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Is the New Blended Retirement System Right for You?

Nov 01, 2018 6 min read Jennie L Phipps

Key Takeaways

  • Every service member has a chance to accumulate retirement savings.
  • Smart investing can maximize a military retirement plan.
  • The deadline for opting into the new plan is Dec. 31.


The military's new blended retirement system was introduced this year. Eligible military families have until Dec. 31 to opt in, and once their decision is made, it is irrevocable. Comparing the new and old system can be confusing, and many families are feeling pressure to make the "right" choice.

Below is information to help you make this important decision. We're including details about the new blended plan as well as an explanation of how the old – or legacy – system works. There are pros and cons to each system, so it's important to evaluate them based on your unique circumstances.
 


The old system


The old, or legacy system as it is now called, is still in effect for current members of the military, although younger members may opt for the new system. More on that later.

The legacy military retirement system gives military retirees who completed 20 years of service a monthly pension for life. Generally, this is how it is calculated:

(2.5%) x (number of years served) x (retired base pay*)

*Retired base pay is an average of the pay the service member received at his or her highest rank for a consecutive 36 months.

For an E-5 (staff sergeant in the Air Force, sergeant in the Army or the Marine Corp, or chief petty officer second class in the Navy or Coast Guard) retiring after 20 years of service, the government calculates an annual retirement pay in 2018, the first year of retirement, of $19,860. This calculator estimates that before taxes, the retired E-5 will have received a total of $1,219,906.64 if he or she manages to live 40 more years.

Keep in mind there are many factors at play that could make this number different.


The new system

The new retirement system is known as the "Blended Retirement System" or BRS. It blends the old system described above with a 401(k)-like system based on the Thrift Savings Plan (TSP). The government runs the TSP. Members, who include federal employees, invest part of their pre-tax pay in either stocks or government securities and – as in many private industry plans – their employer matches a portion of the employee's contribution.

The BRS still incorporates the old retirement system, but the monthly payout is reduced. Instead of multiplying a retiring service member's highest 36 months of basic pay by 2.5%, it is multiplied by 2%. To make up for this reduction, the government contributes to the service member's TSP.
After the first 60 days in the service, all new military members will be enrolled in the TSP and receive an automatic government contribution of 1% of base pay deposited into their accounts monthly. They will also be signed up to contribute 3% of their own base pay to the TSP each month. (Service members can opt to change or stop this amount.)

After two years of service, the government contribution will increase, matching the service member's contributions up to an additional 4%. That means that after two years of service, members can get a 5% matching contribution, on top of whatever they contribute themselves. If a member contributes 5% of base pay, the government will match it, making a maximum total contribution to the TSP of 10% of base pay.

The government estimates that a service person earning $2,000 a month in base pay who contributed 5% that was matched at 5% for a total contribution to the TSP of 10% would sock away $100 each month in their TSP account. Based on the TSP's long-term return, this saver would have accumulated $17,300 in 10 years.

There are some other factors that sweeten the BRS plan:

  • At 12 years of service, the government offers a “continuation pay" bonus. The amount is based on the length of additional service required. The actual time payable differs for each branch of service. In some cases, different military occupations also get differing amounts. As convoluted as it seems, this bonus does increase a retiree's bottom line.
  • At retirement, there is a lump-sum option. A service person can opt to take a lump-sum payment of either 25% or 50% of their gross estimated retired pay. If they accept a 25% lump-sum payment, their monthly retirement pay will be 75% of the normal full retirement pay. If they accept a 50% lump sum, it will be 50% of the normal retirement pay. But when the person reaches age 67, retirement pay goes back up to the full amount. It's worth giving the lump-sum option serious consideration. Someone who embarks on a second career could find this especially rewarding because investing that lump wisely could prove to be a profitable retirement move. This is a time when speaking to an adviser is wise.

     

How do I decide?


Calculating a bottom-line comparison between the old and the new plan isn't simple. If you retire at 20 years under BRS, you get 40% of your final base pay. If you were to stick around and retire after 30 years, you'd get 60% of your final base pay. That compares to 50% of final base pay at 20 years and 75% at 30 years under the legacy system.

Using the only BRS retirement pay calculator the Department of Defense approves, the government estimates that a new service member who joined in October 2017 as a E-4 would – given normal progression to at least an E-7 – accumulate a total retirement package worth $3,027,407 if the service member lived to be 85 and contributed the maximum amount of savings and got the maximum match. The calculator also points out that the government retirement benefit would be worth $2,675,064, compared to a legacy retirement benefit of $2,903,401. That is $228,337 less than the legacy plan offered. But savvy investing could reduce or eliminate that difference.


Why is BRS a good thing?

In a report on military pension reform, the government estimated that only 17% of service people stay in the military long enough to get a retirement benefit. The majority leave before 20 years, and under the legacy plan, aren't eligible for anything. Compounding that issue, most of those service members don't have any retirement savings at all.

The BRS is different; service members are immediately vested in the TSP and can take their money with them whenever they leave the service. Like a 401(k), funds from a TSP can be rolled into a retirement plan offered by a new employer, or it can be invested in another kind of tax-advantaged retirement plan like an IRA. A trusted financial advisor can help servicemembers who are facing a decision by the end of the year make the best choices. It is also smart for servicemembers to get advice from advisors as they move toward retirement. And it is especially important to get savvy advice before separating from the service.


Who is eligible for the BRS?

Current military who had less than 12 years of service on Jan. 1, 2018, can switch to the BRS or stick with the legacy system. There will be no TSP contributions from back pay, but they can begin contributing to the TSP right away.

Otherwise, people who went on active duty:

  • Before Jan. 1, 2006 must remain in the legacy system.
  • After Dec. 31, 2017 are automatically enrolled in the BRS.

Reserve military members with more than 4,320 retirement points on Jan 1, 2018, remain in the legacy system. Those with fewer than 4,320 on Jan. 1, 2018, have a choice. Reserve members joining after Jan. 1, 2018, will be automatically enrolled in the BRS.

If you have an option to join BRS, you must opt-in before Dec. 31, 2018. Otherwise, you will be locked into the legacy system.

 

What you can do next

No matter what system you are in – legacy or BRS – it is smart to get advice about how you can make the most of your military pension. Do it now while you still have time on your side.

 

Jennie L Phipps reports on and writes frequently about retirement issues.

 

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