The new military retirement plan, the Blended Retirement System, offers military members more career options and a greater opportunity to save for retirement. Members have until December 31, 2018 to opt-in to this new retirement plan.
On January 1, 2018, the Department of Defense rolled out a new military retirement plan called the Blended Retirement System (BRS).
Prior to the Blended Retirement System, military retirement plans had an all or nothing vesting schedule. Under most circumstances, military members could earn full retirement benefits once they reached 20 years of service. Separating from the military prior to reaching 20 years of military service provided veterans with no direct military benefits.
This “cliff-vesting” approach is common for many state and federal pension plans. However, there is a downside for military members. For a variety of reasons, it is much more difficult for military members to earn their retirement. Only about 19% of servicemembers remain on active duty long enough to earn full retirement benefits, according to these BRS FAQs.
The new Blended Retirement System was created to address this problem. BRS combines the defined benefit portion of the previous retirement system (at a lower salary multiplier) with matching contributions to the Thrift Savings Plan (TSP), providing matching contributions of up to 5% of the member’s base pay.
This new retirement system addresses several issues. First, it encourages members to save for their own retirement. The military will contribute 1% of the member’s base pay without any action on the part of the member. Members will receive a 1% match for each of the first 3% of the base pay they contribute, and ½% match for each of the next two percent the member contributes, up to a maximum matching contribution of 5% of their base pay.
In other words, members are encouraged to save at least 5% of their pay in order to maximize this portion of their retirement benefits. Military members who do so will be contributing a healthy 10% of their base pay toward retirement when accounting for matching contributions.
The second issue the Blended Retirement System addresses is providing a larger percentage of veterans with retirement benefits when they separate from the military. Members must still serve 20 years in order to earn full retirement benefits. But their Thrift Savings Plan account is portable. Individual contributions vest immediately and matching contributions vest after two years of service.
Finally, there is a cash incentive for Blended Retirement Participants to continue their military service. Servicemembers will receive a cash payment, called Continuation Pay, at 12 years of service if they commit to serving an additional four years. The payment will equal two-and-a-half months of basic pay.
Department of Defense officials estimate that approximately 85% of servicemembers will leave military service with some retirement benefits.
This is a significant increase over the approximately 17% of military members who currently leave the military with retirement benefits.
The Blended Retirement System isn’t perfect. The previous military retirement system uses a 2.5% multiplier, based on the average of the three highest years of military pay. This is multiplied by years of service. So 20 years of military service equates to a 50% pension, vesting immediately. The BRS uses a 2.0% multiplier, which works out to 40% at 20 years. This is a 20% decrease in the fixed portion of retirement pay.
(This is a simplified overview of the BRS but covers the pension portion of the plan. This link provides a more thorough overview of the BRS).
This decreased pension is why it is essential for members participating in the Blended Retirement System to participate in the Thrift Savings Plan. Department of Defense officials estimate some servicemembers may come out ahead in the long run, depending on the amount they contribute to the TSP, market returns and their investment timeline.
But for many military members, the Blended Retirement System provides something more valuable than a larger fixed pension. It offers options. The option to walk away from the proverbial golden handcuffs to pursue other goals. Or to walk away for personal reasons, medical reasons or a better quality of life.
For the 80-plus percent of military members who previously would not have earned any retirement benefits, the new Blended Retirement System is not about the money, it’s about having options. For the many servicemembers, the new BRS is the opportunity of a lifetime.
Decision time: Servicemembers who joined the military prior to January 1, 2018, are grandfathered into the previous military retirement system. However, those who have less than 12 years of service may opt into the Blended Retirement System before December 31, 2018. After that, they are permanently locked into the previous retirement plan. Military members who joined on or after January 1, 2018, are automatically enrolled in the BRS.
Here are some tips to help you decide which retirement plan may be right for you.