Big Decision on Retirement Pay Looming for Service Members
MANAMA, Bahrain -- Service members must choose soon whether to keep their retirement plans or enroll in a new plan that more closely resembles those available in the private sector.
Training required for service members to decide whether to switch to the new plan, known as the Blended Retirement System, must be completed by Dec. 31.
Currently, retired service members each month receive 50 percent of the average of their highest three years of base pay, plus 2.5 percent more for each year of active duty after 20 years.
Under the new plan, the payout is reduced to 40 percent and 2 percent more for each year of active duty after 20 years.
However, the new plan includes matching contributions to the Thrift Savings Plan, a program similar to a traditional 401(k). Service members can choose to invest their money in different funds, with varying risk.
Many service members already contribute to the Thrift Savings Plan. Under the Blended Retirement System, the government will match contributions up to 4 percent.
Service members with less than 12 years of service can opt in to the new retirement plan throughout 2018. Starting Jan. 1, all new servicemembers are automatically enrolled in the new plan.
The mandatory training directs servicemembers to a retirement calculator that can help them decide whether to switch plans. The difference in benefits could amount to hundreds of thousands of dollars.
"I don't want to switch over because I joined the Navy under the old retirement system," said Petty Officer 2nd Class Gabriel Robidart, a sailor stationed in Bahrain with nearly 10 years of service. "I think (the legacy retirement plan) benefits me more in the long run."
Without factoring in future pay raises or taxes, if an E-7 with 20 years of service retired today and lived for 40 more years, he or she would end up getting roughly $1.1 million over that time. The same E-7 retiring under the new plan would get roughly $876,787, plus the additional investment income from the Thrift Savings Plan.
A servicemember contributing $5,000 per year for 20 years, with government matching funds and a 5% annual rate of return, would end up with about $200,000, excluding inflation and taxes.
As with a traditional 401(k), participants must wait until age 59 1/2 to withdraw from the savings plan without penalties.
For service members close to the 12-year career mark who haven't invested much in the Thrift Savings Plan, switching may not be beneficial.
Only about 20 percent of service members make it to their 20-year mark. Most who serve never get to the point where they can collect that monthly retirement check.
For sailors like Petty Officer 2nd Class Naomi Vanduser, who is on her first enlistment and may get out before 20 years, the new plan helps ensure that she will have more money invested in her Thrift Savings Plan fund, which she can then roll over to a 401(k).
"I don't know if I'm going to do 20 years, and I'd rather get something, rather than nothing," she said. "So, if I get out after my next enlistment, then at least I walk away with something."
The Blended Retirement System also offers other incentives, such as a continuation of pay bonus at the 12-year mark of a service member's career and the option to receive lump-sum payments at retirement. However, choosing to receive a lump-sum payment also greatly affects the amount of retirement pay servicemembers will receive over their lifetimes.
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