My veteran focused topic today is looking at retirement benefits for future veterans. During calendar year 2018, service members who entered military service prior to Jan 1, 2018 and have less than 12 years of service have the option to switch to the new Blended Retirement System (BRS). Let’s look at the details and decision points.
The legacy system
Those who are currently retired or have reached the 12-year mark remain covered by the “High-36” or “legacy” military retirement plan. The basics are this:
- Serve 20 years in some combination of the Active Duty, Guard, or Reserve components.
- Receive a lifetime monthly pension adjusted for inflation roughy equal to:
- Active duty (starting immediately): (# of years of service) x (0.025) x (average of highest 36 months of basic pay). Find a calculator here.
- Guard/Reserve (starting at age 60): (total earned “points”)/360 x (0.025) x (average of highest 36 months of basic pay). This website is the best explanation I can find for calculating Guard/Reserve retirement pay without logging into a DoD website.
- Low-cost medical care for life for you and your dependents.
The problem with this system is not the retirement itself. Generous pensions such as this are all but extinct in the private sector. Add in the medical care and some might feel you’ve won the lottery.
The real problem with this system is that only 19% of those who serve stay in the military long enough to receive the retirement pension and medical benefits. That means the other 81% of those who serve our country leave that job with no “employer-sponsored” retirement benefit — no pension and no employer funding to an account such as a 401(k) typically available through large civilian employers.
The solution to this modern day retirement funding question was to create a hybrid plan, blending the 20-year pension (defined benefit plan) with a new employer matching component (defined contribution plan) available in the military’s version of a 401(k), the Thrift Savings Plan (TSP). The pension available in this new system is reduced by 20%, i.e. the multiplier in the above equations goes down from 0.025% to 0.02% (2.5% to 2% per year served), but the difference is made up by the military contributing up to 5% of the individual’s base pay into the TSP account, based on the individual’s own contribution levels. The first 1% is automatic whether the service member contributes or not; the next 3% are matching the individual’s contributions dollar for dollar; the last 1% is a 50% match of the individual’s contribution. For example, if someone contributes 3% of their pay to the TSP account, they will get the automatic 1% match plus another 3% match. If they up their own contribution to 4%, then they would get the 1% plus the 3% plus another 0.5% for a total of 4.5% free matching money. To get the maximum 5% matching contribution, the service member would need to contribute 5% of their base pay.
All healthcare benefits and survivor’s benefits for retirees remain unchanged.
So, for those who “signed on the dotted line” for military service before Jan 1, 2018, or have served less than 12 years, they have a unique opportunity to either stay in the Legacy System or “opt in” to the BRS. Why might someone want to choose the new system and give up the larger pension? Over twenty years, there are all of these and more.
- Family circumstance: They change, and this is especially true for Guard and Reserve members. It becomes harder over time to manage a military career while raising a family and hitting the prime earning years and responsibilities of a civilian career. On the active duty side, people don’t want to move as frequently as the military might demand; spouses do not want to give up careers; kids have to change schools.
- College benefits: Many young people enlist as a way to pay for college. Serve six years and get a college education on the government dime. The BRS option now makes it possible to leave service with a healthy retirement savings account as well.
- Deployments: Enough said. Deployment is not for everyone, whether you are serving or you are the family member left behind.
- Future career opportunities: An example here is the current hiring pace of the airlines. Aviators in the military are seeing a prime opportunity to jump ship and many are taking it. Now they can take a little retirement savings with them.
- Physical abilities: We age. We age a lot over 20 years. The wear and tear of the lifestyle or an unfavorable medical diagnosis can become more than enough reason to end service before 20 years are up.
Thankfully, the Department of Defense as employed hundreds of financial counselors on installations worldwide to help service members make this choice if they are eligible and to education all service members on how to best take advantage of the new system. TSP accounts are just like any other retirement savings vehicle — something you own and control through either the TSP website or by phoning TSP. The funds are all very low-cost index funds of the most common tracked asset allocations and are managed by the highly reputable investment firm of BlackRock. There are also low-cost managed Lifecycle Funds which compare to the target date retirement funds offered in most civilian 401(k) plans.
No matter which system future veterans full into, those who serve our country are still part of the best retirement plan available. If you or someone you know could use more guidance in this area, please let me know. I am well-versed in all aspects of both the old and new system and want to see you be successful in managing this amazing opportunity.