The New Military Blended Retirement System

There have been a few significant changes in the military retirement plan in the last few years that will affect your pension distribution. In 2015 congress passed the annual defense authorization bill, which overhauled the military retirement system. 

The Legacy Plan

All service members that joined the military before 2018 were under the 20-year military pension plan. Under the Legacy retirement plan, years of service, are multiplied by an average compilation of the pay received at your highest rank, for 36 consecutive months, multiplied by 2.5%. This will be your lifetime monthly annuity. For example:

 2.5% X 20 years X $5,500 = 2,750

Under the Legacy Plan, the Thrift Savings Plan (TSP) is a separate account in which you will receive TSP distribution, relative to the amount saved in the account.

There is no matching fund program under the legacy system. You do have an option between traditional contributions; taxes are deferred until money is withdrawn or Roth contributions; taxes are paid upfront, and withdrawals are tax-free. The TSP has a special advantage of having low administrative and investment expenses.

The Blended Retirement System

The new BRS system changed the pension formula by reducing the initial multiplier to 2.0%. Under this plan your TSP would look like this:

2.0% X 20 years X $5,500 = 2,200

That’s a difference of $550 bucks per month; 6,600 annually. The new system has shifted a portion of responsibility for retirement savings back on the service member. Consequently, it’s more imperative now more than ever to consistently place money into your retirement account. Furthermore, multiple reports suggested that less than half all service members are contributing to their TSP. 

Good news, this new system offers an automatic 1% of base pay directly into your TSP after the completion of two months of service. At three years of service, the government will begin offering a matching plan up to an additional 4%; 5% total. 

Any service member with less than twelve years of service at the end of 2017 had until then end of 2018 stay with the Legacy plan or switched to the BRS. All new service members are now under BRS. Also, BRS members are eligible for a one-time, mid-career bonus payment in exchange for an agreement to perform additional obligated service. In addition, there is a ‘Lump Sum Option” members may elect to receive a discounted portion of their retired pay.

Developing a principled financial plan or strategy for your career will dictate how much to save. All new service members should contribute to their TSP because of the matching program. That’s free money that you won’t find lying on the street.

Fund Management

The Federal Retirement Thrift Investment Board contracts BlackRock Institutional Trust Company to manage the F, C, S, and I Fund, The G Fund, and L Funds.

• F Fund – Fixed Income Index – managed by Bloomberg Barclays U.S. Aggregate Bond Index
• C Fund – Common Stock Index

 -Tracks Standard & Poor’s 500

• S Fund – Small Capitalization Stock Index 

 -Tracks the Dow Jones U.S. Completion Total Stock Market

• I Fund – International Stock Index

 -tracks the MSCI EAFE Index

• G Fund – Government Securities Investment

 -invested in short-term U.S. Treasury securities.

• L Fund – Lifecycle Fund

 -more risky funds for the long-term investor. The fund most closely matches your time horizon, that is, the year you expect to start withdrawing money from your TSP account.

You can begin planning your financial goals armed with this knowledge. Remember to continually reevaluate your retirement goals as your military career progresses. Most of us don’t know if we are going to complete a full 20 year or separate after our second enlistment. In either event, you will be more prepared.