The New Blended Retirement System and Life After the Military
Posted in Uncategorized on December 14, 2017
The Department of Defense is ramping up its recruitment and retaining efforts in the form of improved retirement plans for its active duty and reserve components, starting January 2018.
In what is being labeled by DoD leadership as one of the “most significant changes to military pay and benefits in the past 70 years,” the new retirement option – known as the Blended Retirement System (BRS) – will provide the 85% of uniformed Armed Forces that do not serve 20 years a new, portable government retirement savings, while still maintaining a traditional pension for those that do.
The New Blended Retirement System
Previously, service members who left the service with less than 20 years of service did so with no government-provided retirement system. The DoD has spent the past 18 months refining a new plan that functions more as a typical 401k plan, offering new, government-funded matching options and continuation bonuses. The reform of the military retirement system became law in 2015 and was officially established with the Fiscal Year 2016 Nation Defense Authorization Act; eligible servicemembers will have from Jan. 1, 2018 until Dec. 31, 2018 to make their decision to enroll in the new BRS or to stay with the traditional, “High-3” plan.
Those eligible to make a decision to opt in to the new BRS are:
- Active duty members with less than 12 years of service as of Dec. 31, 2017.
- Reserve component members with less than 4,320 retirement points as of Dec. 31, 2017.
Active duty service members with more than 12 years of service as of Dec. 31, 2017, automatically remain in DoD's legacy retirement system, while any new service members enlisting after Jan. 1, 2018 are automatically enrolled in the new BRS plan.
A main difference in the BRS and the traditional High-3 plan hinges on a person’s use of the existing Thrift Savings Plan (TSP), the federal government’s “defined contribution” plan for its employees. Federal civilians and uniformed servicemembers can contribute a portion of their salaries to their TSP accounts and decide how that money should be invested. All members of the Armed Forces are eligible for a TSP account regardless of their retirement plans, and the money vested in the account – both from their contributions and the subsequent earnings – is theirs to keep after separation. However, the new BRS offers some attractive government-matching benefits into the TSP accounts in exchange for a lower overall pension percentage.
With the traditional “High-3” plan currently in operation, if you serve 20 years or more, you will receive a lifetime monthly annuity based on your years of service and the average of your highest three years of basic pay (you must serve at least 20 years to receive any benefit from this plan). This monthly amount is calculated by multiplying the number of years you served by the average of your highest 36 months of basic pay by 2.5%: (Years x High 36 x .025). The result is that a member with exactly 20 years of service will receive a lifetime monthly annuity of 50% of the average of his or her highest 36 months of basic pay. If you serve longer than 20 years, the amount will increase.
For example: If you serve 20 years and your highest 36 months of basic pay average was $6,500, your monthly pay in retirement would be $3,250 (20 x $6,500 x .025 = $3,250).
With the new BRS, the multiplier for the monthly payment is reduced to 2% from 2.5%, coming out to a monthly payment of around 40% rather than 50% at 20 years of service. So with 20 years of service and a high-36 average of $6,500, you’d receive a lifetime monthly annuity of $2,600 (20 x $6,500 x .02 = $2,600).
However, enrollees in the new BRS will benefit from government-funded matching programs similar to what many civilian companies offer their employees. As soon as you enroll in the BRS program, your service begins a Service Automatic Contribution to your TSP account each pay period, equal to 1% of your basic pay. In addition, you can then choose to contribute an additional portion of your own pay into your TSP account, and your service will match it, adding one dollar for each dollar you contribute, up to 3% of your paycheck.
After that initial 3%, you can choose to contribute more, up to 5% of your paycheck, with your service then matching 50 cents for each of your dollars. So if you contribute 5% of your basic pay in a pay period, your service will contribute an amount equal to 4% of your basic pay (1 for 1 on the first 3%, and .50 to 1 on the next 2%); combine that with your Automatic Contribution, you can receive up to 5% additional “free money” into your TSP account from your service branch.
As a reminder, all service members are eligible for use of a TSP account; only BRS enrollees, however, are eligible for the matching program. If you have considered your options and feel the potential earnings from the matching program outweigh the increased monthly pension, it may be in your interest to enroll in BRS as early as possible, since the matching begins as soon as you enroll. The DoD stresses the fact that each service member must consider the options carefully; once you have made your decision to enroll in the new BRS program, you will NOT be able to change your option, even if you change your mind before the end of the enrollment period (Dec. 31, 2018).
Additionally, the new BRS program offers an incentive for servicemembers at mid-career with a new “Continuation Pay” bonus, which is a one-time bonus payment made between 8-12 years of service, in exchange for an agreement to perform an additional period of obligated service. This one-time bonus payment is 2.5% times your basic monthly pay – or if reserve, at least 0.5 a month’s active duty basic monthly pay – in exchange for a commitment of at least 3 more years of service. This bonus does not affect your retirement pay if you decide to continue to 20 years and does not obligate you to serve to 20 years.
Everyone who is eligible to make a choice between the two retirement plans will be required to take a training course on the new system options at some point before the end of 2018, even if they intend to stay with the current retirement system. The training is currently available on Joint Knowledge Online for those with a common access card, and family members and others without a CAC can also take the course at Military OneSource (click "financial and legal," then "personal financial management and taxes."). The full course takes between one and a half to two hours to complete, although the course-taker can pause the process and restart it later.
The DoD also recently released multiple tools to help servicemembers choose the best retirement plan for their futures, including an online calculator that allows you to input basic information – such as age, years of service, rank, and estimated years of service at the time of separation and retirement. It then auto-populates fields such as expected rate of investment return, life expectancy, TSP contribution percentage, and career progression, but allows you to alter them to se how results would change. It then compares the results to potential results from the High-3 plan (keep in mind that the High-3 results do not include any of your own TSP contributions). The calculator does allow you to consider the effects of bonuses and payments on the final numbers, and you also have the option of considering the effects of taking a lump sum under the new BRS.
The procedures for opting in to the new BRS vary from service to service, so you should see your military personnel office for information. Additional, it is advisable to talk to your installation’s personal financial counselor for more guidance in choosing the right plan.