Military Retirement: SBP, TSP and VGLI
3 Retirement Decisions Simplified
If you’ve served 20 plus years in the military, you know how to work a checklist. Whether it’s a complicated pre-flight checklist or a simple end-of-day security checklist, you know the drill. When it comes to PCS out processing, you can run that checklist with your eyes closed. As you start working through your retirement checklist, you may find a couple of less familiar to do’s in the form of SBP, TSP and VGLI.
These three important financial decisions impact your military pension, retirement savings and life insurance coverage, and will require a little bit more thought and research than most of the items on your list. This article outlines each of these important retirement decisions and shares a few details that may help you navigate these steps on your road to retirement.
Survivor Benefit Plan – should I accept the SBP annuity?
What is SBP?
The most important fact to know about the amazing military pension you’ve earned during your 20+ years of service is that it ends at your death. The only way to ensure your spouse and/or your dependents continue to receive a portion of your retired pay is to sign up for the Survivor Benefit Plan.
In the event you pass away before your spouse or your dependent children, SBP continues to pay an inflation adjusted monthly benefit, known as an annuity, to your survivors. In the case of your spouse, the annuity continues until their death or remarriage in some instances.
Of all the decisions you’ll make at retirement, the SBP decision is the most critical because it is largely irrevocable.
Why is the SBP decision so critical?
The exact decision comes in the form of either accepting or declining SBP in the weeks before your final out processing. If you’re married and decide to decline SBP or accept less than the full SBP benefit, your spouse will need to sign off on that decision during your out processing. The rationale behind requiring your spouse’s concurrence is he or she has the most to lose if you decline SBP.
If you decline SBP, it is very unlikely that you’ll ever have a chance to regain it, your decision is final. On the other hand, if you elect to accept SBP, you will have an opportunity to discontinue it during the period between 25-36 months after your retirement. To be extra clear - this window of opportunity to change your mind in your third year of retirement is a one-way decision – exit only. You can only choose to discontinue SBP, you cannot regain access to SBP.
Why would you need SBP?
If you’re married or have dependent children, they likely rely on your military pension for a large portion of their monthly living expenses. SBP ensures your survivors continue to benefit from your decades of dedicated service through continued payments from your inflation-adjusted pension. Without SBP, your family would need substantial savings and investments to cover their expenses.
Sometimes it comes down to one simple consideration: which decision helps you sleep at night knowing your family is protected.
The decision to accept or decline SBP is unique to each service member and their family. Because there are so many important variables to consider, it is vital to make your own decision with your family’s specifics in mind rather than simply following the decisions of your peers.
Thrift Savings Plan –should I leave my retirement savings in TSP?
What is TSP?
The Thrift Savings Plan is the retirement savings plan available to military members. Similar to a private sector 401(k) retirement plan, military members can allocate a portion of their paycheck to TSP where the money is invested in either a tax-free or tax-deferred account until needed in retirement.
TSP invests in a wide range of holdings in both US and international stocks as well as government and corporate bonds through an investment strategy known as indexing. These index funds passively track the components of a major financial benchmark providing ownership in a representative sample of that index and offering broad diversification across hundreds of stocks and bonds.
What is the TSP decision?
When you leave military service, your ability to contribute payroll deductions to TSP ends, but that doesn’t mean you lose access to the amazing benefits of your TSP investments. When you retire from the military, you have the option to leave your TSP investments where they are or take them with you to your new employer’s retirement plan. You also have the option to roll your TSP investments into an individual retirement account (IRA).
What’s so special about TSP?
Ultra-low fees. TSP’s passive investment strategy ensures broad diversification while minimizing the expenses associated with managing those investments. Instead of diverting a substantial portion of your invested money to pay for investment expenses; TSP’s passive investment strategy minimizes most investment expenses, allowing more of your invested dollars to remain invested.
Lifecycle Funds. TSP offers a wide range of lifecycle target date funds known as the L funds. These L funds match the mix of investments with your retirement timeline, from 2025 to 2065. The L funds are fund of funds, meaning they offer access to all five TSP funds within one portfolio, providing not only a diversity of asset types like stocks, bonds, and cash-like investments, but also diversity within each of these asset types by owning hundreds of different stocks and bonds within the individual funds.
