White Paper Military retirement reform and its impact on America s career military families

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1 White Paper Military retirement reform and its impact on America s career military families First Command Financial Services, Inc. With the final approval of the 2016 National Defense Authorization Act (NDAA), the members of America s career military face significant and fundamental changes in their compensation and benefits. They will see cuts in their Basic Allowance for Housing and increases in TRICARE co-pays on prescription drugs. But the most significant change one that poses a serious challenge to their long-term financial security comes from the overhaul of the military retirement system. Proposed last year by the Military Compensation and Retirement Modernization Commission (MCRMC), this new retirement system has been frequently praised as a way to give service members a bigger and more rewarding benefit. Proponents say replacing the traditional retirement benefits of the 20-year cliff vesting system with lump sum bonuses and 401(k)-style contributions offers service members new opportunities to control their own financial futures. And it will put new dollars in the pockets of service member families, especially those who today leave the military with no retirement benefits. Look a bit deeper, though, and you ll find that this new reward comes with significant risks. The long-term financial security of career service member families will be built on fewer government guarantees and depend on the types of strong personal financial choices and behaviors that run counter to the temptations of our instant-gratification society. The up-front dollars reduce the size of the regular checks that come from a military pension, checks which today begin arriving immediately upon retirement and grow in size through annual cost of living adjustments that continue for the life of the retiree. The new system reduces the value and security of the military s traditional retirement program, a powerful benefit that has formed the foundation of long-term financial security for generations of career service members. This white paper offers a detailed examination of the new military retirement system, featuring a history of previous changes to benefits and in-depth examples that explore the potential impact on the families of our men and women in uniform who choose to make the military their career. 1

2 The new military retirement system In January 2015, MCRMC released an in-depth report with recommendations to modernize the military compensation and retirement system. A substantial number of these recommendations were enacted into law as part of the 2016 NDAA, which was signed into law on Nov. 25, The changes will impact all service members who enter the military on Jan. 1, They come in four components: 1. Reduced multiplier. The retired pay multiplier is reduced from 2.5 percent for each year of service to 2.0 percent, resulting in a 20 percent reduction in the retirement annuity. 2. Thrift Savings Plan (TSP) participation. Military retirement reform depends heavily on service member participation in the TSP. It includes a Department of Defense (DoD) automatic contribution of 1 percent of basic pay, and matching contributions applied to a participant s first 3 percent of contributions dollar for dollar, and 50 cents on the dollar for the participant s next 2 percent. The automatic plus matching contributions can reach a maximum of 5 percent of the participant s basic pay. 3. Continuation pay. The reform seeks to encourage service members completing their 12th year of service to commit to four additional years and be eligible for a continuation pay bonus. Their service department will determine the number of months of basic pay, from a minimum of 2.5 to a maximum of 15.5, the member would receive as a bonus. The member will be required to extend their commitment four years. If the member does not serve the full four-year extension, he or she will be required to pay back a portion of the bonus. Those years, when served, would push the service members to within four years of retirement. The payment can be taken as a single lump sum, or a series of not more than four payments. 4. Lump sum of certain retired pays. A retiring member will be able to receive a portion of his or her pension in the form of a lump sum upon retirement in exchange for a reduction in the pension until reaching Full Retirement Age. Full Retirement Age, for all practical purposes, is age 67. The service member will be able to take either 25 percent or 50 percent of his or her pension as a lump sum, and the pension will be reduced accordingly. The lump sum will be calculated using a Present Value calculation with a discount rate (assumes the long-term future value considering inflation, then reduces that amount for assumed investment returns). Once the retiree reaches Full Retirement Age, the reduced pension will be returned to the original value, with cost of living increases. While these changes offer new benefits to our non-career service members (that is, those who currently serve less than 20 years and leave with nothing), those who serve out a 20-year career will see smaller pensions and be required to make up the difference through a greater reliance on their own savings and investment behaviors. We saw a mirror image of this approach 30 years ago, when the private sector traded the defined benefits of pensions for the defined contributions of 401(k) plans. Certainly it was a successful trade for many employers, who were able to transfer the uncertainty of long-term financial risk from their company balance sheets to the household finances of their employees. But for a good portion of American workers, the trade hasn t worked nearly as well. According to Fidelity, one of the world s largest 401(k) providers, the average account balance for all participants (includes those who are actively employed as well as retired or terminated employees who still carry a balance) is now about $90,000 1 far short of what most middle-class Americans will need to maintain their standard of living in retirement. Now we are transferring the uncertainty of long-term financial risk from our nation s balance sheet to the household finances of our career military families. Beginning in January 2018, new service members will embark on their military careers with the knowledge that they are receiving a smaller guaranteed income stream than those who came before them. They will be compelled to make up the difference by taking on the risks of the financial markets. The history of changes to military retirement This is not the first time substantial changes have been made to the retirement benefits of career service members. The system has gone through a number of reforms in recent history, and many elements of those reforms are shaped 1 Fidelity's Quarterly Retirement Snapshot Q ( 2

