If you owed someone a large sum of money and they told you to pay them $4,800 now or $120 per month starting 12 years from now for the rest of their life (anticipated to be about 30 years), what would you do? Conversely, if someone gave you the choice of receiving $3,200 per month 12 years from now for the rest of your life or giving you $239,000 in 12 years and also $1,860 per month, which would you take? The first view is that of the government and the second is that of a Navy lieutenant being offered a matching funds 401(k) retirement plan. The best offer in both situations provides a win-win situation for each side.
With all the recent talk about retirement plans and fears that a Uniformed Services Payroll Savings Plan (USPSP) will open the door for future cuts in retirement funding, a closer examination of a real 401(k) option is owed to our armed forces. The USPSP proposed falls far short of what is best for either the government or the service member. There is a much better option. Even more enticing, this better option will improve morale, aid in retention, facilitate savings in the government's military retirement account, and provide more money to our troops in their retirement years. The example to follow is a simple case with room to massage numbers to favor one side or the other, more or less. All of the calculations are in current-year dollars (that means the government actually will save more in the long term). The ground rules:
-
Service members may contribute any amount without matching funds at any point in their career (a slightly modified USPSP proposal).
-
Contributions will be matched up to 10% of pay in service years 10 through 35, if desired.
-
For each year of matching contributions, 2% will be deducted from retirement pay (i.e., for a member who would get 50% retirement, after ten years of matching contributions, he or she would get 30%).
-
Funds may be contributed to any legitimate 401(k) investment the service member chooses.
-
Participation is voluntary and ordinary retirement benefits remain intact.
As an example case, consider a 32year-old lieutenant with more than ten years of service. If he started contributing $400 per month for the next five years and then $500 per month (with matching funds) until retiring as a captain with 22 years of service, he would have about $239,000 in his retirement account (assuming 10% tax-deferred interest). The government would then pay him a 31% retirement (2% for 12 years reduced his original 50% by 24% plus 5% for the two years more than 20), $1,860 per month.
In order to view this from the government's perspective, consider the first year our junior officer contributed $4,800. If his retirement base is $6,000 in 12 years (a captain with 22 years), then reducing his retirement check by 2% for that first year of matching contributions means he would get $120 less per month. So, in 40 months (3 years and 4 months), the government has recouped the expense of matching his contributions. If he lived another 25 years, until age 72, the government would save $36,000. For the case above where he contributed for all 12 years, the government would recoup the matching funds in just over four years after retirement and then save an astonishing $518,000.
Let's face it, Uncle Sam will continue to debate cutting military retirement benefits. This plan allows service members more flexibility and more security to determine their own financial health in retirement. At the same time it allows the government a legitimate option to spend less on retirements. The bottom line is that a real 401(k) provides the government a potential savings of more than $4 billion per year in just the retirement account. How can we not do this?
Lieutenant Capen is the Operations Officer on the staff of Commander, Destroyer Squadron 21.
