BG (Ret.) Michael Meese, PhD
The military retirement system is undergoing the biggest overhaul since World War II. It will affect everyone joining the force and many current service members. These are some common questions from Reserve and National Guard members about the new system.
Why are we changing?
The previous “defined benefit” retirement system was good and generous, but only provided benefits at retirement, which was normally after 20 years. More than 86 percent of all reservists will never benefit from a traditional 20-year military retirement. After years of study and proposals, Congress approved the changes to the retirement system in the 2016 National Defense Authorization Act.
What is the “Blended” Retirement System (BRS)?
The new military retirement system is a “blend” of defined contributions, defined benefits, and a continuation bonus:
• First, it adds a “defined contribution” component, similar to a 401k. The military automatically contributes 1% of base pay or inactive duty pay to a servicemember’s Thrift Savings Plan (TSP) accounts and will match up to 5 percent of a servicemember’s contribution. After serving two years, Soldiers, Marines, Sailors, Airmen, and Coast Guardsmen can take those retirement savings, with the matching contribution, to their next job.
• Second, to retain experienced leaders, the BRS provides a mid-career continuation pay “bonus” paid between 8 and 12 years of service of at least 0.5 months of pay for reserve component members (and 2.5 months of pay for active) who commit to serve an additional 3 years.
• Third, the new plan retains, but reduces by 20 percent, the “defined benefit” pension paid to retirees after 20 years of service. For reservists, retired pay still commences at age 60.
Who is covered by the New Blended Retirement System?
• In the new BRS: Anyone whose initial entry into service is 1 January 2018 or later.
• Can’t be in new BRS: Reserve and National Guard with over 4,320 retirement points (12 years for active) on 31 December 2017.
• Have a choice: Less than 4,320 retirement points on 31 December 2017
Is the new system more generous or less generous?
The new military retirement system is unequivocally more generous for anyone who does not stay until retirement.
According to the Military Compensation and Retirement Modernization Commission, if a service member stays until retirement and successfully invests their own funds, the matching funds, and continuation bonuses, and receives historically average returns from the TSP, then they could be at least as well off. Overall, the new system is estimated to result in annual steady-state savings for taxpayers of $1.9 billion.
If I have less than 4,320 retirement points, should I opt into the new system?
This is a difficult and personal question. The military will have substantial training to help you understand your options and decide. It really comes down to your answer to two challenging questions:
(1) Do you plan to remain in the military until retirement? Are you: “Staying” “Leaving” or “Unsure”?
(2) Will you save the 5% to get matching 5% into TSP? “Yes” or “No”?
• If definitely “Staying,” the old system is likely better.
• If definitely “Leaving,” and “Yes” will save 5%, the new system is better.
• If you are “Unsure,” and “No”you won’t save 5%, the old system is likely better (but only pays if you stay to retirement). The 1% automatic contribution (with no matching) will likely not make up for the 20% reduction in retirement income, if you do stay.
• If you are “Unsure,” and “Yes,” you would save 5% to get a full 5% matching, this is the most difficult situation. You need to evaluate your probability of staying until retirement to determine which option is financially better for you. If you remain in the old system and then left the service, you would still take the 5% you are saving in the TSP with you, but will have forgone the 5% matching. If you choose the new BRS and stay, your eventual retirement would not be as generous, but you would have the 5% match throughout the remainder of your career. Retiring at 20 years with a pension of 40% of your salary is still very generous. Although the decision may be difficult, it is between two good options.
Do Cadets or Midshipmen have a choice?
Yes. A Cadet or Midshipman with an agreement to serve as an officer upon graduation, who receives basic pay or inactive duty pay before 1 January 2018, has a choice between the legacy or blended retirement system.
When do I have to decide?
You have until 31 December 2018 to “opt in” to the new blended retirement system. Everyone will receive training on the new system and no one will be forced into the BRS. If you do not make a decision, you will stay grandfathered in the old defined benefit system.
How does the “defined contribution” matching work?
In the new “blended” plan, the government provides the 1% “free” contribution after 60 days of service. For those “opting in” to the new system, the 1% “free” contribution begins at your next pay period. The government will also “automatically” enroll all service members with a 3% personal contribution after 60 days of service or in the month after they “opt in” to the new system. After 24 months of service for new service members or immediately after “opting in” to the BRS, the government will match the member’s contribution according as follows:
You can always change your contribution from the automatic 3%. If you were to increase to 5%, then you will get additional matching contributions from the government totaling 5%. You can put more than 5% of income into TSP, but 5% maximizes the government’s match. You can also decrease your contribution to 0% of your pay, and would still receive the 1% automatic contribution into your pay. Is my contribution a traditional or a “Roth” contribution? Your contribution is, by default, a “traditional” tax-deferred contribution, not Roth, unless you elect to designate all or part of it as “Roth” (and then you would have to pay taxes on it in the year that the contribution is made).
Where do the contributions go?
Contributions from you and the government are invested in the Thrift Savings Plan, which is for Federal employees and military members to offer the same types of savings and tax benefits that many private corporations offer their employees under 401(k) plans. It has low administrative and investment fees and you have a choice of directing your investments into one of five “sector” funds listed below or into one of five “lifestyle” funds. The lifestyle funds use a combination of the sector funds to balance risk and return based on a targeted retirement date.
When do I have access to the money?
Remember that all of the contributions — from you and from the government — are part of a “qualified retirement plan,” which means that, in general, you cannot access the funds until you are 59½ without paying a penalty.
Current service members who “opt in” to the new system are fully vested immediately and can take their contributions and all matching contributions with them when they leave the service. New service members who leave in the first two years will lose the automatic one-percent and will not have earned any matching contributions. Otherwise, service members can transfer all contributions when they leave the service.
When do the government’s contributions ever stop?
The automatic and government contributions stop when you complete 26 years of service.
How does the mid-career continuation pay “bonus” work?
If you are in the Blended Retirement System, then you are eligible for a one-time bonus payment that is paid between the 8th and 12th year of service. As a reservist, the bonus will be equal to at least 0.5 times and could be up to 6 times the monthly base pay for your rank and years of service. If you are on active duty, the bonus is from 2.5 to 13 times your monthly base pay. The size and timing of the bonus is based on the needs of the service. To receive the continuation bonus, you must agree to serve an additional three years of service in the component (reserve or active) in which you are currently serving.
Are there changes in the payment of the “deferred benefit” (pension) at retirement?
The biggest change is that the retirement pension is reduced by 20% from 2½% to 2% for each year of service, with that percent multiplied by your highest 36 months of base pay. Reserve component retired pay still begins at age 60 for most people. Additionally, under the new system, you can choose to receive an up-front, “lump sum” accelerated payment of 25% or 50% of your retired pay in exchange for accepting reduced retired pay until you reach full retirement age (normally age 67). This lump sum might be advantageous to buy a home, start a business, or pay for other large expenses immediately upon retirement. But, you should carefully examine the costs and benefits of such a lump sum payment before you accept it.
—BG (Ret.) Michael Meese is the Chief Operating Officer of the American Armed Forces Mutual Aid Association (AAFMAA). For more information, visit www.aafmaa.com.