3 and impacted by the new system. In order to put details of the new system in perspective, we offer the following review of five major changes that have shaped our existing military retirement system. Those changes include: Final Pay. Prior to 1980, the military was covered by a system commonly known as Final Pay. Under this system, military members reaching at least 20 years of service (YOS) were eligible for retirement pay. This pay was calculated based upon their Basic Pay at the time of retirement. A multiplier of 2.5 percent, times the number of years of service, resulted in the retired pay they would receive for life. Someone with 20 YOS would receive 50 percent of basic pay. The multiplier capped out at 75 percent at 30 YOS. The multiplier in this system, as all others discussed in this paper, applied only to Basic Pay. Other pay and allowances, such as Basic Allowance for Housing, Basic Allowance for Subsistence, and Proficiency Pay for certain skills, is not included in the calculation. Typically, these allowances can account for approximately 20 percent of a service member s pay. Because of this, a 50 percent retirement benefit results in approximately 40 percent of their gross pay and allowances. High-Three. The first round of changes became effective for all service members with a Date Initially Entered Military Service (DIEMS) between Sept. 8, 1980, and July 31, This system is known as High-Three or High-3. Under this system, instead of receiving the 2.5 percent multiplier applied to final basic pay, the multiplier is applied to the average of the service members highest three years of basic pay. The significance of this change came in two forms. They are: 1. The average of the highest 36 months of basic pay except in extremely rare circumstances is lower than the final pay. Three years prior to retirement is paid at the over 16 rate on the pay table, and the final two years are paid at the over 18 rate. (See the 2016 Military Pay Chart, Attachment 1). Additionally, three years of cost-of-living increases are lost in the calculation by using pay numbers from up to three years ago. 2. Military retirement occurs on either the first day of a calendar month, or the last day. Since it requires a minimum of 20 years to reach retirement, members typically retire with at least 20 years and a few days. So their final pay was the basic pay for a person at that rank, over 20 years of service. For comparison purposes, on the 2016 Military Pay Chart, an O-5 over 18 YOS has a basic pay of $8,388.90, while an O-5 over 20 YOS has a basic pay of $8, The change to High-Three resulted in an approximate 5 percent reduction in retired pay compared to the Final Pay method. Redux Retirement. Service members with a DIEMS date August 1, 1986, or later were initially covered under the Redux Retirement system. As the name suggested, the new system offered a reduction in benefits compared to earlier retirement plans. Redux Retirement had two specific changes from the High-Three plan: 1. Redux Retirement used a reduced multiplier for retired pay calculations. Rather than a 2.5 percent multiplier times the number of YOS, it was changed to 2.0 percent. This reduced 20- and 30-year retirements from 50 percent and 75 percent of basic pay, to 40 percent and 60 percent. There was no added benefit or attempt at masking, it was simply a change to provide less retired pay to the newest group of military members and their families. 2. Redux Retirement also introduced a new concept that came to be known as Diet COLAs. Under this system, once retired, members received annual cost-of-living increases at a calculation of COLA minus one, meaning the COLA was 1 percent less than the increase that applied to the retired pays of those under the previous systems. This reduced COLA continued until their 62 nd birthday, at which time there was a one-time calculation to bring the retirement pay in line with where it would have been, had normal COLAs been applied. This one-time leveling the field did not change future COLAs, which would continue to be applied using the minus 1 calculation for the life of the retiree. 3

