How service members can get more out of their blended retirement system

More than a million military service members participate in the so-called blended retirement system. It lets them make TSP-style savings contributions that are portable. The funds go with them when they leave the military. But there is more to financial readiness, something to think about in a high-spending season. For some ideas,  the Federal Drive with Tom Temin spoke with Mike Meese, the President of the American Armed Forces Mutual Aid Association.

Interview Transcript: 

Tom Temin And let’s talk about the blended retirement system. This has been around a few years, but it seems to be picking up lately.

Mike Meese It has. It started in 2018 when Congress made an adjustment. The first real big adjustment to the military retirement system in several decades where new members who come into the military have a slightly smaller retirement if they stay for a full 20 years. But the federal government contributes to their 401k like Thrift Savings Plan, which is the blended retirement part of that, so that they end up with something even if they only serve like a three year, four year enlistment, they could take some retirement savings with them.

Tom Temin It sounds like the best benefit is just developing the habit of putting away that money, because let’s face it, when you’re a new member of the military, you ain’t earning all that much.

Mike Meese That’s right. And the way it’s designed is the government will automatically contribute 1% and then it will match up to 5%. And so we just crossed over, as you mentioned, more people are actually participating in the blended retirement system. 1.3 million service members that were participating in the old system before. And that has caused people to take a look at this and realize how valuable it truly is.

Tom Temin That leads to the idea of keeping and hanging on to the money you should in a season where even military service members, if they walk into a [post exchange (PX)], are bombarded to say nothing of what comes through on social media with offers to how to part with your money in this holiday season because everything’s on sale.

Mike Meese Yeah, I think it’s really important for people to kind of have a perspective over the last several years coming out of COVID. Two or three years ago we weren’t traveling, people had more money. You got money from the federal government. So Christmas gifts got a little bit bigger because you felt kind of bad not being able to visit your loved ones during the holidays. And now people can travel because travel costs are up. People can spend money and they’re putting an increasing amount on their credit cards. So it’s important for people to have a budget, maintain a good perspective, perhaps do a little bit of the gift sharing where you’re drawing gifts, not necessarily getting one for every other relative that you have, like people had the capacity to do more during COVID.

Tom Temin Yes, I understand by reading the latest stats that the total credit card debt of people in the United States is more than a trillion dollars right now, and service members are part of that. I’m sure.

Mike Meese It’s increasing. And actually, what was good was it was being paid down during COVID as people had more dollars and were not spending more. And now it’s going right back up again. As a service member, especially at the end of the year since you’re on a fixed income. It’s important to as much as you possibly can keep that spending within reason. People will still appreciate you being home for the holidays and doing all that kind of stuff, but you don’t need to spend quite as much on lavish gifts.

Tom Temin Yeah, I was going to say, what are some of the other good pieces of advice, particularly for military members at this time of year, because they sometimes are more vulnerable to financial, I don’t know, not so much scams, but offers that aren’t all that useful to them.

Mike Meese That’s right. Well, it’s first being disciplined and making sure that you and your spouse or others in your family are keeping within your spending limits. And then there’s a lot of things to do at the end of the year, too, as we mentioned, with the blended retirement system. If you’re not contributing the full 5% to that match, now’s the time to take a look at that and be sure that you can do that. It’s also important for people that have a little bit more income to look at their charitable contributions and be sure that for the charities that they want to contribute to, that they contribute what they want to do. But again, you get lots and lots and lots of solicitations for that. You don’t want to overspend.

Tom Temin We’re speaking with Mike Meese. He’s president of the American Armed Forces Mutual Aid Association. And getting back to the topic of the TSP like or the 401k like blended retirement contributions. Is there a way that as people progress year to year like there are on some plans, a way to automatically up your contribution percentage year after year so that if you start at one or 2% by the time you’re a little bit better paid, a little bit more established, it might be up to four or 5% and you get that sense of acceleration there.

Mike Meese Exactly. The automatic contribution used to be just at 3%. Now the automatic contribution is at 5%, which is the maximum amount to get the match. What’s important, though, is you can actually contribute more than that and it will continue to grow. Deferring that savings will take advantage of the fact that you have compound interest. The Thrift Savings Plan has done particularly well in the various funds, as you may have seen this year. The C Fund is up, I just noticed, 13% over the last year, which is a great opportunity for people to save even beyond the amount that they are matched by the federal government. So if you can save 5%, you absolutely should do that to get the matching. But if you can up that by 6% or 7%, that could help you significantly in the long run.

Tom Temin Also, with interest rates high, I mean, it’s expensive to buy a home now and so forth relative to a few years ago. But on the other hand, there are instruments you can get from financial institutions now that pay that 5%. And that’s something especially for a young military member doesn’t remember the days of 13%, CDs and so forth that we had 40 years ago or so. But that’s a newly emergent way to boost your savings, isn’t it?

Mike Meese Yeah. A great example is recognize that you’re going to have to pay more for your automobile. Automobiles are lasting longer. So with that car payment ends, continue to pay yourself that car payment so that the next time you have to buy a car, you could put a lot more down, a lot more that can be in cash. So instead of paying the back a lot of interest, you’re actually pay yourself a lot of interest through either a CD or a high interest money market you get from many good reputable banks.

Tom Temin Yeah, I mean, those didn’t exist a few years ago. Last time they were even around was when you and I were young and you had CDs and wow, But we’ve had inflation and now we have inflation in interest rates. So that’s something.

Mike Meese People should take advantage of that be sure that, if you’re only making 0% or 1% on your checking account, you probably haven’t looked at the opportunities that you have to be able to put that into earning. Just a little bit more interest can go a long ways.

Tom Temin And again, on the topic of service members and what they might find appealing, let’s say at this time of year, especially in the case of vehicles, and they often tend to like nice vehicles. I had to resist the urge to put down on a trade in motorcycle the other day because I fell in love with one in the dealer. And the cool hand of logic finally grabbed my arm away. But sometimes if you’re younger, you may not be able to resist that F150 with the large wheels. And those are expensive and auto companies are offering and car loaners are offering seven and even eight year loans. That sounds like a terrible trap.

Mike Meese And recognize how much you’re going to be committed to that. Plus, look at the total cost of driving that automobile. When you look at the insurance for that expensive in Nevada may be adding several hundred dollars to your monthly payments in addition to the cost of the automobile payment over time.

Tom Temin And on the issue of that’s close to home to AAFMAA, anything new in life insurance that people should know about these days?

Mike Meese Well, the good news is the federal government has expanded the coverage from 400,000 to 500,000. But if you are married, and especially if you have any children, that amount is still not enough. And so that’s why we find a lot of people turning to AAFMAA and other life insurance providers to be able to get some supplemental insurance. We could do that actually at less costs that’s [Service Members Group Life Insurance (SGLI)]. And for veterans who leave, since SGLI ends, when you leave the service, it’s really important to turn to AAFMAA or somebody else to be able to get life insurance to protect your family even after you leave the service.

Tom Temin SGLI is?

Mike Meese That’s Service Members Group Life Insurance that is provided for, you pay for it. But the government provides that to you without any medical underwriting. We do the same kind of thing. Actually, a little bit less cost. And that’s why we encourage folks to look at that at aafmaa.com.

Tom Temin All right. In the meantime, service members watch your wallets and tread slowly right now.

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