Why Did Military Retirement Benefits Change
According to the DoD, only about 19 percent of active duty members and 14 percent of reserve members actually hit the 20-year service mark previously required to receive retirement benefits from the military about 1/6 of our military population.
To alleviate this problem, the Department of Defense rolled out the Blended Retirement System to serve the remaining 80 percent of service members left without military retirement benefits. The goal of the BRS is to offer a retirement system that aligns more closely with a civilian 401 plan, as well as to offer military benefits for those who serve their country in uniform, but not for a full 20-year career. While these new military retirement changes are designed to save the government money, many benefits are available for military members who understand the new system. Its perfect for veterans who want to build their savings for retirement, those who may be seeking to open a small business, or those who want to become a certified, veteran-owned, small business government contractor.
Military Retired Pay Vs Military Retirement Pay Vs Military Pension Etc
Though this article generally uses the term “military retirement”, different sources will use different terms. The Uniform Services Former Spouses Protection Act at 10 U.S. Code § 1408 uses the term “Retired or Retainer Pay”, but other parts of the same code chapter use the term “monthly retired pay.” In fact, there are a host of terms used which all mean “military retirement”. So when you see any of the following terms, you know they mean the same thing:
- U.S. Military Retirement Pay
Frequently Asked Questions About Military Retirement
Getting a head start is critical to making the most of any service members retirement – no matter if youre with the Army, Navy, Air Force, Marines or Coast Guard. At a minimum, the transitioning process should start a year before your expiration of time-in-service date, but many people start planning even before that.
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Summary Of The Discussion So Far
It looks like we have two camps.
We have the camp that is convinced that anything being sold by the government is a bad deal. More specifically, if DoD is saying that BRS will save money and forcing all new recruits into the system, then it cant be in our favor.
Admittedly, this was my initial reaction a couple of years ago, with the obvious exception for folks who already had plans to exit. Since then, Ive amended my thinking to include the possibility that BRS is a good idea for lots of troops who would like to serve 20 years.
The second camp, which appears to reside on this and related blogs, is unambiguously telling everyone to choose BRS, and saying that anyone who doesnt is either delusional or doesnt understand the system. The foundation of their argument is that you probably wont serve 20 years. And even if you do, they argue that BRS is just as lucrative as the legacy system. Much of what I will write is a counter-argument to this.
Get The Scoop On Military Retirement Planning & Changes
To help you through your military retirement planning process, our partners at the Defense Credit Union Council developed a guide. It provides a total view of what to be thinking about when planning for retirement and gives all of the details you need to know about the new Blended Retirement System. .
This content is for informational purposes only and may not contain all material information about financial planning, nor is it intended to address any particular reader’s individual financial planning goals. This information is not intended to be, nor should it be construed or used as, financial, tax, legal, or investment advice. Please consult with your advisor regarding your financial planning and/or retirement goals.
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How Can I Manage Taxes With My Military Retirement
Like other income, retirement pay is subject to federal income taxation unless wholly or partially exempted by statute. The federal government and individual states have established tax breaks for military members and veterans to lighten your financial load and ease your return to civilian life. If the retirement is for disability and all retired pay is tax-free, retirees are not required to report this income. Taxable income from retired pay does not include the amount of SBP deductions. Service members are taxed only on what they receive.
You can get both Social Security benefits and military retirement. Generally, there is no reduction in Social Security benefits because of your military retirement benefits. You’ll get your full Social Security benefit based on your earnings. While you can retire as early as age 62, your Social Security benefits will be reduced if you do and won’t be increased when you reach full retirement age. If you decide to apply for benefits before your full retirement age, you can work and still get some Social Security benefits. When you reach your full retirement age, you can earn as much as you can and still get all of your Social Security benefits.
Blended Retirement System Not For Everyone
Now for the fine print.
On the surface, the BRS is a cutback. Fundamentally, new service members will not make as much as they would have in the old system. Those are the black-and-white numbers and theres no way around them, but its estimated the BRS will mean an annual savings of about $2-billion to taxpayers.
Yes, were cutting military retirement benefits, said Michael Meese, a retired Brigadier General who is now Chief Operating Officer of the American Armed Forces Mutual Aid Association , which provides financial services for U.S. service members and their families.
But were doing so in a way where theres a plan to hopefully make up for that by people investing in the 401-type element. If that is managed in the right way, theres the potential to make even more than the old system.