4 Redux Reform. Redux was unpopular with many service members, who did not like having two different retirement programs applied to personnel serving at the same time. This became a concern to military leadership, so the law was changed in October Service members covered under Redux were placed under the High-Three plan, with the OPTION to return to the REDUX plan. In consideration of electing Redux, they become entitled to a $30,000 Career Service Bonus (CSB). The bonus was a fixed amount for all grades, and was in effect an offer to purchase some of the retirement annuity for a lump sum payment. Electing Redux and the CSB also included keeping the COLA minus 1 formula. Initially, the CSB was popular. The lure of a $30,000 lump sum was appealing. It was also eligible for deposit into the TSP, in which service members had only been allowed to participate beginning in Over time, the popularity of the bonus has decreased, from 45 percent in 2003, to approximately 11 percent in Retired pay examples: Using the three systems Final Pay, High-Three and Redux assuming retirement using the Military Pay Charts for 2014, 2015 and 2016, this is how retirement pay would look for two specific grades, retiring at 20 YOS at the end of 2016: Grade at Retirement in 50% Final Pay 50% High-Three 40% High-Three (Redux) 2016 E-7 over 20 $2,236 $2,144 $1,715 O-5 over 20 $4,308 $4,107 $3,286 (See Calculation of retired pay, Attachment 2) Transition from Final Pay to High-Three resulted in an approximate 5 percent reduction in retirement annuity. Transition to Redux Retirement further reduced it by 20 percent, or an overall 24 percent reduction in retired pay annuity for service members serving 20 years. Thrift Savings Plan. In 2001, service members became eligible to participate in the TSP. This is the same 401(k) style plan available for participation by federal civilians. The significant difference is that, though military families were given the option to contribute, there were no agency automatic or matching contributions. Without an incentive, participation rates have remained relatively low. Today only 42 percent of eligible service members participate. While there are different investment options within the TSP, the most popular option is the G Fund, a government securities fund which is protected from loss of principal but delivers returns that are below the rate of inflation. This so-called safe investment is by no means benign. For the majority of service members, it may not grow enough over time to meet future needs. Financial impact of changing the military retirement benefit As with previous changes described in the previous section, the new military retirement program comes with its own unique set of risks and rewards for America s career military families. To put the new system in perspective, we have constructed four in-depth examples of future results for two hypothetical career military members one enlisted, one officer who enter service on Jan. 1, 2018, when the new program begins, and continue to serve until eligible for a 20-year retirement. 2 Army Times, Today's troops reject REDUX retirement option, By Andrew Tilghman, Staff writer 9:51 a.m. EST March 1, 2015 ( ) 4

5 Our two service members: Member 1 Member 2 Entered Service as an E-1 Entered Service as an O-1 Retired at 20 years as an E-7 Retired at 20 years as an O-5 We assumed a reasonable, successful military career. Starting with the 2016 Military Pay Chart, we applied inflation (military pay raise) of 1.5 percent every year. Similar to above, here are the estimated retirement pays in 2038, if all 50 percent Final Pay, 50 percent High-Three and 40 percent High-Three (Reform) were available: Grade at Retirement in 50% Final Pay 50% High-Three New system (40% High-Three) 2038 Member 1 (E-7 over $3,103 $2,951 $2,361 20) Member 2 (O-5 over $5,978 $5,599 $4,479 20) Details are available at Attachment 3 In this illustration, Member 1 (E-7 retired at 20 years) receives $590 less in monthly retired pay under the new system versus the current High-Three system. Member 2 (O-5 retired at 20 years) receives $1,120 less. In order for these service members to retire with at least the same amount of monthly retirement pay as they would in the current system, the combination of TSP contributions and continuation pay must make up the difference. To illustrate TSP contributions and earnings, we used the rate of return assumed in the MCRMC report. MCRMC assumed all contributions into the Lifecycle L2050 fund, with a 7.3 percent rate of return, although this does not match current behavior of members of the uniformed services contributing to the TSP. In 2012, 43 percent of account balances were in the G Fund (Government Securities) and F Fund (Fixed Income Securities). Example No. 1: Best case scenarios Let s assume both Member 1 (E-7 retired at 20 years) and Member 2 (O-5 retired at 20 years) exhibit the preferred behavior they: Contribute at least 5 percent of their basic pay to the TSP to earn full government matching, Invest it in the L2050 fund and earn the assumed 7.3 percent rate of return and Invest their net continuation pay (after taxes) into an investment that also returns 7.3 percent. Member 1 (E-7) at 20 Years Member 2 (O-5) at 20 Years TSP Automatic 1 percent $18,216 $34,858 TSP Matching 4 percent $66,787 $128,598 TSP Participant 5 percent $91,750 $175,559 Continuation Pay (15.5 months) $110,634 $195,633 To convert the lump sum investments into equivalent retired pay, we assumed a 4 percent withdrawal off of the initial amount, a commonly acceptable financial planning assumption. (Withdraw 4 percent of the initial amount, 5

