Significant changes are underway in the retirement system for military personnel.
The Fiscal Year 2016 Nation Defense Authorization Act authorized creation of a new retirement system. It is similar to the FERS system for federal employees.
The new military retirement plan has a smaller pension but has added a defined contribution to the Thrift Savings Plan (TSP) account. This new system will go into effect on January 1, 2018.
Who Will Be in New Retirement System?
Military personnel will have some decisions to make about their future retirement. Existing service members will not be forced into a new retirement plan.
Military personnel serving as of December 31, 2017, will be “grandfathered” under the current retirement plan. But, while no one currently-serving will be automatically switched to the new system, many will have a choice.
Active service members with fewer than 12 years since their Pay Entry Base Date, and some Reserve Component Service members will have an option to join the new retirement plan. The new retirement plan is called the Blended Retirement System (BRS).
The opt-in period for the BRS begins January 1, 2018. It ends on December 31, 2018.
Those who enter the military on or after January 1, 2018 will be automatically enrolled in the BRS.
Why Is There A New Military Retirement System?
The Military Retirement Modernization Commission recommended changes to the existing retirement system.
There will be advantages to the new system for many people although many current military personnel may want to stay within the existing retirement plan. The decision for many people will depend on their own unique circumstances.
The new retirement system will reduce the cost of the retirement system to the government. It will also require military personnel who want to be financially independent in their “golden years” to contribute to their own retirement.
Another major change will be that under the new retirement system, each person will be responsible for making investment decisions. The decisions each person makes will determine the relative financial success of their future retirement income. A number of training sessions will be conducted to help those who are affected make the best decision for their personal situation.
Approximately 83% of service members do not remain in the military for the 20 years necessary to receive a retirement benefit. The Commission proposed this new system, in part, to provide a higher retirement income for people who do not complete the 20 years of service now required for a full military retirement.
The BRS includes a defined benefit as well as a defined contribution to the TSP. It also provides Continuation Pay for members who have more than 12 years active duty. Here is how the system will work.
The Blended Retirement System (BRS)
There is a defined benefit portion of the BRS.
Retirement pay will be 2% times the number of years of service. If a person retires at 20 years, there will be a pension equal to 40% of final base pay. For someone who has 30 years of service, that person will receive 60% of final base pay. Under the current system, a retiree can receive a monthly pension check equal to 50 percent of basic pay after 20 years of service.
Retirement pay could be paid in different ways. These include a pension payment; lump sum, then smaller pension until full social security retirement benefits are available, then full amount; a larger lump sum, then no payment until full social security retirement.
There is also a Defined Contribution portion of the BRS.
The military will contribute 1% of a person’s base pay to a service members’ Thrift Savings TSP account. Enrollment in the TSP will be automatic with a 3% base pay contribution to the TSP.
This initial action does not have to be continued. A person could choose to raise or lower the TSP contribution or terminate the individual contribution to the TSP.
The military would match up to 5% of individual contributions after two years of service. A TSP participant will be vested in the investment program after completing two years of service.
In practice, what this means is that service members have to complete at least two years of service to receive the government’s contribution.
There is also a Continuation Pay component of the BRS. At 12 years of service, active duty service members signing up for an 4 additional years of service would receive a bonus equal to 2.5 months of basic pay. Services can increase continuation pay bonuses, if needed.
What If a Person Leaves Military Service?
A major advantage of the BRS will accrue to those who do not complete a military career.
If a person elects to leave the military before completing 20 years of service, all money in an individual TSP fund belongs to that person.
While military personnel have been able to contribute to a TSP account since 2001, the participation rate was fairly low. Under the new retirement system, the government will match up to 5% of a member’s contribution. All service members will receive at least 1% of their base pay through a government contribution to their TSP account.
Practical Implications of the New Retirement System
This system will be more attractive to potential TSP investors serving in the military. In effect, if a person contributes at least 5% of base pay into the TSP, Uncle Sam will double that contribution by contributing another 5%.
Those who leave the military will also have the option of moving the TSP to another 401(k) retirement plan when leaving military service.
Those who are working under the new retirement system will have to have some knowledge of investing in order to have a more lucrative retirement available to them in future years.
The safest fund in the TSP is the G fund. There is a natural inclination to stick with safety when investing money. Most of the money in the TSP is in the G fund because it is the safest one.
But, particularly for younger people with more years for their investments to grow, investing in stocks or stock funds has always yielded better investment results over a longer time period.
In other words, those who invest in the TSP stock funds throughout their career, and leave their money in these funds instead of trying to time future stock market performance, usually have more money available in their retirement fund.
The TSP offers several stock funds with different types of stocks in each fund. There are also two types of bond funds available to investors.
It is worth taking the time to see which funds will be the best ones depending on each person’s unique personal circumstances. Check out this section in TSP.gov for more information on each of the TSP funds.
