Previously, I wrote about the upcoming changes to the Department of Defense (DoD)’s long-standing retirement program for service members. By signing the 2016 National Defense Authorization Act (NDAA), then-President Obama started a new era in military retirement.
Soldiers, Sailors, Airmen, and Marines now have the choice. They can take a smaller, defined-benefit pension with a matching Thrift Savings Plan (TSP) contribution. Or, they can keep the original legacy retirement plan, which gives 50% of their monthly base pay when retiring at 20 years of service.
There are also some updates to the BRS and more resources for military retirement planning, which we will discuss in this article.
The legacy retirement system (currently in place) is available for anyone now serving and those who join the military prior to January 1, 2018. It offers 50% base pay for life when you retire after 20 years of service.
Keep in mind that this is an “all or nothing” program. If you serve less than 20 years, you leave the military with nothing. There are very few exceptions to this rule.
Anyone who has more than 12 years of service on January 1, 2018 will not be eligible for the new system. They are eligible to contribute to the TSP on their own, but they will never receive any government contribution to their account.
The new system, known as the Blended Retirement System (BRS), is optional for service members with less than 12 years of active federal service as of January 1, 2018. It is not mandatory to take the BRS if you are already in uniform. However, it will be the only system available to new recruits joining on January 1, 2018 and beyond.
The BRS combines matching contributions to your TSP with a reduced retired pay rate – 40% instead of 50% – at 20 years. This means you are taking a 20% reduction in your guaranteed retirement pay under the new system.
For Those Who Opt In…
Retiring service members who choose to take advantage of the BRS can expect a few noticeable differences.
Updates, Tools, and News You Can Use
This spring, I sat in on a DoD bloggers’ roundtable with military blogging legends like Doug Nordman and Ryan Guina (links to their work below). We heard directly from the leaders in charge of implementing the military’s new system.
The DoD launched a calculator to help service members make the decision about opting into BRS. Plus, mil-bloggers continually post updates and advice as we get closer to the opt-in date. Still, let’s break out some more specific details on how the BRS will work.
Remember, you are taking a 20% cut in your guaranteed pension if you opt into the new retirement plan.
Under the BRS, all service members will receive an automatic TSP contribution, equal to 1% of base pay, after completing 60 days of service. For new recruits, this will occur near the completion of basic training, boot camp, or sometime during Officer Candidate School (OCS). For those already serving, the 1% contribution will start on the day you opt into BRS.
Related: 5 Ways to Automate Your Finances
Vesting and Matching Contribution Eligibility
I become eligible for matching contributions at the same time that I vest. Vesting in the automatic and monthly 1% TSP contribution comes at the completion of two years of service. If I leave the military, the money is mine to keep.
The BRS and vesting means that a large population of service members who never complete 20 years will leave the military with something in their own TSP, which is similar to a private-sector 401(k). This is a big change from the current system, where they would leave empty-handed before the 20 year mark.
The automatic contributions also increase with years of service. On day one of my third year in service, I am eligible to receive an added 4% of matching government contributions to my TSP. This brings the total government contribution to 5% of my base pay, if I am contributing 5% voluntarily to my TSP account. I must contribute 5% of my pay throughout the year in order to get the full 5% match.
Mid-Career Incentive Pay
The BRS adds a one-time, optional, mid-career incentive pay when a service member is between 8 and 12 years of service.
For members on active duty, you are eligible for a bonus that ranges from 2.5 to 13 times your monthly base pay. Special pays and incentives will not count towards the calculation of this benefit. For example: if my monthly base pay is $3,000 and I am eligible for a 7 times multiplier, I will receive $21,000.
Your job in the military matters when it comes to this bonus. Each service – Army, Air Force, Navy, and Marine Corps – will individually decide which military specialties get what pay multiplier.
One can expect low density, highly-skilled jobs (like pilots and special operations soldiers) to receive closer to the 13 times pay multiplier. High density, low-skilled specialties can expect to receive bonuses on the lower end of the scale.
This should not exclude a service member from collecting other occupation-specific bonuses, such as Air Force pilots who receive a hefty bonus for each year they serve. I would expect other specialized jobs — like cyber defender, nuclear plant operator, and other technical and “long training pipeline”-type jobs — to receive a higher mid-career incentive pay.
Reservists who opt into BRS and choose the mid-career bonus will receive between 0.5 to 6 times their monthly basic pay, calculated as if they were serving on active duty. The same considerations for active duty apply.
So, what’s the catch?
In either case, active or reserve, I must serve an added three years if I accept the mid-career incentive bonus. I must opt into BRS to be eligible, and then I must choose to receive the bonus in exchange for the three years of service.
This monetary bonus aims to entice service members to stay in until they reach retirement. The election must occur between the 8 and 12 years of service window.
What can I do with this bonus money? Well, anything I want.
Resource: 10 Ways to Invest $10,000
According to the BRS comparison calculator, I can choose to have it deposited directly into my TSP account if it will not exceed my annual TSP contribution limits. Depositing this money into a Traditional TSP account could be a smart way to reduce your tax liabilities during your working years. I can also receive the bonus in as many as four equal installments, to further spread out the tax burden of this extra pay.
If you enlisted at age 18 or commissioned at age 22, you are either 38 or 42 years old at retirement eligibility. You have plenty of life left to start a new career.
But what if you want to start a business or pay off all your personal debt? Send your kids to college debt-free? There is a way with the BRS.