6 increase the withdrawal each year with inflation in this case, retired pay increases and assume the portfolio will last throughout retirement.) How does the retirement look using funds provided by the government, using maximum continuation pay? Member 1 (E-7) at 20 Years Member 2 (O-5) at 20 Years TSP Automatic 1 percent $18,216 $34,858 TSP Matching 4 percent $66,787 $128,598 Continuation Pay (15.5 months) +$110,634 +$195,633 Total Lump Sum $195,637 $359,089 Equivalent Retired Pay from Lump Sum $652 $1,197 Retirement Reform Retired Pay +$2,361 +$4,479 Equivalent Retired Pay $3,013 $5,676 Excess Compared to Previous System $62 gain / +2.1% $77 gain / +1.4% Based upon this analysis, if a military member makes 5 percent contributions, received the maximum 15.5 months of continuation pay and invests it according to the MCRMC model, the resulting retirement pay will be approximately equivalent to what it would be under the current plan (a gain of 2.1 percent for the E-7 and 1.4 percent for the O-5). If we include the personal contributions that are allowable today but required in order to earn the 4 percent in TSP matching contributions, the service member s retired pay would be even greater. Member 1 (E-7) at 20 Years Member 2 (O-5) at 20 Years Adding in Personal Contributions $91,750 $175,559 Equivalent Additional Retired Pay (Based on a 4 percent withdrawal rate) $306 $585 Equivalent Retired Pay from previous example +$3,013 +$5,676 Total Equivalent Retired Pay $3,319 $6,261 Excess Compared to Previous System $368 gain / +12.5% $662 gain / +11.8% In this example, the resulting retirement pay is higher than what it is under the current system (up 12.5 percent for the E-7 and 11.8 percent for the O-5) because it includes the service member s own contributions. The personal contributions totals include the service member s TSP contributions ($47,460 for the E-7 and $89,864 for the O-5) plus projected investment gains based on the previously mentioned 7.3 percent rate of return. Example No. 2: Worst case scenarios What if the service member does not demonstrate the preferred behavior? He may choose to decline TSP participation and therefore will not receive matching contributions. He may receive the minimum continuation pay 6

7 and spend it. If the service member relies entirely on government funding of the retirement plan, with no personal contributions, what does that look like? Here is a repeat of the previous example, but without the 4 percent in TSP matching contributions. Member 1 (E-7) at 20 Years Member 2 (O-5) at 20 Years TSP Automatic 1 percent $18,216 $34,858 Continuation Pay (15.5 months) +$110,634 +$195,633 Total Lump Sum $128,850 $230,491 Equivalent Retired Pay from Lump Sum $430 $768 Retirement Reform Retired Pay +$2,361 +$4,479 Equivalent Retired Pay $2,791 $5,247 Shortfall Compared to Previous System $160 loss / -5.4% $352 loss / -6.3% Without the 4 percent in TSP matching funds, the resulting retirement pay will be less than what it would be under the current plan (down 5.4 percent for the E-7 and 6.3 percent for the O-5). Here is an example in which the service member does not earn the 4 percent in TSP matching contributions and only receives the minimum continuation pay of 2.5 months. Member 1 (E-7) at 20 Years Member 2 (O-5) at 20 Years TSP Automatic 1 percent $18,216 $34,858 Continuation Pay (2.5 months) +$17,844 +$31,553 Total Lump Sum $36,060 $66,412 Equivalent Retired Pay from Lump Sum $120 $221 Retirement Reform Retired Pay +$2,361 +$4,479 Equivalent Retired Pay $2,456 $4,700 Shortfall Compared to Previous System $470 loss / -16% $898 loss / -16% If service members use only government contributions, with no active participation on their part, and the continuation pay is at the low end of the spectrum, then their monthly retirement pay falls 16 percent short of what it does under the current plan. What happens if the service member does not take actions to earn the 4 percent in TSP matching contributions and does not save the continuation pay? Member 1 (E-7) at 20 Years Member 2 (O-5) at 20 Years TSP Automatic 1 percent $18,216 $34,858 Total Lump Sum $18,216 $34,858 Equivalent Retired Pay from Lump Sum $61 $116 Retirement Reform Retired Pay +$2,361 +$4,479 Equivalent Retired Pay $2,422 $4,595 Shortfall Compared to Previous System $529 loss / -18% $1,004 loss / -18% In this example, monthly retirement pay falls 18 percent short of what it does under the current plan. 7