In speaking to broader, non-military audiences, Id point out this is a very responsible action and perhaps one that ought to be applied to other aspects of government entitlements, when you consider the deficits we have.
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If You Joined After 2005 You Have Until December 31 Of 2017 To Choose Your Plan
If you are a service member with less than 12 years of service before the plan takes effect, you will be required to choose between the two plans. The election period lasts from January 1 to December 31, 2017. Soldiers with greater than 12 years time in service as of that date will keep the legacy retirement plan. There are two exceptions to the selection deadline: a case by case hardship clause , and a break in service clause. If you leave the military and rejoin after the decision year , you have 30 days to elect either plan upon returning to active duty. If you meet the less than 12-year service criteria, you can opt in to the matching TSP contribution plan or stick with the legacy system. Keep in mind that you will NOT receive any backdated TSP contributions to make up for the reduction in guaranteed retirement pay.
What Is The Choice Military Retirement Plan
Military personnel who entered service after July 31, 1986, who are eligible and intend to serve for 20 years, must choose between DODs High-3 plan, which bases retirement pay on the highest average basic pay for three years of a career, or the REDUX plan, which provides a $30,000 upfront bonus with smaller retirement
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Ways To Maximize High
Stay in the military for at least 20 years.
You get 50% of your average highest 36 months base pay if you retire with 20 years of service.
Stay in the military beyond 20 years.
Waiting to leave after 40 years will make your pension 100% of your monthly pay average.
Assess your risk tolerance.
Look at whether youd be willing to follow a long-term strategy with the potential for substantial earnings.
The Blended Retirement System
The new retirement system gets its name by blending the two systems together. If you stay in 20 years, you will still get a pension , but the government will also match the money you contribute into the TSP like in a civilian 401. If you contribute 5% of your monthly income at say $200 a month, Uncle Sam will also contribute $200 a month into your TSP. If you get out before 20 years, you can keep all the money in your TSP and role it into a civilian 401 or IRA. You can do this on the old system as well, minus the government contributions.
At age 60, you can start withdrawing money from your TSP without any penalties. If you tap into it before age 60, you will suffer a 10% tax penalty. This means if at age 45 you pull out $100,000 from your TSP $10K goes straight to Uncle Sam. So unless you like giving away your money, dont do that except in extreme circumstances.
The BRS has two additional incentives:
- When you reach 12 years of service and you commit to 4 more years, you will be eligible for a cash incentive of 2.5 to 13 times your regular monthly basic pay if you are Active Duty and 0.5 to 6 times your monthly basic pay if you are in the reserves. I can almost guarantee you the infantry guys will get 2.5% cause #godhatestheinfantry. So, if you are an E-7 infantry person your continuation pay would be approximately $10,450 .
Lump Sum Benefit:
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Tips For Maximizing Your Tsp
The following tips can help you maximize your Thrift Savings Plan contributions. The sooner you start, the better off youll be when it comes time to retire from the military.
Contribute at least 5%.
The TSP matching contribution comprises two parts: automatic 1% match and 4% agency match. If you do not contribute at least 5% of your pay, you are not making the most of what’s being offered to you. If you are participating in the BRS but not contributing to your TSP, you will only receive the Department of Defense’s 1% automatic contribution. If you do not contribute to your TSP, you do not receive any matching contributions.
Make catch-up contributions.
Catch-up contributions are extra deposits you can begin making into a TSP any time starting in the year that you turn 50 years old, as long as you expect to make the maximum regular contribution as an eligible federal employee. This gives you the chance to save up more for your retirement. You decide how much you want to deposit, and it’s automatically deducted from your basic pay every pay period. There is a yearly limit, determined by the IRS. Catch-up contributions automatically stop when you reach the limit or when the calendar year ends whichever comes first. They don’t continue from one year to the next. You must make a new catch-up contribution election each year.
Traditional TSP vs. Roth TSP.
Weigh your options.
Stay up to date.
Does The Military Still Have A 20
There have been changes made to military retirement so that those who retire before 20 years whether due to circumstance or personal choice can still obtain retirement pay. Stepping back into civilian life after years or decades in the military brings certain retirement benefits depending on the length of time served and rank in the military. Typically, however, you’ll need to serve for at least 20 years to receive full retirement pay.