Under BRS, I have two choices for payment of my retirement benefits. My first is to take the standard 40% of base pay, which lasts from my first day of retirement until my death. My second choice is to take a lump sum payment, at either 25% or 50% of the discounted present value of my retirement benefits.
Along with the lump sum, from retirement until my 67th birthday, I will receive a reduced monthly pension. The DoD will adjust the lump sum discount rate every year and base it upon Treasury Department rates.
I will receive either 25% or 50% less than my normal 40% pension if I choose the lump sum. Quick math shows that at 20 years of retirement, I’ll receive $58k per year to start (based on today’s pay scale). If take the 25% lump sum, I will get $43k. The 50% choice reduces my annual pension to $29k.
Once I hit age 67, my pension jumps back to the same percentage – 40% of my base pay – that I would have received on day one of retirement using the standard choice. I am choosing to take a reduced monthly pension in exchange for a generous sum up front, with the promise that my normal pension will return when I reach the Social Security retirement age.
For example, the BRS comparison calculator shows me receiving a lump sum of about $150,000 with the 25% choice and $300,000 with the 50% selection. That is a large amount of capital that I can use to open a business or pay off a mortgage.
This lump sum payment is taxable income, but I can choose to spread it out over four years and four installments to decrease the yearly tax burden. This is a valuable feature when considering a hefty sum of money, so tax planning will be an important part of decision making under the BRS.
For opt in-eligible service members, enrollment begins on January 1, 2018. It ends on December 31, 2018. The decision to opt-in is irrevocable and once the deadline passes, members may not take the BRS.
The only exception to this timeline is for those service members who had a break in service during the opt-in period, and then rejoin active/reserve service after 2018.
One of the hallmarks of military retirement is healthcare for life. Regardless of the current public image of the VA Hospital system, this is a valuable form of compensation that both legacy and BRS retirees have earned. There is no change to the healthcare component of military retirement under the BRS.
Learn More: How to Use an HSA to Save for Retirement
For Reserve Members
Reservists and National Guard members are eligible for the BRS, but the calculation for service time differs from those on active duty. Click here to learn more about the Reserve-specific considerations for the BRS.
Click here for more information specifically regarding military spouses. It is important that families consider the impact opting into BRS will have on their financial future.
New Tool: Comparison Calculator
The BRS Comparison calculator gives service members a peek into the opportunities tied to choosing the BRS. It is far from perfect, and can’t account for some unique individual career scenarios. However, it’s a step in the right direction.
What the calculator highlights is that the legacy system will beat the BRS every year until I reach the Social Security retirement age of 67. The BRS then out-performs the legacy system by as much as 40% initially, then decreases to about 20% over the next few decades.
A critical assumption has been made here. It is that the member who chose the legacy system contributed nothing to their own TSP or IRA.
I’ve included a screen shot of the present value calculations and comparison created by the BRS calculator.
USAA offers a quick and easy BRS versus Legacy retirement comparison. You can access it here; their tool is simple and straightforward.
If you have a non-traditional timeline of service, like I do, then you can change the calculator to reflect your actual remaining years until retirement.
The chart to the right shows how, with 14 years of service and saving remaining and a 7% return on investment, I could have $370,000 stashed away in addition to my regular pension.
The Military Guide
Doug Nordman, a Navy Veteran who writes at The Military Guide, publishes articles discussing the BRS and how you can go about making the decision to opt-in or out of the new system. Be sure to follow his blog for updates and commentary on the roll out of the BRS.
The Military Wallet
Ryan Guina serves in the Air National Guard and offers content focused on all things military and personal finance. Read his article that gathered some of the top personal finance/mil-bloggers on the web and see their thoughts on the new BRS.
The BRS is beneficial to those who are not sure if they will serve until retirement. Far too many veterans leave the service with little to no savings in the TSP, a 401k equivalent.
The BRS will change that and help service members consider saving more of their own money for retirement. If you already have 10 years in service, chances are you will stay until 20. So, it’s probably best to stay with the legacy. For those younger in their careers, the BRS may be the best choice.
Everyone’s situation is different. However, regardless of the decision you make, your defined benefit plan should not keep you from contributing to personal retirement vehicles like the TSP or a Roth IRA.
Service members, like most civilian employees, must start contributing more to their TSP accounts, especially if they opt into the BRS. The onus is on you, the employee, to make your retirement life what you want it to be.
Lastly, I am eligible to opt-in but have not decided on which system is best for my situation. When it comes time to opt-in or out, I will have carefully examined my financial situation, choosing the new or staying with the old. I need to do this now so I can make the best decision for my financial future.
Resource: Paying Off Debt vs Saving for Retirement
Decision Time is Coming — Are You Ready?
If you meet the eligibility requirements for BRS, start thinking about it now. Meeting with a certified financial planner to understand the implications of choosing the BRS is a great first step. Companies like USAA even have fee-only advisors that specifically cater to military retirement planning.
January 1, 2018 will be here before you know it. The earlier you opt in during 2018, the earlier you receive the government sponsored 100% return on your 5% TSP contributions. If you are in your 8 to 12-year service window, you could also immediately take the mid-career incentive pay and invest that for the future.
Consider your likelihood of serving until retirement and use the BRS comparison calculator to help guide your decision. Once you opt-in, there is no going back. Once January 1, 2019 rolls around, grandfathered service members can only keep the legacy system.
Now is the time to decide. What will you do?