8 These examples clearly demonstrate the importance of service member contributions in the new retirement system. Earning matching funds and saving continuation pay is critical to success. If a service member chooses not to participate in the TSP, or cannot afford to participate, they forego matching contributions made by the DoD. Without those matching contributions, they accept a less valuable retirement plan. Example No. 3: Existing military TSP allocation The MCRMC model assumed that all TSP dollars would be invested in the L2050 fund, earning a constant 7.3 percent return. Historically, TSP participants invest more conservatively than that. According to the Thrift Savings Plan 2013 survey results 3, as of Dec. 31, 2012 members of the uniformed services allocations in the various funds were: Fund G Fund F Fund C Fund S Fund I Fund L Funds Allocation 38% 5% 15% 12% 9% 20% 10-yr average annual return through % 4.89% 7.72% 9.44% 4.58% 6.93* *Using the L2040 fund, the most aggressive of the L Funds, rate of return since inception This allocation would result in a portfolio return of 5.6 percent. Inserting that lower return into the Best Case Scenario above yields different results. Member 1 (E-7) at 20 Years Member 2 (O-5) at 20 Years TSP Automatic 1 percent $15,422 $29,436 TSP Matching 4 percent $57,278 $109,891 Continuation Pay (15.5 months) +$97,365 +$172,170 Total Lump Sum $170,064 $311,496 Equivalent Retired Pay from Lump Sum $567 $1,038 Retirement Reform Retired Pay +$2,361 +$4,479 Equivalent Retired Pay $2,928 $5,517 Shortfall Compared to Previous System $23 loss /-0.8% $81 loss /-1.4% This more conservative asset allocation would turn the best case scenario of a slight gain in retired pay into a shortfall. But once again, we see that adding in the personal contributions of the service member contributions that are required to earn the 4 percent in TSP matching funds can make a positive difference. Member 1 (E-7) at 20 Years Member 2 (O-5) at 20 Years Adding in Personal Contributions $77,589 $148,094 Equivalent Additional Retired Pay (Based on a 4 percent withdrawal rate) $259 $494 Equivalent Retired Pay from previous example +$2,928 +$5,517 Total Equivalent Retired Pay $3,187 $6,011 Excess Compared to Previous System $236 gain / +8% $412 gain / +7.4% In short, any behavior by the service member that is less than ideal will result in reduced retired pay in the long run Thrift Savings Plan Survey Results (AON Hewitt) 8

9 Example No. 4: Lump sum payments of certain retired pay An additional feature of the new retirement reform is the ability for a service member to take a portion of his retired pay as a lump sum. Upon retirement at 20 years or more, a retiree may choose one of three options for receipt of retired pay: 1) Begin receiving the full retired pay immediately; 2) Begin receiving 75 percent of the calculated retired pay, and receive a lump sum payment in lieu of the annuity forfeited; 3) Begin receiving 50 percent of the calculated retired pay, and receive a lump sum payment in lieu of the annuity forfeited. If either option 2 or 3 is selected, the reduced annuity remains in effect until the retiree turns age 67. At that time, the annuity is restored to the full amount. The lump sum value of the retired pay forfeited will be calculated taking into account assumed retired pay increases, generally accepted actuarial principals, and reputable studies of personal discount rates for military personnel. This adds increased complexity and risk to the retirement decision. At a time when retirees are attempting to turn the accumulated value of 401(k) plans into guaranteed income streams for retirement, this option could result in the exact opposite. Although many military retirees are young and are preparing to enter into a second career or invest in a business and continue earning a living, that is not the case for all. Imagine if Member 1 (E-7 retired at 20 years) and Member 2 (O-5 retired at 20 years) above, in the Worst Case Scenario, opted to take 50 percent of their retirement in cash, all with good intentions. They invest in a business that subsequently fails. They lose the money as a result of a failed marriage. They help out relatives or just spend it. Member 1 (E-7 retired at 20 years) could find himself with $1,180 in monthly income ($1,180 less than full retired pay), until age 67, which could be nearly 30 years away. For Member 2 (O-5 retired at 20 years), the result could be a loss of $2,239 per month. The shifting burden of retirement Military families, like their civilian counterparts, are being asked more and more to accept responsibility for their retirement outcomes. With a change from a 20-year cliff-vesting system to a system that includes tax-deferred contributions and employer matching, a large number of service members who up until now left before retirement eligibility with no retirement dollars to show for it will have the opportunity to accumulate assets to take with them into their next career. Service members who remain on active duty until retirement eligibility will still receive a pension, but only 80 percent of what it once was. It will take active involvement on their part to ensure they are benefitting most from the new system, contributing to their TSP and receiving the maximum government matching contribution. In this new system, a significant share of the burden of creating a financially secure retirement is shifted onto career military members by expecting them to contribute to the Thrift Savings Plan. Service member investors will face the uncertainties of the financial markets, where money invested in stocks and other assets can rise or fall in value. We saw this type of risk negatively impact many retirees during the stock market downturn in Service members also will face increased risk from so-called safe investment options that is, putting their money into savings accounts or other products that protect principal values but may not grow enough over time to keep up with future increases in the cost of living. And of course they will face the risk of an unexpected financial hardship, which could induce some people to spend part or all of their up-front dollars on immediate needs rather than save for their long-term retirement security. The need for education and professional advice The risks of the new retirement system are not limited to those who will be joining the military in the future. Today s service members also face significant risk. The new system gives some current service members the option 9