The L funds take the guess work out of knowing how to diversify your assets and when to reduce risk by rebalancing. As you move closer to your target retirement date, your investment goal shifts from growing wealth to preserving wealth. As the target date gets closer, the L fund dynamically reduces the risk in the portfolio by pulling back on more volatile stock investments and replacing them with less volatile assets like bonds and cash.
G Fund. The TSP G Fund in unique among investment vehicles in that it guarantees an investor’s principal by providing interest income without the risk of loss of principal. This extremely rare safety net may not seem exciting now, but it could prove priceless when you’re fully retired and relying on your investments to generate income to cover your expenses.
The retirement savings opportunities offered by the Thrift Savings Plan don’t end when you retire from the military. Continued access to these ultra-low fee, broadly diversified passive investments make retaining your TSP investments after your military retirement the easy button for most military retirees.
Veteran’s Group Life Insurance - Do I need VGLI?
Veteran’s Group Life Insurance is the veteran’s equivalent of SGLI, the Servicemember’s Group Life Insurance that you carried during your military service. It is the term life insurance offered to veterans when they leave military service.
What is the VGLI decision?
When you retire from active duty, your SGLI extends life insurance coverage for 120 days after your retirement date. If you enroll in VGLI within these first 120 days, you avoid having a gap in life insurance coverage. If you enroll in VGLI within 240 days of your retirement, you have guaranteed access to VGLI without any medical underwriting. This means you can’t be denied VGLI coverage based on your health history. There is no requirement for a medical exam and no health or lifestyle questions to answer.
What’s so special about VGLI?
VGLI provides guaranteed access to life insurance coverage to veterans regardless of their health history; this makes VGLI the only affordable option for many military retirees. Qualifying for commercial life insurance typically involves a process known as medical underwriting where the company requires the applicant to complete a health history and often a medical physical including lab work. Additional underwriting might include a lifestyle survey inquiring about your participation in adventurous activities like scuba diving, sky diving, or aviation.
Underwriting allows the life insurance company to accurately assess the risk of insuring you. If you’re healthy, your life insurance premiums are very low. If you have health or lifestyle risk factors like tobacco use or high blood pressure, your insurance premium goes up. It’s also possible the medical underwriters might determine your medical history makes you too much of a risk, deeming you uninsurable.
Is VGLI the same as SGLI?
VGLI and SGLI offer similar coverage options, but the biggest difference between SGLI and VGLI is the cost. SGLI premiums are held at a super low rate for all servicemembers, regardless of age; VGLI premiums vary based on your age with monthly premiums increasing in five-year increments. For comparison, the current SGLI rate is $7/month for $100,000 in coverage, while VGLI coverage for veterans in their early 40’s is $16/month and veterans in their early 50’s pay $33/month for the same $100,000 in life insurance coverage.
If you’re healthy, you’ll likely find more affordable term life insurance options outside of VGLI. Acquiring commercial life insurance can take time, so it’s best to start the process well in advance of your retirement date. If you find your health history makes VGLI your best or only option, it is important to complete the enrollment within the 120-day window to ensure you don’t have a gap in coverage.
If you’re edging closer to your retirement date or the end of the 120-day coverage window, you may consider enrolling in VGLI to maintain your coverage and insurability while you figure out if another option is available. This gives you time to make an informed decision about what is best for your unique situation.
What’s the best course of action on SBP, TSP and VGLI?
Like all financial decisions, the right decisions on SBP, TSP and VGLI are unique to each military family’s situation. We recommend working with a financial planner who understands your military benefits from first-hand experience and specializes in serving military and veteran families.
If you’re approaching a turning point in your military career, we would love to partner with you to help you prepare for this major life and financial transition. Please use this link to schedule an introductory call.
The information provided in this blog is simply that, information. It is not intended to serve as an individual recommendation and should not be relied on as investment or tax advice.
