Update: The Department of Defense has released new information regarding the continuation pay. I have updated the article to reflect the new information, but left the old information (lined through) so that you can see the changes that were announced.
This week's hot topic is the military's new blended retirement system (BRS.) While it doesn't come into effect until 1 January 2018, there are plenty of reasons to learn about it now. I could, and probably will, write tens of thousands of words about it during this year, but I don't want to overwhelm you. This is one of those subjects that is best learned a little bit at a time, and repeated over and over. So, today's we'll break it down into 10 distinct facts about the BRS.
There Are Four Parts To The ChangeThe new BRS differs from the current High Three retirement system in four distinct ways.
First, there will be automatic government contributions and government matching of service member's contributions to the Thrift Savings Plan (TSP.)
Second, there will Continuation Pay available to service members at year 12, when they agree to serve for an additional four years.
Second, there will be continuation pay available to service members. Each branch will determine when to offer continuation pay, between 8 and 12 years of service. Acceptance of continuation pay will incur a three year service obligation.
Third, the multiplier used to calculate military retirement pay is reduced from 2.5% to 2.0%. For a service member who retires with 20 years of service, this means that they will receive retirement pay equal to 40% of the average of their highest 36 months of pay, vs. 50% for the legacy (old) retirement system.
Lastly, there is a provision for a portion of the retirement annuity to be paid out in a lump sum. This lump sum, if elected, will be either 25% or 50% of the present (discounted) value of the retirement pay between the time of retirement and the age at which the retiree reaches full Social Security retirement age (typically age 67.)
We'll explore each of these changes in-depth over the upcoming weeks and months, but that's the short version.
You May Not Be Affected By BRSEveryone who is serving on 31 December 2017 is automatically grandfathered into the current High 3 retirement system. Only those who have less than 12 years of service will be eligible to opt-in to the BRS if they desire. For those of you who will be at more than 12 years of service on 1 January 2018, you don't get a choice. *There are some special situations for those enrolled in the Delayed Entry Program (DEP) and students enrolled at service academies or Reserve Officer Training Corps (ROTC) programs.
You'll Get Some EducationIf you're eligible to opt-in, you'll have to take the training before making a decision. This will be mandatory even if you already know what you plan to do.
Not Choosing Is A Choice31 December 2018 is the deadline for opting-in to the BRS. If you don't opt-in by this date, you are irrevocably locked into the legacy High 3 retirement system. The decision to do nothing will have the same effect as the decision to remain in the High 3 system.
Five Percent Equals Four PercentThere's some confusion because different publications refer to a 4% government match, but it isn't a straight one-for-one match. You will be matched 1% for 1% for the first three percent of base pay that you contribute to TSP. You are matched at half that rate, 0.5%, for the fourth and fifth percent of base pay that you contribute to TSP. This chart shows it better than I can explain it with words:
Your Money Remains Your MoneyYou are always vested (own) the money you've contributed to TSP. This includes both your contributions and the money earned on them. You'll be vested in the automatic 1% government contribution when you reach 2 years of service. Government matching funds, earned after 2 years of service, will be vested immediately to you.
TSP Automatic Contributions and Government Matches End at 26 YearsOnce you reach 26 years of service, you will no longer be eligible for either the automatic government contribution or the government match of your contributions to TSP.
Continuation Pay Requires Additional ServiceThe BRS includes the payment of "Continuation Pay" at 12 between eight and twelve years of service, in return for an additional four-three-year obligation. If you receive continuation pay, and do not complete the obligation, you may be required to repay the bonus or a pro-rated amount of the bonus.
There Are No Retroactive ActionsFor those who are eligible to opt-in to the BRS, there is no provision for retroactive government automatic contributions or matches to their TSP contributions that occurred prior to the date they opted in. Automatic contributions and government matches will be effective in the pay period following the service member's election to switch to the BRS.
You Don't Need To Know It All Right NowAs I said in the beginning, this is a big change and an important decision for those who are eligible to opt-in to the new BRS. Thankfully, you have all year to figure it out, and you want to take it slow to ensure that you understand all the nuances and details. Heck, some stuff hasn't even been thoroughly explained by the Department of Defense yet, such as how the discount rate for lump sum payments will be calculated. As my Italian landlord used to say, "piano, piano," by which he meant, "slowly, slowly." It's appropriate for this situation!
Other articles about the Blended Retirement System: