay, including active duty pay and allowances and retired pay, stops upon a Soldier's death. The Survivor Benefit Plan (SBP) is a program through which the Department of Defense provides monthly, cost-of-living-adjusted income to eligible survivors of Soldiers who die on Active Duty, including Reserve Soldiers and National Guard Soldiers who die on Federal Active Duty, and of Retirees who choose to continue participating in the program after they retire.”1 Your military retirement pay only belongs to you, not your spouse, not your children, only you. The Survivor Benefits Plan can be a great option for you to protect your spouse in the event the retiree passes away first. Applying for this benefit does not require you to have proof of good health. You should contact your local installations Retirement Services Officers who are available for pre-retirement services and counseling on the Survivor Benefits Plan. I would also recommend that you contact us to go over your specific situation.
There are some good alternatives or supplements to the SBP program. If you are healthy without any major medical issues, life insurance can provide an alternate solution or can complement the SBP program very well. Selecting the right amount and type of life insurance can be a daunting task. Please don’t hesitate to contact us for a free consultation if you would like help or information on the life insurance options available.
Please do not get out of the military without taking the SBP option if you do not have investments or life insurance in place that would provide similar coverage.
I included a short video that briefly explains the difference between temporary (Term) or permanent life insurance here https://youtu.be/JKG-ufKoprM?list=UU8BuDhGqmGa5OyBYDDYcvIg
What should I do with my Thrift Savings Plan?
Another great benefit that became available after I left the military is the Thrift Savings Plan. This plan became available in October 2001. “The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. It was established by Congress in the Federal Employees' Retirement System Act of 1986 and offers the same types of savings and tax benefits that many private corporations offer their employees under 401(k) plans. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency, if you are eligible to receive agency contributions) put into your account during your working years and the earnings accumulated over that time.”2
Here are the options you have with TSP as you leave military service:
1. Leave the money invested at TSP
2. The Life Annuity option at TSP
3. Take partial, full withdrawals or rollovers from you TSP
Your first option with the money you saved in the Thrift Savings Plan is to leave it in TSP. The Thrift Savings Plan has very low administration costs and you are able to leave your money invested there after you leave the military or federal service. Like other retirement plans, you will have to start taking withdrawals when you reach age 70 ½. These are referred as your Required Minimum Distributions.
A second option with your money at TSP is the life annuity option. “The TSP life annuity is one of the full withdrawal options that are available to you once you have left the Federal Government or the uniformed services.”3 There are several different types of annuity elections, please refer the booklet Withdrawing Your TSP Account After Leaving Federal Service found on the TSP website.
The third option is to take partial or full withdrawals out of the account. If you need money to pay off debt or you are just cashing in your TSP then please understand that you will be taxed at your current income rate and may be subject to a 10% early withdrawal penalty if your age is less than 59 ½. To avoid any taxes or penalties, your withdrawals must go into a similar retirement plan such as your new employer’s 401k plan, a 403b plan, a Traditional Individual Retirement Arrangement (IRA) or other types of deferred retirement accounts. On May 7th, 2012 Roth TSP contributions became available. If you have been contributing to both traditional and Roth TSPs you need to determine both your pre-taxed and after-tax balances. If you do take money directly out of your TSP please remember you have 60 days to place the money back into a similar type retirement account to avoid any taxes or early withdrawal penalties. Most TSP withdrawal payments will be subject to Federal income taxes. You do have an option to move your money out of TSP into a Traditional IRA account of your choice. This would be classified as a rollover. If you decide you want to move your money out of TSP, via a withdrawal or rollover please allow our firm to help you decide the right type of investment choice for you and your family.
As you are approaching retirement, or possibly already retired, you have a lot of financial decisions to make and we want to be there to assist you and your family! We offer free-consultations to help assist you in all of your financial decisions. www.123-investing.com is run and operated by Michael W. Mandarino, USMA Class of 1996 and Charles J Russ Jr. Class of 2002.
Beat Navy and God Bless!
The Author, Michael W. Mandarino grew up in West Newton, Pennsylvania and then attended the United States Military Academy at West Point from 1992-1996. He was a Military Policy Officer stationed in Germany and Bosnia from 1996-2001. He has been working as an investment advisor since 2002 with many of his clients being in the military. He currently resides in Apollo Beach, Florida with his wife Patty and his daughter at Florida State University. He is very active in his Church, The Crossing Church where he helps run the Men’s Group and is studying to be a Pastor and will graduate in November 2016.
Securities offered through Intervest International Equities Corporation, Member FINRA/SIPC. Advisory services provided by Intervest International Inc., a SEC Registered Investment Advisor.