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When Does It Make Sense To Opt
There are two situations where it may make sense to opt in. The first is if you plan on leaving the Army before 20 years. Then you absolutely should opt-in, as you will still be able to take the governments matching contributions with you wherever you go. The 2nd situation is if you have less than 8 years TIS and plan to stay in for 20 years.
I have ignored the TSP matching contribution of the BRS up until this point. In my previous examples, I used an E-8 and an O-5 that would retire in 2028, meaning that they currently have 10 years TIS. As you can see in the images above, the High-3 Retirement system wins in both cases by approximately 160K with the E-8 and 400K with the O-5, regardless of the lump sum payment options.
This disparity shrinks as your TIS shrinks. I did the math, and the two systems start to balance out around the 7 to 8 year TIS mark . A young specialist or officer with 4 years in could absolutely make more money over time with the BRS under certain circumstances. Why dont we check it out? Im here for you after all :-).
The Blended Retirement System: 2018 Military Retirement Changes
Military retirement changes are happening for many of our nations service members in the form of a new, blended retirement system. Anyone who joined the military after January 1, 2018 was automatically enrolled in the Blended Retirement System , so its important to understand exactly what it is and how it might impact you.
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The New Plan Comes With A Cost
Current law says that service members will receive the number of years in service times 2.5, to calculate what percentage of their base pay they can expect to collect each year in retirement. Generally, you need to serve for 20 years to retire, and when you retire with 20 years of service youll receive 50% of your base pay. If you choose the new plan, that multiplier of 2.5 reduces to 2.0, so youll only receive 40% of your base pay at 20 years. The matching contributions of 5% will cease after 26 years in service, but you can still earn the 2.0 multiplier on your base pay until you retire.
About The Military Retirement System
The military retirement system is arguably the best retirement deal around.
Unlike most retirement plans, the military offers a pension that starts the day you retire, no matter how old you are. That means you could start collecting a regular retirement pension as early as 37 years old. What’s more, that pension check will grow with a cost of living adjustment each year.
Your surviving family members can even draw a portion of your retirement if they outlive you.
All of these retirement systems have a common thread: If you stay in the military for 20 or more years, you get a pension based on a percentage of your basic pay.
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History Behind Blended Retirement System
The BRS was based on a recommendation by the Military Retirement Modernization Commission, which conducted a long-term study of the military retirement benefit.
Its recommendation to Congress was included in the National Defense Authorization Act of 2016 and becomes effective on Jan. 1, 2018.
Its actually the latest in a series of changes, updates or revisions to the military retirement benefit.
Overall, the current setup is a defined retirement system. Simply, a set retirement benefit is paid based on the number of years served in active duty.
There are three phases:
The evolution of military retirement plans, not surprisingly, was motivated by money.
When it was instituted in 1980, the High-3 plan represented savings over the Final Pay plan. Looking to slash even more money, the Reagan Administration introduced the Redux plan in 1986.
If the careerists agreed on a return to Redux, they received a $30,000 payment entering their 15th year of service. Under that agreement, members received 2% of their base pay for each of the first 20 years of service . The period from years 20 to 30 of service is worth 3.5%, so retirement at 30 years means 75% of base pay, the same rate as High-3 offers.
None of this addressed the non-career service members who put in less time and had no retirement benefit to show for their time. Service members wanted that flexibility and now they will have it with the BRS.
Not Many Troops Are Opting Into The New Retirement System
With less than three months to go before the year-end deadline, only one in six service members who are eligible to make the choice to opt in to the new military retirement system have done so, falling far short of prior expectations and raising questions about why the response has been so low.
About 1.6 million active-duty and reserve troops are eligible to opt into the new retirement system, which promises a smaller pension check for those who complete a 20-year career but offers cash payments into a personal retirement account that service members can keep regardless of how long they stay in the military.
As of the end of September, 16.5 percent of those eligible service members have opted in to the Blended Retirement System, also known as the BRS, according to defense officials. The deadline for eligible service members to opt in to BRS is Dec. 31.
Yet within the individual military services, the response has varied significantly. The have the highest opt-in rate, with 36.6 percent opting in to BRS. Theyve continued the trend from earlier this year. More than a third of the service members who opted in to BRS since July are Marines the smallest service.
The service with the lowest percentage of enrollment is the Army, at 10.5 percent of eligible soldiers opting in. To date, 20.5 percent of sailors have opted in, and 16.9 percent of airmen.
The retirement savings is accrued in a Thrift Savings Plan, or TSP.
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