Serving Military Clients
A retired Air Force pilot turned CFP says advisers should take a closer look at armed services personnel and be aware of their unique needs.
A retired Air Force colonel turned CFP says advisers should take a closer look at armed services personnel and be aware of their unique needs.
MILITARY MEMBERS CAN BE TERRIFIC CLIENTS. THEY are often disciplined savers, and midcareer personnel can make well into the six figures. Some planners, however, hesitate to add military clients to their rosters.
“There’s a misconception that members of the military can’t balance their checkbooks and don’t need a financial adviser,” says Curt Sheldon, a retired Air Force fighter pilot who is now a CFP with his own firm in Alexandria, Virginia.
Speaking at a session on what fiduciaries need to know to serve military members at the annual Fi360 conference, Sheldon said that, among other advantages, armed services retirees often “move into high-paying civilian positions and have significant investment portfolios.”
What’s more, military members, accustomed to a disciplined lifestyle, bring that self-control to their savings, he told the audience.
But, cautioned Sheldon, a colonel who served in Operation Desert Storm, men and women who are or have been in the military “speak a different language,” may have dealt with highly stressful situations and have very particular financial planning needs.
PLANNING PAIN POINTS
For example, those in the armed forces who are nearing retirement age will face a major “planning pain point” on Jan. 1, according to Sheldon.
That’s when a new so-called blended retirement system for the U.S. military kicks in. Upon reaching retirement age, individuals will be able to receive a lump sum portion of their pension’s future cash flow at a discount rate, currently predicted to be 7%. The problem, Sheldon says, is that, with interest rates currently around 2%, that future payout may not be the best deal for retirees.
“It’s tempting to take the cash,” he said, “but an adviser really has to sit down and ask the client what their needs are, what else they have and why they really want to do it.” Those in the armed forces also have to decide what to do with their thrift savings plan, known as TSP, the government’s version of a 401(k).
Many military members have substantial savings that are tax-exempt, Sheldon said. For example, military members do not have to pay any taxes on pay they receive while in a combat zone. Funds from IRAS and 401(k)s can be rolled into TSPS, but contributions and distributions are pro rata. As a result, “you can’t maximize tax efficiency and you can’t control taxes on distributions,” Sheldon said.
What’s more, distributions, whether in the form of a partial withdrawal, monthly payments or a life annuity, are “cumbersome at best … and there may be possible estate planning surprises,” Sheldon added.
TSPS represent a “material decision” for advisers working with military members, according to Sheldon.
“They’re great for accumulation, not so good for distribution plans,” he said.
Charles Paikert is a senior editor of Financial Planning. Follow him on Twitter at @paikert.