Blended Retirement System: Yes or No? Part 1

Warning Order:

       In 2016’s National Defense Authorization Act, Congress created a new retirement system for our military.  The majority of today’s military service members are eligible to remain in the legacy retirement system or opt into the new Blended Retirement System and have the year of 2018 to make their selection.  I broke this article into two parts. In this first part (Situation), I discuss who is eligible and detail the benefits of the three broad components of the new system.  Along the way, I explain some of the differences between the new and legacy systems.  The objective is to provide a comprehensive overview to help our service members make an informed decision.  In the end, though, everyone has a unique situation and must weigh their goals and priorities against the benefits and drawbacks of each system.

Situation

When Congress passed the 2016 National Defense Authorization Act (NDAA), it created a new retirement system for our military.  Congress wanted this new “Blended Retirement System” to accomplish two primary goals: provide more benefits to service members who serve less than 20 years and reduce the long-term cost of the military pension system.  The current pension system harkens back to the 1940s with only minor modifications over the years.  While it currently offers outstanding benefits in a world where only 15% of the private sector provides any pension, it requires service of at least 20 years to receive any benefit whatsoever.  As a result, the majority of those who serve in the military leave with no retirement benefits of any kind.  The new system fixes that problem.

Who is eligible?

Concerning eligibility for the transition to BRS, there are three groups of service members.  First, anyone with more than 12 years of active service or at least 4,320 retirement points for national guard/reserve members will remain in the legacy retirement system.  The second group is made up of those who join the military on January 1st, 2018 or later; they are automatically enrolled in BRS.  The third and final group are those who have less than 12 years of service or 4,320 retirement points as of December 31st, 2017.  Service members in this group have the option to move to BRS or stay in the legacy system.  They have the calendar year of 2018 to make their decision, and those who do nothing will remain in the legacy system.

What is BRS?

       The Pension

We can break down BRS into three main elements: the pension, TSP contributions, and continuation pay.  The first, and primary, component remains the pension system.  After a minimum of 20 years of service or the equivalent in the national guard or reserves, service members earn a pension equal to the average of their highest three years of base pay times two percent times the number of years of service.  The formula looks like this:

High 3 Average Monthly Base Pay X 2% X Years of Service = Monthly Pension Payment

A person retiring after 20 years, simply put, would earn retirement pay approximately equal to 40% of their base pay.  How does this compare with the old system, you ask?  The legacy system had a percentage multiplier of 2.5%, which Congress reduced to 2% in BRS.  Under the legacy system, a 20-year retiree would receive 50% of their base pay.  In both systems, each year serving beyond the 20-year mark results in a higher take-home percentage in addition to base pay increases associated with promotions and annual pay raises from Congress.
Service members can choose to trade 25% or 50% of their pension payments for the lump sum,

A new option related to the BRS pension is the opportunity to take a portion of the annuity benefit as a lump sum payment.  In other words, service members trade lower monthly payments in retirement for a large, one-time payment upfront.  Service members can choose to trade 25% or 50% of their pension payments for the lump sum, with the 50% option resulting in the largest lump sum payment.  The discount rate to calculate the lump sum payment will vary from year to year.  For 2018, the rate is 6.99%.  In technical terms, the discount rate is used to calculate the present value of the pension payments that service members trade for the lump sum.  Present value = lump sum amount.  A crucial caveat to this part of BRS is that at age 67, pension payments will return to 100% of the earned amount even if one takes the lump sum.

       TSP Contributions

The second major component of BRS is the DoD contribution to the Thrift Savings Plan, or TSP.  TSP is the federal government’s equivalent of a civilian 401(k) retirement plan with the same tax benefits and tax treatment.  Unlike many 401(k)s, though, the DoD never made contributions of any sort to TSP under the previous retirement system.  In other words, no employer match.  Under BRS, the DoD makes contributions to TSP in the following manner:

Picture1
Source: militarypay.defense.gov

The first portion of the DoD contribution is automatic.  Service members under BRS will receive a monthly contribution to their TSP equal to 1% of their base pay. This contribution occurs without any action on their part.  The second portion of the DoD contribution is a matching deposit. DoD will deposit an additional percentage of base pay equivalent to the service member’s contribution up to 5% of base pay.  This arrangement provides an incentive to service members to make TSP contributions of their own.  Service members who contribute 5% of their base pay monthly will see their TSP value increase by 10% of base pay per month, a great place to start! Service member contributions can be in Roth (after-tax) form or traditional (pre-tax) form.  All DoD contributions will go to the traditional account regardless of the service member’s selection on this front.

One thing everyone must keep in mind, though, is that these matches are on a monthly basis.  One can’t contribute less money in one month and more money in another month and have the DoD average out their contribution.  A missed contribution to TSP in a given month causes the service member to lose out on that portion of the DoD match for that month and can never get it back.

The third primary component of BRS is continuation pay.  The details on this part of the new system are somewhat murky.  Continuation pay is supposed to provide an incentive for mid-career officers to commit to an additional period of service.  Here, we define mid-career as those between 8 to 12 years of service.  Service members will have the opportunity to receive a cash payment in return for committing to 3 or 4 additional years of service.  This amount can range from 2.5 to 13 times monthly base pay, or 0.5 to 6 times monthly base pay for national guard/reserves.

Here’s where it gets murky regarding continuation pay.  The timing and amount of continuation pay are up to each branch of the military and can vary from year to year and specialty to specialty.  We are only a few months from the start of the opt-in window, and the Army and Air Force have yet to publish this information for 2018.  Continuation pay is ideal for the services because it allows each branch to use the bonuses to manage retention, but it means that service members can’t make any long-term plans due to the variations in bonus possibilities.  In theory, some service members will be eligible for continuation pay soon after the BRS opt-in window opens but will only have a few months before their eligibility ends.

Command and Signal

Having read this article, you should now have an understanding of the major components of BRS and how they compare to the legacy retirement.  I will post some useful links below.  In Part 2 of this series, I discuss the significant topics service members must consider before making their choice to remain in the old system or move to BRS.

Other Resources

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