In case you missed it, 2018 was the first year that the U.S. military introduced its new retirement program called the Blended Retirement System or BRS. This has already impacted thousands and will continue to encourage additional retirement savings for millions of future service members.
Before we dive into the BRS, let’s look at the current set-up. There are two arms to the retirement plan and they are the Thrift Savings Plan (TSP) and the pension. For those not familiar with the TSP, it is the military and U.S. government’s “401(k)” equivalent. Pre-tax funds are contributed to the TSP account via salary deferrals and there is a dollar-for-dollar match up until 4%. So, if you are contributing 4% of your pay, you are also receiving a match of 4% from your employer, assuming you have been working for two years. Two years of service is required to receive the matching contribution.
The pension portion of your retirement plan, called the high-3 pension, considers your years of service as well as your highest three years of pay (technically highest 36 months of basic pay). The pension payout is available if you have put in your 20-years of service, which is the minimum to qualify for pension benefits. Let’s assume you have served 20 years and your highest three years of pay averaged out to $80,000:
20 years of service x 2.5% x $80,000 = $40,000 annual pension.
In other words, 50% of whatever your “high 3” is.
<here is a handy source to determine your high-3: https://militarypay.defense.gov/Calculators/Active-Duty-Retirement/High-36-Calculator/ >
Those who have served 12 years of service or more, will stay in this system and are not eligible to join BRS. On paper, it appears pretty good! Having that pension income, social security income, and hopefully a sizeable TSP account should certainly make for a decent retirement. However, only 17% of service members are able to benefit from this pension as they have not put in the required time. So, your goal should be to make it to 20 years to get full pension benefits!
The Department of Defense has recognized the small percentage of its members benefiting from the pension, as well as the low participation in the TSP (possibly due to the fact that TSP enrollment has never been done automatically). As a result of these findings, the BRS was created.
The Blended Retirement System has tweaked the current system to encourage additional retirement savings for the U.S. Army, Air Force, Coast Guard, Marines, and Navy. The new pension calculation actually results in a lower payout of 40% of your high 3, rather than 50%. The new value-add, actually comes from the TSP account. Enrollment into the plan is now automatic! The 4% match and the 2-year waiting period still exist. But, there is now an additional 1% automatic contribution that is done by the military, for you. You don’t even have to wait two years, either! The 1% starts almost immediately upon enrollment: 60 days after you sign on the dotted line.
Think back for a second to when you were in the lower/lowest rank and were making between $20,000 – $30,000 a year. It probably didn’t cross your mind to pay into the TSP as you most likely needed every penny of your paycheck. With the 1% automatic contribution, you receive that even if you don’t put anything into the plan (although you should still try to). Here is the new automatic contribution laid out:
(Table by: Department of Defense)
By contributing 5% of your paycheck, you can have 10% put away as retirement savings on your behalf!
Another new feature to the BRS, is the lump sum provision. At retirement, you may choose to receive 50 or 25% of the actuarial calculation of your pension in the form of a lump sum payment. This payment can be rolled over into an IRA or other pre-tax retirement account, all while still receiving the other 50 or 75% as monthly retirement benefits. Someone may want to choose this option if they decide to work in the private sector after retiring from the military, and simply don’t need all of their pension income each month – or the income tax that comes along with it.
These are all things to consider if you are one of the 1.6 million active-duty members who are given the choice to choose between this new amendment or be grandfathered in to the old plan. Those who are active-duty members with less than 12 years of service and fewer than 4,320 points have this choice. This election of choosing the old plan or BRS must be made by December 31st 2018!
If you do fall into the category of someone with less than 12 years and fewer than 4,320 points, I would suggest asking yourself if you truly think you’ll put in the full 20 years of service. If the answer is “yes,” then sticking with the old plan (50% of high-3 pension and 4% match TSP plan, with no 1% auto contribution) may be the right decision for you. If you don’t think you will be putting in the 20 years, the new plan might make the most sense.
Now that you are caught up to speed on what is being called the biggest change to military retirement benefits since World War II, feel free to pass this along to anyone serving or with friends and family serving who may benefit from this information.
If you have any questions at all, please reach out to me personally. I’d love to help!
Categories: Educational Articles, Heather Atkins, Market Commentary