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Understanding the Military’s New Blended Retirement System, Part 2

I wanted to go a little more in detail on the new Blended Retirement System that the Military will be phasing in in 2018.  In Part 1, http://johnnyc2id.us1.advisor.ws/blog01/understanding-militarys-new-blended-retirement-system-brs we talked about what the major differences are between the legacy “High 3” system and the BRS.  In Part 2, we will discuss who is affected by the change, the timeline for the rollout, and what decisions need to be made.

“The Grandfathers”

Military members will essentially fall into 3 distinct groups with regards to the BRS.  The first group, we will call the “Grandfathered Group.”  The Grandfathered group consists of those military members who as of 31 Dec 2017 will have completed at least 12 years of active duty service or for those in the reserve component who have accumulated more than 4,320 points.  Service members who fall into this group will automatically stay in the legacy system.  If they serve at least 20 creditable years they will be eligible for a defined benefit annuity pension plan that will be calculated using the below equation:

2.5%  X  Years of Creditable Service  X  Average of 3 highest paying years

Those in the grandfathered group will also be able to take advantage of the Thrift Savings Plan, although their accounts will only consist of their contributions plus the earnings on those contributions.  The grandfathered group is not eligible for matching contributions.  The TSP account will go with the service member regardless of how many years they serve, but the defined benefit annuity pension plan will only be provided to those service members who complete at least 20 creditable years of service.

“New Recruits”

                The second group we will call new recruits.  This group will consist of any service member who joins the military on or after January 1^st, 2018.  These new recruits will be automatically enrolled in the BRS.  A TSP account will be created for that service member as soon as they join the service and they can instantly be able to contribute a percentage of their base pay to that account.  After 60 days of service, the government will automatically deposit 1% of the service members’ base pay into the account, regardless of the level of contribution by the service member.  After 2 years of service, the government will begin matching contributions to the service members’ account, up to 4% of base pay.  Table 1 shows the full contribution amounts eligible based on the service members own contributions.  It is important to note, the 1% contribution by the government is automatic, regardless of the service member’s contribution, and the government’s total contribution will not exceed 5%.  Additionally, while the service member can contribute a percentage of their base pay and any bonus/entitlement pay they are entitled to, the match percentage by the government is only based on the base pay of the soldier and does not include any form of bonus or entitlement pay.

TABLE 1

Also, as part of the BRS, service members who serve at least 20 creditable years in the military will be eligible for a defined benefit annuity pension plan, however, the multiplier has been reduced from the 2.5% under the legacy retirement system to 2% under the BRS.  Thus, the new formula for calculating the pension benefit will look like:

                2%   X  Years of Creditable Service  X  Average of 3 highest paying years

In addition to the defined benefit annuity pension plan and the added government contributions to the TSP, the BRS also added two additional features; continuation pay and a lump sum retirement pay option.  We talked about both of these in the previous blog, and will touch on them briefly here.  The continuation pay will be offered to service members between their 8^th and 12^th year of service, providing a payment of between 2.5 months’ salary and 13 months’ salary for active duty and 0.5 months’ salary and 6 months’ salary for reserve service members.  This payment is in return for a commitment to serve an additional 4 years.  The lump sum payment option would allow service members to receive 25% or 50% of their pension amount in exchange for a reduced monthly benefit from military retirement until they reach the full retirement age of 67.  Keep in mind, the lump sum will be based on a present value amount of your pension, and will be calculated using a discount rate specified by the Secretary of your specific branch of the military.

“The Opt-In Eligibles”

                OK, so we have discussed the two groups who do not have to make a decision.  The grandfathered group is automatically staying in the legacy system and the new recruits are automatically entering into the BRS.  That leaves the last group, let’s call them the “Opt-In Eligibles.”  This group will consist of any service member who is in a pay status as of 31 December 2017 AND has less than 12 years of creditable service (Active duty) or less than 4,320 points (Reserves).  This group will have an option to stay in the legacy system or Opt-In to the BRS.  One difference with the Opt-In eligible group as opposed to the new recruit group I talked about above is that for those who choose to opt-in to the BRS, the automatic 1% and government matching contributions will begin with the first pay period after the opt-in decision is made, there is no 60-day or 2 year waiting period.  Before we get into some of the factors this group should be thinking about when deciding whether to opt-in or not let’s start by talking about the timeline for implementing the BRS, and when these decisions will need to be made.

                The BRS was passed as part of the 2016 National Defense Authorization Act and will go into effect on January 1^st, 2018.  Service members who are Opt-In eligible will have all of 2018 to decide whether they want to remain in the legacy system or opt-in to the BRS.  It is very important to remember that if you decide to opt-in to the BRS, that decision is irrevocable, once you have made it you cannot decide to go back to the legacy system at any time.  If you do nothing by December 31^st, 2018, you will remain in the legacy system and will not have the option to opt-in to the BRS at a later date.

“So You are Opt-In Eligible, What Should You Do?”

                Well, that is going to depend.  It will depend on you, where you are at in your career, how long you plan on staying in the military, and how much you can afford to contribute to the TSP.  DOD will be providing a calculator http://militarypay.defense.gov/BlendedRetirement/, hopefully available soon, that will allow you to input a number of variables so that you can see what the value of your pension would be under the legacy system, compared to the value of a pension system plus TSP under the BRS.  While this can give you a sense of the financial comparison on your personal financial situation, it is a calculation that uses data based on multiple assumptions; years you will serve, pay increases, rate of return on TSP, contribution percentage to TSP, life span, and on and on.  This is not meant to diminish the value of the calculator; I just want you to be able to view the calculation as a range of alternatives versus an absolute number.  Beyond strictly the financial comparison, this also needs to be a decision based on your own personal preferences and vision for your future.  If you have doubts that you will stay in for twenty years and qualify for the pension, you should seriously consider opting-in to the BRS to take advantage of the matching TSP contributions and the flexibility the BRS gives you even if you do stay the full twenty.  No one should stay in the military for the sole purpose of qualifying for a pension, or continuation pay, etc.  You should serve because it is a rewarding choice for you and your family. When it stops being that, provided you have met your service obligations, you should explore another career.  The BRS allows you to serve honorably, leave the service when it is right for you to leave, and still have accumulated a government aided start to retirement.  You cannot Opt-In until 2018, so use these next 8 months wisely.  Learn all you can about both the legacy system and the BRS.  Talk to a military financial counselor on post, or work with a financial planner like myself to help talk through your options.  Most of all though, talk with your family.  Discuss your career, your plans for retirement or post-military career, and fully explore what is available to you, so that when 2018 comes, you can be comfortable in making a decision about your retirement.  While you cannot opt-in until 2018, there is certainly one thing you can do now to help prepare you for retirement.  If you haven’t already opened a TSP account, do that now.  If you have a TSP account, take a hard look at the percentage you are contributing towards it, and consider increasing that contribution if you can.  If you have questions about the BRS, TSP, or any financial related issues contact us today at john@greenandgoldfinancial.com.  We can have a free introductory call and see if Green and Gold Financial can help you properly plan for your retirement now.

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