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- Up to 5% base pay match for TSP contributions. 1% automatic DoD contribution regardless of member's contribution.
- Retirement pension is now calculated as years served x 2.0% x retired base pay. So if you serve 20 years, you get 40% of your highest 36 months of average base pay.
- Continuation pay bonus is now paid out at between 8-12 years, 2.5x – 13x monthly base pay. Standby for more details on this.
- Anyone with less than 12 years of service as of 31 Dec 2017 is eligible to sign up. Opt in period is calendar year 2018.
Here’s what we know about the new U.S. Uniformed Services (Army, Navy, Marines, Air Force, Coast Guard, NOAA, and US Public Health Service Commissioned Corps) Blended Retirement System. Authorized in the 2016 National Defense Authorization Act (NDAA), the new military retirement system is the most radical change since the Career Status Bonus/REDUX scheme passed by Congress in 1986.
The CSB/REDUX plan was an absolutely terrible deal for troops. The new retirement system is actually quite a good deal, especially for the 83% of the force that leaves before the current 20 year retirement cut off. The new Blended Retirement System (BRS) will be fully implemented on January 1, 2018 for all troops enlisting or commissioning after that date.
Who is eligible for the new military retirement?
Servicemembers with 12 or less years of service on Dec 31, 2018 (those who joined after Dec 31, 2005) or who join before Jan 1, 2018 will be given the option to opt into the new retirement plan. This opt-in period will be during calendar year 2018. Of course, this raises the question of whether you should opt in or not.
Bottom line: if you are not sure if you will stay in for 20 years, the new BRS system offers you additional retirement savings that can substantially increase your retirement income.
- If you are 100% sure you’ll stay in for 20, stick with the old plan.
- If not, I would recommend signing up for the new plan.
There’s a 83% chance you won’t make 20 years and the new plan offers many monetary benefits to those who get out before their 20 years.
The old military retirement system consisted of the Thrift Savings Plan (TSP) (with no matching) and a pension that began immediately upon retirement, calculated at 50% of the average base pay for the last 3 years of the servicemember’s career.
This is a great scheme for those who make it to 20 years. But it leaves the 83% of the armed forces that doesn’t make it to 20 years without any retirement benefits outside of their personal savings into the TSP and IRAs. The Blended Retirement System will change the system for the better and offer every servicemember retirement savings that they can take with them no matter how long they serve.
The BRS has three pillars:
- retirement pay or pension
- automatic contributions plus matching contributions to the employee’s Thrift Savings Plan
- continuation pay
Let’s break them down…
New Military Pension
The first pillar should be familiar to all military personnel: the military pension. The new BRS offers the traditional inflation-adjusted pension paid immediately upon retirement from the uniformed services. The calculation is a bit different from the old system. In both the old and new system, retired pay is calculated on your “retired base pay.”
This is calculated by taking the average of your highest 36 months of base pay (usually the last 3 years of your career). Remember, in both old and new systems this is only calculated off your base pay, not any special pays you received or your BAH, which could make up a large percentage of your income on active duty.
Once you have your retired base pay, in the old system you would multiply that by your years of service and then by 2.5%. So if you served for 20 years, you would receive 20 x 2.5% = 50% of the average of your last 36 months of base pay.
In the new system the multiplier has changed to 2.0%. Now if you served and retired at 20 years, you will receive 40% of your retired base pay. This means that you will receive a 20% reduction in your pension, which could cost you hundreds of thousands of dollars over your lifetime.
However, with proper investment of the other two pillars of the new retirement scheme, you can potentially close the pension gap between the new and the old scheme. Besides, the pension gap is only a player if you make it to 20 years.
Military TSP Match
Already available to civilian government employees, the TSP match is the best improvement of the BRS. The Thrift Savings Plan is already the best retirement account in the world. Now with matching, it becomes an even more powerful savings vehicle. The TSP offers simple and diversified index funds at the lowest costs available in the world. If you're not taking advantage of this program already, you need to start ASAP.
Under the new system, every recruit will be automatically enrolled with 3% of their base pay going into the TSP. After 60 days of service, the DoD will automatically begin kicking in an additional 1% of their base pay until the member separates, retires, or reaches 26 years of service. This addes up to 4% total (3% from servicemember's base pay + 1% DoD) of the servicemember’s base pay going into the TSP.
Additionally, after 2 years of service the DoD will match up to an additional 4% of the servicemember’s basic pay. This is on top of the 1% automatic contribution. The maxmimum match is 5% if the servicemember is also contributing 5% of their base pay. This matching is already widely used in the civilian sector so it’s good to see it coming to the military side.
This TSP match could mean $70,000+ of additional savings into your TSP, assuming you serve for 20 years. At retirement age of 60, these extra invested assets means you'll have a retirement account of $1 million, rather than half a million (assuming a 7% return).
Here's how the matching works for a 6 year Air Force captain (O-3):
- $5540 monthly base pay, or $66480 annual
- 1% agency automatic contribution = $664.80 annual contribution
- Servicemember contributes 5% = $3324
- DoD matches 4% = $2659.2
- Total contributed = $6648, or 10% of total annual base pay.
Continuation Pay – New Military Retention Bonuses
The continuation pay bonus is paid upon completion of between 8-12 years of service, in exchange for a 4 year additional service commitment. The amount of the pay is 2.5 to 13 months of basic pay. (This detail is in flux, standby for more details as we get closer to the Jan 1, 2018 rollout.)
The continuation pay is an incentive for military servicemembers to stick around to least 16 years, usually past their initial enlistment or active duty service commitment (ADSC). Initial enlistments and ADSCs range between 2 years for new enlisted personnel and 10 years for Air Force pilots. Re-enlistments also range widely in length.
In the current system, there is no retirement advantage to staying another year, other than re-enlistment bonuses and pay raises. Now with the new continuation pay benefit, there’s a monetary incentive to stick around past your initial service commitment but not necessarily until the 20 year point.
For a 12 year Army or Air Force major or Navy lieutenant commander (O-4), the value of this bonus pay in 2016 would be $17702.50 at 2.5x monthly pay. For a 12 year E-4 or E-6, the value of the continuation pay would be between $8000-$9000.
The continuation pay will most likely be taxable, unless the servicemember is eligible for the combat zone tax exclusion (CZTE). Also, the smart servicemember will invest this pay immediately into their TSP. By adding this money to the TSP, you will significantly increase your retirement income.
So, is the new military retirement a good deal?
I believe that while the 20 year, 50% of base pay pension is a fantastically good deal for military servicemembers, the new plan offers many opportunities for the smart investing servicemember. If the match is utilized to it’s full potential, the difference between the new plan and the old plan shrinks substantially.
However, the new plan does rely much more on the servicemember to invest smartly over the course of their career, in a properly diversified portfolio with enough equities to provide a decent (6%+) return. Just sticking with the G Fund is the wrong approach to maximizing your returns over the lifetime of your investments.
Personally, I will be signing up for the new plan. I believe the uncertainty of staying for 20 years and the additional benefits (TSP matching and continuation pay) are worth sacrificing a potential 20% cut in pension pay.
Remember, only 17% of the total force sticks around for a full 20+ years. At 6 years in, there’s no guarantee that I’ll be able to stay in for the full 20, whether it’s for family, personal, or professional reasons. The flexibility the new plan offers makes it worth it to me to sacrifice 20% of a pension I will probably never receive.
So, if you’re eligible, are you going to opt in to the new plan? Or will you stick with the old plan and aim for 20 years of service?