Upcoming Changes To Military Retirement System Explained
The military retirement system will be undergoing major changes in the near future. This is based on a recommendation by the Military Retirement Modernization Commission which conducted a long-term study of the military retirement benefit and made a recommendation to Congress. Their recommendation was included in the National Defense Authorization Act of 2016 and will be effective in 2018.
Current Military Retirement System
The current military retirement system is basically what is known as a "defined retirement system". This just means that you get a set retirement based on the number of years you are on active duty. There are currently 3 existing retirement systems depending on when you entered the service:
- If you entered prior to September 1980 you are eligible for the Final Pay retirement system. Under this system, your retirement pay is your final base pay times 2.5% for every year of active duty. Under this system, if you retire at 20 years you get 50% of your final base pay. If you retire at 30 years you get 75% of your final base pay.
- If you entered between September 8th, 1980 and August 1986 you are eligible for the High 36 system. Under this system your retirement pay is the average of your highest 36 months of base pay times 2.5% for every year of active duty. Under this system, if you retire at 20 years you get 50% of the average of your highest 3 years base pay. If you retire at 30 years you get 75% of your highest average 3 years base pay.
- If you entered after August 1986 you are under the REDUX system, which means you have the option to choose either the High 36 retirement system above, or the Career Status Bonus/REDUX (CSB) retirement system. The CSB/REDUX system pays a $30,000 bonus on the 15th year of active service, but it also reduces the retirement pay to 40% of the average of your highest 3 years of base pay. If you retire at 30 years you would get 75% of your highest 3 years base pay.
New Military Retirement Plan
To modernize the military retirement system, the Military Retirement Modernization Commission recommended changes to the system which will reduce the cost to the government and require military members to contribute to their own retirement. Since 83% of servicemembers do not stay in the military for the full 20 years required to get the normal retirement benefit, the Commission proposed a new system which includes a defined benefit, a defined contribution to the Thrift Savings Plan (TSP), and Continuation Pay for members who have more than 12 years active duty. This will result in higher retirement income for most members, and allow people who don't complete the 20 years required for full retirement to save some money towards their retirement.
BG Mike Meese, USA, Ret., COO of AAFMAA described the new retirement plan to military.com and explained that the new system is made up of 3 specific components:
- Defined Benefit:
- Retired pay will be 2% times number of years of service. If you retire at 20 years you get 40% of your final base pay. If you retire at 30 years you get 60% of your final base pay.
- Retired pay could be paid in different forms (constant pension payment; lump sum, then smaller pension until full social security retirement, then full amount; larger lump sum, then no payment until full social security retirement, etc.).
- Defined Contribution:
- The military would contribute 1% of your base pay to your Thrift Savings Plan (TSP) account.
- You would be automatically enrolled with a 3% base pay contribution to your TSP. (You could raise or lower contribution or terminate individual contribution.)
- The military would match up to 5% of your contribution, after of 2 years of service.
- You would be vested in TSP after completion of 2 complete years of service, which means that you would have to complete at least 2 years service to get the government contribution.
- Continuation Pay:
- At 12 years of service, active duty servicemembers who commit to 4 additional years would receive a bonus equal to 2.5 months basic pay.
- Services can increase continuation pay bonuses, if needed.
Even if you get out of the military before completing 20 years you would keep the money you have in your TSP fund. Military members have been able to contribute to the TSP since 2001, but under this new retirement system the government will match up to 5% of a member's contribution, and all members will get at least 1% of their base pay contributed to their TSP by the government. That means that if you contribute at least 5% of your base pay to the TSP, the government will double that money by contributing another 5%. If you do this for 20 years you could have several hundred thousand dollars saved towards retirement! You can also move your TSP to another 401(k) retirement plan after you get out of the military. The TSP also offers tax advantages, see our TSP page for more details.
Current Servicemember Eligibility For New Retirement System
The military has announced that current members who have less than 12 total years of service when the new plan is effective in 2018 will be able to switch over to the new system. There will be no back pay but matching contributions will begin on enrollment.
About AAFMAA: AAFMAA is the longest-standing not-for-profit association that empowers military families with affordable financial solutions including life insurance, investment management, and survivor assistance. We have been working exclusively for the military for 137 years and have a team of experts who assist service members with financial challenges.Visit their website at AAFMAA.com for more information.
BG Michael J. Meese, USA, Ret., PhD is a retired Army Brigadier General and is the Chief Operating Officer of the American Armed Forces Mutual Aid Association (AAFMAA).
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