10 to be grandfathered in under the old system or opt into the new retirement benefits. Our marketplace studies reveal that almost three out of ten service members who say they are likely to serve to full retirement want to opt into the new system. 4 Certainly lump sum bonuses and 401(k)-style contributions seem very appealing at first glance. But do these service members understand what they may be giving up? Do they understand that the up-front dollars may not be large enough to justify a smaller lifetime pension? And if not, who will help them understand? Part of the implementation plan for the NDAA is a comprehensive program of financial literacy. The plan includes providing financial education at key points in service members careers, family life and other milestones. While education is valuable and necessary, it is general in nature and does not replace the need for specific advice as it applies to each service member and his family. Now, more than ever, service members will need professional advice on topics such as: Can they afford to defer a portion of their pay to help fund their retirement? How much should they invest in their TSP, and into which funds? How much will they need in retirement, and how much do they need to invest to get there? Should they opt into the new retirement system, or stay with the current system? Should they take the continuation pay after 12 years of service? What should they do with their net continuation pay? Invest? Pay debts? Is a retirement lump sum right for them? How should it be used? How is it treated for income tax purposes? These are items that are new concerns for the military. Individualized, professional advice that cannot legally be provided by a plan sponsor is critical to the success of the reformed military retirement. A new military retirement system has been created that trades guarantees for risk. We owe it to our service members to help make the most of their benefits and secure their financial futures by improving what they know and what they do. They must improve their own financial knowledge and savings and spending behaviors. Financial education is an important element of preparing service members to take a stronger role in pursuing their financial security in retirement. In one of our recent marketplace studies, we administered a financial literacy test to career service member families in pay grades E-6 and above. More than half (55 percent) of military test takers failed to correctly answer at least seven of the nine questions on the test, resulting in an average grade of The need to improve financial knowledge is clear. But knowledge alone is not enough to help military families feel prepared for a comfortable retirement. In the same study, we found no statistically significant differences in feelings of retirement confidence between those who failed the test and those who earned a perfect score. Confidence does increase with improve savings and spending behaviors. And those with the strongest behaviors are the ones who work with a financial advisor. Our marketplace studies have consistently shown that partnering with a financial advisor has a positive relationship with confidence in one s ability to retire comfortably. In our year-end 2015 survey, we found that 59 percent of middle-class military families who work with a financial advisor felt confident in their ability to retire comfortably. In contrast, just 31 percent of those without an advisor felt confident. Those with a financial advisor also report greater financial security and greater confidence that their financial situation will improve in the next year. 6 The value of working with a professional financial coach is clear. Financial education and professional financial advice represent two different but complimentary approaches that can help America s career military families make the most of their government benefits. Both approaches will be critical to helping these families take responsibility for and successfully pursue their own paths to long-term financial security. 4 First Command Financial Behaviors Index December 2015 survey 5 First Command Financial Behaviors Index January 2015 survey 6 First Command Financial Behaviors Index December 2015 survey 10

11 First Command Financial Services, Inc., is the parent of First Command Financial Planning, Inc. (Member SIPC, FINRA), First Command Advisory Services, Inc., First Command Insurance Services, Inc. and First Command Bank. Financial planning services and investment products, including securities, are offered by First Command Financial Planning, Inc., a broker-dealer. Financial planning and investment advisory services are offered by First Command Advisory Services, Inc., an investment adviser. Insurance products and services are offered by First Command Insurance Services, Inc. in all states except Montana, where as required by law, insurance products and services are offered by First Command Financial Services, Inc. (a separate Montana domestic corporation). Banking products and services are offered by First Command Bank. Securities products are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met. In Europe, investment and insurance products and services are offered through First Command Europe Limited. First Command Europe Limited is a wholly owned subsidiary of First Command Financial Services, Inc. and is authorised and regulated by the Financial Conduct Authority. Certain products and services offered in the United States may not be available through First Command Europe Limited. First Command Financial Services, Inc. and its related entities are not affiliated with, authorized to sell or represent on behalf of or otherwise endorsed by any federal employee benefits programs referenced, by the U.S. government, or the U.S. armed forces. Compiled by Sentient Decision Science, Inc., the First Command Financial Behaviors Index assesses trends among the American public s financial behaviors, attitudes and intentions through a monthly survey of approximately 530 U.S. consumers aged 25 to 70 with annual household incomes of at least $50,000. Results are reported quarterly. The margin of error is +/- 4.3 percent with a 95 percent level of confidence. Sentient Decision Science was commissioned by First Command to compile the Financial Behaviors Index. SDS is a behavioral science and consumer psychology consulting firm with special vertical expertise within the financial services industry. SDS specializes in advanced research methods and statistical analysis of behavioral and attitudinal data. 11

