Starting January 1st 2018, the military will see, perhaps it’s first ever, major overhaul of its retirement system. For decades, a solid pension plan and medical insurance were the cornerstone of what veterans received for a qualifying retirement. For new service members joining after January 1st, and those who can opt in, that is all going to change, but it’s not all bad. The new plan is coined the “Blended Retirement System” and below you’ll understand why. Keep reading for highlights on the new plan and what it could mean for you.
The government did good?
First, we want to give credit where credit is due. It may shock a lot of people to hear that the government did a good job, but they did, at least on the part of pushing the word out about these changes and offering resources to educate the military on it. Whether the new plan is “good” or not is a matter of opinion.
Feel free to post your comments or questions on our social media pages! The military overall has done their people a solid by making several websites, seminars, and calculators available for learning about the new retirement. Rob actually had a mandatory, two-hour class on it through his unit. Such classes are being integrated as part of mandatory annual briefs.
So what’s new?
The major change with the new plan is the scaled back pension. We won’t bore you with the math problem that is the pension calculation, but what you need to know is that the new pension is figured on a 2% rate rather than 2.5% with the old plan. The second big change is a matching program for the Thrift Savings Plan (TSP). The TSP has been around for a while, but the military was never given any type of matching incentive like federal employees have enjoyed. Going forward, military guys and girls in the BRS will get a 1% automatic contribution from the government and up to a 4% match based on what you put in. And you should put in! For those who opt-in, the match starts immediately, everyone new will have to wait two years. Having a pension, plus a 401k style contribution plan, “blends” two different types of retirement systems…see what we did there?
Two other new features for the BRS are a continuation pay bonus and a lump sum pension payout. The continuation pay may be offered between 8 and 12 years of service. The payout is anywhere between 2.5 times to 13 times monthly basic pay for Active Duty, and ½ times to 6 times monthly basic pay for Reservists/National Guard. This is a retention tool, so your payout will depend on time in service, occupation, and force need….we’ll let you roll those dice. The lump sum option will let you choose a 25% or 50% payout of what the government will calculate your pension to be worth. Now, that “worth” is based on the present value of your pension, meaning no inflation or cost of living increases will be assumed. If you choose to do this, you’ll get a big check, but your monthly pension checks will be discounted for it until age 67. Then your checks will go up as if you never took the lump sum.
Making sense of it
With this BRS having a couple moving pieces, it may be all too easy to be unsure of exactly what to do. Our best advice is to take advantage of the available calculators. Chances are, if you are more tenured in your service (12 or more years in), you may be better off with the old, “legacy” plan. The reason being that your use of the TSP, even with a government match, and a realistic rate of return, may not make up the gap between the new 2% and old 2.5% pension rate. That’s not to say the continuation bonus or lump sum option may be attractive depending on your plans for the money. For the newbies, using the TSP is a no-brainer, otherwise you are leaving free money on the table. You’ll want to get the biggest bang for your buck, and the best way to do that is put in 5% of your own money into the TSP so you can get the full match.
We are big believers in finishing strong, and with that, we want to go out with something we know you’ll remember….TAXES! Every piece of the BRS is subject to taxes. You can elect (not required) for your continuation pay to go straight into your TSP, but if you are only using the Roth TSP, your money will be taxed prior to getting there. If you have the Traditional TSP, the taxes are deferred like your normal contributions. That lump sum option, yep, subject to taxes too ?. That tax portion could be major depending on the size of your payout. Plus remember, you’ll have to budget for having smaller monthly pension checks for a while.
More info on the BRS and calculators can be found at:
http://jko.jten.mil/courses/brs/OPT-IN/launch.html http://militarypay.defense.gov/BlendedRetirement http://militarypay.defense.gov/Calculators/BRS
Time to start plannin’, Cheers, @planwithmfp
DISCLOSURE: The ideas, thoughts, and opinions in this article are our own, except where sources are specifically cited, and are property of Millennial Financial Planning. This article is intended for informational and entertainment purposes only, and does not serve as direct financial advice, nor is it an endorsement for or against the Blended Retirement System. Speak with your financial professional for direct advice and guidance. All investments contain risk and the potential loss of principal.