More than 1.6 million people serving in the United States military have a decision to make this year regarding their retirement. Beginning January 1, 2018, the military is overhauling their entire retirement system from a traditional pension (also known as the Legacy System), to a new Blended Retirement System (BRS) that Congress approved as part of the 2016 National Defense Authorization Act.
Under the Legacy System, the military had generous retirement benefits for those serving at least 20 years of service. This benefit was calculated by taking the average of the servicemember's highest 36 months of basic pay times 2.5% of their years of service, guaranteed for life. However, if you left the military before 20 years of service, which is about 83% of those serving in the military, you left with nothing for your retirement savings. This new system is an effort to modernize the way the military structures their retirement benefits to reflect most 401k plans that civilians participate in, increase the years of active service, and recruit new service members. The BRS blends the traditional legacy retirement pension with a defined contribution to a Thrift Savings Plan account and creates a more portable retirement option that will benefit most service members.
Who does this new plan effect?
- Those who join the military on or after Jan. 1, 2018, will be automatically enrolled in the new BRS plan.
- Those who have greater than 12 years serving in the military, are grandfathered into the Legacy System.
This leaves the 1.6 million people who have less than 12 years of service with a decision to make during the 2018 calendar year.
No service member will be automatically switched to the Blended Retirement System. If you do not make a choice, you will be grandfathered into the Legacy System. If you are eligible to opt-in, you are required to complete a training course regarding the new BRS before making a final decision. The decision to switch to the BRS is irrevocable.
The window to make this decision: January 1, 2018, through December 31, 2018.
The new Blended Retirement System includes three key components:
1) Thrift Savings Plan matching (TSP):
Participants will now receive an automatic 1% of your base pay contribution from the Department of Defense to a traditional Thrift Savings Plan account that starts 60 days after your first day of service. After two years of service, you are fully vested. If you leave the military after two years, you keep the 1% base pay contributions and any contributions that you have made and can roll them into an IRA.
After three years of service, participants will be able to receive a TSP match of up to 5% of their base pay each year of service. The matching contributions can only be deposited into a traditional TSP. You can contribute to a Roth TSP and still receive the matching contribution, but the match will need to go into a separate traditional TSP account. Everything starts as soon as you opt-in and is not retroactive.
2) Continuation pay (additional cash bonus):
After 12 years of service, participants will be eligible for a one-time additional bonus that can range from 2.5 to 13 times your monthly base pay if you commit to an additional service obligation of a t least four years.
3) Pension Payout:
Those who stay for 20 or more years of service will earn an annual pension payout of 2%. This value is calculated by taking the average of the servicemember's highest 36 months of basic pay times 2% of their years of service, guaranteed for life. This is a 20% decrease in benefits compared to the Legacy System, however, the difference will most likely be offset by the contributions to the Thrift Savings Plan.
You will also have a lump sum distribution option. You can take either 25% or 50% lump sum discounted benefit, in exchange for a reduced pension benefit until you reach full Social Security retirement age (typically age 67). This option must be carefully considered as it provides less of a benefit over the long run. The lump sum distribution option must be made no less than 90 days before retirement.
A key factor in this decision is how long you plan on serving in the military. The Legacy System may serve you best if you plan on a full military career of at least 20 years of service. If you plan on leaving the military with fewer than 20 years of service, then the BRS could be a great option for you. If you are planning on opting in the BRS, it would be beneficial to do so as soon as possible so you can begin taking advantage of the TSP match which is a powerful savings tool.
Carol Chaudet
(Updated 3/19/2018)