12 ATTACHMENTS Attachment Military Pay Chart 12

13 Attachment 2 Retired Pay Calculations Pay Chart Grade over 16 Over 18 Over O-5 $ 7, O-5 $ 8, O-5 $ 8,389 $ 8, E-7 $ 4, E-7 $ 4, E-7 $ 4,424 $ 4,473 Final Pay Grade Basic Pay Percent Retired Pay O-5 $ 8,617 50% $ 4, E-7 $ 4,473 50% $ 2, High-Three Grade 2016 Pay 2015 Pay 2014 Pay Average Percent Retired Pay O-5 $ 8,389 $ 8,281 $ 7,974 $ 8,215 50% $ 4, E-7 $ 4,424 $ 4,242 $ 4,200 $ 4,289 50% $ 2, Redux Grade 2016 Pay 2015 Pay 2014 Pay Average Percent Retired Pay O-5 $ 8,389 $ 8,281 $ 7,974 $ 8,215 40% $ 4, E-7 $ 4,424 $ 4,242 $ 4,200 $ 4,289 40% $ 2,

14 Attachment 3 Hypothetical Career Path and Military Pay Member 1 Member 2 Year Grade YOS Pay Grade Basic Pay Grade YOS Pay Grade Basic Pay 2018 E-1 1 E-1 $ 1, O-1 1 O-1 un 2 $ 3, E-2 2 E-2 $ 1, O-1 2 O-1 un 2 $ 3, E-3 3 E-3 ov 2 $ 2, O-2 3 O-2 ov 2 $ 4, E-4 4 E-4 ov 3 $ 2, O-2 4 O-2 ov 3 $ 4, E-4 5 E-4 ov 4 $ 2, O-3 5 O-3 ov 4 $ 5, E-4 6 E-4 ov 4 $ 2, O-3 6 O-3 ov 4 $ 5, E-5 7 E-5 ov 6 $ 3, O-3 7 O-3 ov 6 $ 6, E-5 8 E-5 ov 6 $ 3, O-3 8 O-3 ov 6 $ 6, E-5 9 E-5 ov 8 $ 3, O-3 9 O-3 ov 8 $ 6, E-6 10 E-6 ov 8 $ 3, O-3 10 O-3 ov 8 $ 6, E-6 11 E-6 ov 10 $ 4, O-4 11 O-4 ov 10 $ 8, E-6 12 E-6 ov 10 $ 4, O-4 12 O-4 ov 10 $ 8, E-7 13 E-7 ov 12 $ 4, O-4 13 O-4 ov 12 $ 8, E-7 14 E-7 ov 12 $ 5, O-4 14 O-4 ov 12 $ 8, E-7 15 E-7 ov 14 $ 5, O-4 15 O-4 ov 14 $ 9, E-7 16 E-7 ov 14 $ 5, O-4 16 O-4 ov 14 $ 9, E-7 17 E-7 ov 16 $ 5, O-5 17 O-5 ov 16 $ 10, E-7 18 E-7 ov 16 $ 5, O-5 18 O-5 ov 16 $ 10, E-7 19 E-7 ov 18 $ 5, O-5 19 O-5 ov 18 $ 11, E-7 20 E-7 ov 18 $ 6, O-5 20 O-5 ov 18 $ 11, E-7 21 E-7 ov 20 $ 6, O-5 21 O-5 ov 20 $ 11, The 21 st year is included to display the Over 20 pay figure, used in the Final Pay retirement calculations. 14

