On 1 January 2018, everyone entering the military will be part of the new “Blended Retirement System” (BRS), which includes a 401(k)-like defined contribution plan that vests at two years, provides a continuation bonus around 12 years of service, and then establishes a defined benefit pension at retirement after 20, or more, years.
Current military retirees, as well as Active Duty servicemembers with more than 12 years of experience, will remain in the existing retirement system. However, Active Duty servicemembers who entered the military less than 12 years ago (and Reserve Component members with less than 4,320 retirement points), have the option to “opt in” to the Blended Retirement System.
Everyone eligible should get mandatory training on the options in order to make the best decision. Unless you “opt in” to the BRS, you will stay with the legacy system. So, should you opt in?
This is a difficult and personal question, and we are here to assist those who face what can seem this overwhelming decision.
Military retirement: As it stands
Under the military’s old system, military members receive only a “defined benefit” retired pay equal to 2.5% of the average their highest 36 months of pay.
The new system is a “blended” system with a “defined contribution” component, similar to a 401k, a mid-career continuation pay “bonus,” and a smaller “defined benefit” retired pay equal to 2.0% of the average their highest 36 months of pay.
Factors of the big decision
The most important determinant of whether or not to opt into the new “Blended Retirement System,” (BRS) is your answer to two challenging questions:
1. Are you planning to stay in the military until retirement? Are you "staying," "leaving," or "unsure"?
2. Will you save the 5% to get the match in your Thrift Savings Plan (TSP)? "Yes" or "No"?
If you are sure that you are staying in the service until retirement, then the old system will likely be better. Under the old system, your retired pay will 20% higher than it would be under the new BRS. Although you would be forgoing matching contributions while you are in the service, getting a 20% larger retirement check for as long as 40 years or more would likely be worth it—assuming that you stay until retirement.
On the other hand, if you are sure that you will leave the service before retirement, then the blended system will likely be better. After you “opt in” to the new system, the military will pay an automatic 1% of your salary into your TSP account. Additionally, the military will match up to 5% of your own income, if you can save 5% of your own money. If you choose the blended system, you should definitely save 5% to maximize the matching contributions.
The decision becomes tough if you are not sure whether or not you will stay until retirement. Families in this scenario may want to consider the impact of making the “wrong” decision, which could happen in one of two ways:
If you decide to stay with the legacy system, but end up leaving the service, then you will leave the military with no retired pay and no government contributions to your TSP. You will have plenty of earning years ahead of you, you will be behind on retirement savings.
On the other hand, if you decide to “opt in” to the BRS stay, but stay until retirement, your retired pay will be 20% less than you would have received had you remained within the legacy system. That retirement, however, is still generous—2% for each year of service. Additionally, the government will have paid at least 1% and up to 5% of your base pay into a 401(k)-type retirement plan, which will likely earn a competitive return in the Thrift Savings Plan. You will also have received a continuation bonus at 12 years, equal to at least 2.5 months pay. Although the total amount of retired compensation would likely be higher if you had stayed with the legacy retirement system, the BRS does provide funds for your eventual retirement, regardless of whether or not you remain until retirement.
Our potential role in your decision-making process
AAFMAA remains ready to discuss your options with you and to provide advice and counsel along the way. We will explain moree in detail on the upcoming webinar, which you can sign up for or view on line. Register for the live webinar here, and we will update this article with the link to the recording after the live broadcast.
The BRS is an important change to the military retirement system, which you should carefully consider because it can have a significant impact on your family’s future total earnings.