Brig. Gen. Brent Feick, outgoing director of joint staff for the Alaska National Guard, participates in a flag folding ceremony during his retirement ceremony at the National Guard armory on Joint Base Elmendorf-Richardson, Alaska, April 1, 2017. Feick retired after 41 years of service to our nation.

What military service members need to know about the new retirement system

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By Dan Kadlec, Money

The military’s introduction of its new Blended Retirement System leaves nearly all current service members in a quandary. Those with between one and 12 years of service must choose between the old and new retirement plans—and there is nothing easy about the calculation.

Why one to 12 years? Because on Jan. 1, 2018, all military personnel whose length of service is in that time bubble are eligible for either the old or the new programs. Both have pros and cons. Service members will have one year to make an irrevocable choice. About 88% of active-duty military—or 1.15 million service members—fall into this category.

By contrast, anyone who joined before 2006 is automatically grandfathered into the old system, a generous traditional pension with inflation adjustments. Anyone joining in 2018 or beyond will be enrolled in the new blended system, which features a scaled-back pension but adds up to a 5% match for personal contributions to the government’s massive 401(k)-like Thrift Savings Plan (TSP).

The military just rolled out a calculator that service members can use to compare their options, which is labeled as the beta version of the Blended Retirement System Comparison Calculator. Some unofficial calculators are also available, including one from USAA, a financial services company that serves military families.

To choose wisely, those in the bubble years will need to take a hard look at their expected tenure in the military and their career earnings, as well as their ability to save and their stomach for taking a more active role in managing their own money. “There are a lot of ifs,” says Kathleen Brinkler, relationship manager with AAFMAA Wealth Management, a financial advisor for military personnel. “The new plan works if you contribute enough to get the full match, if you invest prudently, if you don’t take money out early, if you have enough time for your money to grow.”

In general, if you plan to stay in the military for a total of at least 20 years—and thus become eligible for the legacy pension—the old plan will be your best choice. This becomes clearer the closer you currently are to 12 years of service. Why? With fewer than 10 years left before becoming eligible for the legacy pension you probably will not have enough time to make up the difference by saving in the TSP. Besides, under the old plan you can still save in the TSP. You just won’t get the match.

Someone with just a year or two of service has a much tougher calculus. Many additional years of matching contributions and compound growth in the TSP can close the gap—and then some. But going with the blended program requires savings discipline and more hands-on attention. Meanwhile, at any length of service, if you suspect you may not stay at least 20 years, the new system is the obvious choice. It guarantees you will leave with some savings.

These are not absolute answers. Power savers—those able to save 15% or more of pay—might do better in the new plan in many cases. And keep in mind that military personnel are subject to involuntary layoffs, like everyone else. The Army announced a forced troop reduction of 8% just two years ago. If you choose the old pension plan and get downsized, you lose.

To understand the options, start with the legacy pension. A typical officer retiring after 20 years leaves with annual guaranteed income of about $53,000, which is indexed for inflation. Based on a 40-year retirement, that pension has a present value of about $1.4 million, according to AAFMAA calculations. Under the new blended system, the scaled back pension would provide $42,000 of annual income, which has a present value of about $1.1 million. So in rough terms anyone in the bubble years would need to save about $300,000 by retirement after 20 years for switching to the new system to make sense.

That’s a tall order if you have only eight to 10 years to save. Ross Cutler, an AAFMAA advisor, figures an officer would have to save a Herculean 26% of pay for eight years for the new system to make sense. That assumes a fairly conservative 6% average annual return. If he or she achieved average annual returns of 8%, which is reasonable, that officer still would have to save 24% of pay. The percentages are similar for enlisted members who earn much less.

Service members in the bubble years but with a longer time horizon–say, those who only recently joined–have a much clearer path to the new blended system. They would need to save only 6% of pay and achieve 6% average annual returns for the choice to make sense, AAFMAA figures. If they earned 8% on their money, they would need to save just 5% of pay.

Cutler says most service members are low-risk investors. And matching funds under the new system go into a fund that yields about 1%. So soldiers would need to understand the value of more aggressive investing, and be willing to switch the money to more appropriate long-term accounts. “Most retire from the service and have second careers,” Cutler says. “If they don’t touch the TSP they can extend the time horizon out to age 62, and it’s easier to make the case for more aggressive investing with equities.”

In general, anyone opting into the new blended retirement system should save at least 5% of pay—and not touch it. That way they get the full 5% match. The new system is designed around new service members saving 5% and retiring after 20 years with roughly the same total retirement benefit as under the old system.

But new soldiers and even those in the bubble years could do much better if they power save. That isn’t easy on military pay. But saving 15% of officer’s pay instead of just 5% could add another $131,400 in 10 years. Over 20 years, it could add another $415,000 at historical rates of return. That’s enough to make the new plan a better choice.