15 Attachment 4, TSP Contributions, Member 1 During Year of Service Basic Pay Monthly Contributions Agency Automatic Employee Maximum for Matching Agency Match Value at 20 Years of Service Agency Automatic Employee Maximum for Matching 1* $ 1,614 $ 13 $ 81 $ 7,313 $ 43,876 2 $ 1,837 $ 18 $ 92 $ 2,427 $ 5,493 Agency Match 3 $ 2,084 $ 21 $ 104 $ 83 $ 1,105 $ 5,526 $ 37,303 4 $ 2,442 $ 24 $ 122 $ 98 $ 1,451 $ 7,254 $ 5,803 5 $ 2,605 $ 26 $ 130 $ 104 $ 592 $ 2,958 $ 2,366 6 $ 2,644 $ 26 $ 132 $ 106 $ 128 $ 639 $ $ 3,152 $ 32 $ 158 $ 126 $ 1,487 $ 7,437 $ 5,949 8 $ 3,199 $ 32 $ 160 $ 128 $ 123 $ 616 $ $ 3,470 $ 35 $ 173 $ 139 $ 625 $ 3,124 $ 2, $ 3,891 $ 39 $ 195 $ 156 $ 855 $ 4,274 $ 3, $ 4,075 $ 41 $ 204 $ 163 $ 326 $ 1,631 $ 1, $ 4,137 $ 41 $ 207 $ 165 $ 94 $ 468 $ $ 4,933 $ 49 $ 247 $ 197 $ 1,040 $ 5,202 $ 4, $ 5,007 $ 50 $ 250 $ 200 $ 81 $ 406 $ $ 5,303 $ 53 $ 265 $ 212 $ 268 $ 1,340 $ 1, $ 5,382 $ 54 $ 269 $ 215 $ 58 $ 289 $ $ 5,618 $ 56 $ 281 $ 225 $ 132 $ 660 $ $ 5,703 $ 57 $ 285 $ 228 $ 34 $ 170 $ $ 5,958 $ 60 $ 298 $ 238 $ 66 $ 331 $ $ 6,048 $ 60 $ 302 $ 242 $ 11 $ 56 $ 45 Totals $ 18,216 $ 91,750 $ 66,787 *Contributions begin after 60 days of service. Year 1 values are adjusted accordingly 15

16 Attachment 4, TSP Contributions, Member 2 During Year of Service Basic Pay Monthly Contributions Agency Automatic Employee Maximum for Matching Agency Match Agency Automatic Value at 20 Years of Service Employee Maximum for Matching 1* $ 3,062 $ 26 $ 153 $ 13,872 $ 83,233 2 $ 3,108 $ 31 $ 155 $ 2,747 $ 1,134 Agency Match 3 $ 4,140 $ 41 $ 207 $ 166 $ 4,617 $ 23,083 $ 74,111 4 $ 4,839 $ 48 $ 242 $ 194 $ 2,829 $ 14,147 $ 11,318 5 $ 5,781 $ 58 $ 289 $ 231 $ 3,435 $ 17,173 $ 13,739 6 $ 5,868 $ 59 $ 293 $ 235 $ 284 $ 1,419 $ 1,135 7 $ 6,242 $ 62 $ 312 $ 250 $ 1,094 $ 5,469 $ 4,375 8 $ 6,335 $ 63 $ 317 $ 253 $ 244 $ 1,220 $ $ 6,753 $ 68 $ 338 $ 270 $ 964 $ 4,819 $ 3, $ 6,854 $ 69 $ 343 $ 274 $ 206 $ 1,028 $ $ 8,065 $ 81 $ 403 $ 323 $ 2,144 $ 10,721 $ 8, $ 8,186 $ 82 $ 409 $ 327 $ 185 $ 926 $ $ 8,723 $ 87 $ 436 $ 349 $ 701 $ 3,504 $ 2, $ 8,854 $ 89 $ 443 $ 354 $ 144 $ 719 $ $ 9,283 $ 93 $ 464 $ 371 $ 388 $ 1,942 $ 1, $ 9,422 $ 94 $ 471 $ 377 $ 101 $ 505 $ $ 10,666 $107 $ 533 $ 427 $ 695 $ 3,477 $ 2, $ 10,826 $108 $ 541 $ 433 $ 65 $ 323 $ $ 11,299 $113 $ 565 $ 452 $ 122 $ 612 $ $ 11,468 $115 $ 573 $ 459 $ 21 $ 106 $ 85 Totals $ 34,858 $ 175,559 $128,598 *Contributions begin after 60 days of service. Year 1 values are adjusted accordingly 16

17 Attachment 5 Continuation Pay, Member 1 Basic Pay 2.5 Months 15.5 Months Basic Pay, E-7 over 12 $4, $12,332,03 $76, Social Security Tax (7.65%) $ $5, Federal Income Tax (10%) $1, $7, Net Pay $10, $62, Invested for 8 years at 7.3% $17, $110, Continuation Pay, Member 2 Basic Pay 2.5 Months 15.5 Months Basic Pay, E-7 over 12 $8, $21, $135, Social Security Tax (7.65%) $1, $10, Federal Income Tax (10%) $2, $13, Net Pay $17, $111, Invested for 8 years at 7.3% $31, $195,