Military Retirement Info

One of the biggest reasons why I’m joining the Air Force is for the retirement benefits.  I’ve seen so many people get to retirement age and continue to have to work because they don’t have enough retirement savings saved up.  I didn’t want to be like them, and I wanted my “golden years” to actually be golden.  Military retirement benefits are some of the greatest out there.  However, often they are not understood.  Furthermore, many service members may have to choose between two different retirement options.  I hope I can break the options down for you.

First, a little about me.  Before my current career, I used to work at a very large financial services institution.  I was licensed to sell securities (mutual funds, etc.) and help people figure out their retirement plans.  So, I hope you can trust that I’m credible in this field.

January 1, 2018

January 1, 2018 will give us the biggest change to the military retirement system in the last 70 years.  Those who joined before that date (more on eligibility in a moment) will get to choose between the old “High 3” retirement plan and the new “Blended Retirement System (BRS).”  The government is changing to this new system because it’s made to benefit more service members.  It’s estimated that less than 20% of service members get ANY retirement benefits under the old plan.  This new plan should bump that number up to over 80% of service members being able to benefit from the military retirement program.

Eligibility

For those that are joining the military after January 1, 2018, you will NOT get a choice between the two retirement options.  These people will automatically be enrolled in BRS.

Those who already have 12 years of active duty time in service (TIS) will also NOT get a choice between the two retirement options.  These people will have to stay with the High 3 retirement plan.

Anyone else in the middle of those two time frames will have to choose between the two options.

High 3

So, let’s start with explaining the details of the old plan.  It’s pretty simple.  After 20 years of service, service members will get a retirement pension.  This pension is based on the 3 highest years of your base pay (hence why it’s called High 3).  This pension will be paid to you on a monthly basis for the rest of your life.  The calculation for your monthly pension goes like this:

• 2.5% X [Time In Service] X [Average of your highest 3 years of base pay]

Let’s look at a couple of examples of what this means.

First, an O-5 who wants to retire at 20 years.  Let’s say his last 3 years his base pay was $7,684 a month.  His calculation would be:

• 2.5% X 20 X $8,798 = $4,399 a month, for the rest of his life (adjusted for inflation every year)

Next, an O-6 who wants to retire at 30 years.  Let’s say her last 3 years base pay was $11,328 a month.  Her calculation would be:

• 2.5% X 30 X $11,328 = $8,496 a month, for the rest of her life (adjusted for inflation every year)

Last, an O-3 who wants to retire at 8 years. His retirement would be $0 a month.  That’s the major con to the High 3 retirement program, if you don’t do a full 20 years, you get nothing.

BRS

The BRS has a similar benefit as the High 3 plan, where if you serve 20 years you get a defined pension.  The major difference is that the BRS also introduces an investing option, called the TSP (Thrift Savings Plan), that is very similar to a 401K on the civilian side.  This one change makes it possible for those who decided to leave before 20 years to still get a retirement benefit.  Let’s first talk about the TSP.

For those enrolled in the BRS plan, the military automatically puts 1% of their base pay into the TSP.  The TSP runs very similar to a 401K.  You elect funds that you want to invest in; those funds buy stocks, bonds, or cash; and the total amount in your account goes up or down depending on what the market is doing.  Additionally, the military will match up to another 4% of whatever you put into the TSP yourself.  In order to get the full match, you must contribute 5% of your base pay into your TSP.  If you do this, the military will put an additional 4% into your TSP, which added to the automatic 1% equals a full 5%.  This is actually a pretty good program when compared to civilian 401Ks.

Those in the BRS also have the benefit of a pension plan if they serve 20 years.  The only difference is that instead of a 2.5% multiplier, they get a 2% multiplier.  So, our three examples above:

First, an O-5 who wants to retire at 20 years.  Let’s say his last 3 years his base pay was $7,684 a month.  His calculation would be:

• 2% X 20 X $8,798 = $3,519 a month, for the rest of his life (adjusted for inflation every year) PLUS whatever total amount he has in his TSP.

Next, an O-6 who wants to retire at 30 years.  Let’s say her last 3 years base pay was $11,328 a month.  Her calculation would be:

• 2% X 30 X $11,328 = $6,796.8 a month, for the rest of her life (adjusted for inflation every year) PLUS whatever total amount she has in her TSP.

Last, an O-3 who wants to retire at 8 years.  His pension would be $0 a month.  HOWEVER, he will keep whatever is in his TSP, which is at minimum the 1% invested of his base pay, and could potentially be much more.

While the pension portion is less, for those that participated in the TSP, they have a chunk of money saved up outside of their pension.  Furthermore, anyone that decides to leave before 20 years will still have a retirement benefit that they can take with them.

So, which is right for you?

For those of you (un)lucky enough to get to decide, which is right for you?  Well, that depends on many factors.  For those that are close to the 12 year mark, you probably are better off sticking with the High 3 retirement plan, as long as you plan on finishing up 20 years.  For those earlier in your career, you may be better off with the new BRS plan.  The good news is that the military employs trained, intelligent financial advisors who are there just to answer your questions.  There’s an online calculator available (linked below); but, they highly suggest that you sit down with the financial advisor and do the calculator together.  That way the advisor can clarify questions that you may have, and help you interpret what you are seeing on the screen.

As for me, I’m not even sure if I’ll get to decide.  I was National Guard for a long time, but by the time I go to OTS I’ll have been separated for two years.  But, that doesn’t matter to me.  I already plan to take the BRS.  It gives me the most options, and the upside of investments makes me happy.

Other random bits of info

• One thing to remember that when you retire with the pension (with both the High 3 and BRS), you will no longer receive you BAH and BAS.  Your retirement is based solely on your base pay.
• The BRS only really works if you are dedicated to contributing your 5% of your base pay to your TSP.  If you don’t, then you are leaving a lot of free money on the table.
• When you do start contributing to your TSP, make sure you meet with a financial advisor on base to go over the fund options.  When I contributed to my TSP my first year in the National Guard, I didn’t realize that the default fund just went to government bonds.  That year the stock market went up over 30%, and my funds went up only 1%. It’s not enough just to put money in, you also need to make sure money is going to the right place.
• Talk to the financial advisor about contributing to a Roth TSP vs the traditional TSP.  The difference is how taxes are calculated.  A traditional TSP allows you to take a tax deduction the year you contribute the money; however, the full amount (including growth) will be taxed when you withdraw the money during retirement.  The Roth TSP does not allow you to take the tax deduction now, but when you withdraw the money it’ll all be tax free, including all the growth.  Most financial advisors suggest you use a Roth if you are able, because you’ll save on taxes in the long run.
• I can’t stress this enough:  Every person, family, and situation is different.  Take time to visit with your base financial advisor.  This visit will change your life in the future.

Resources

https://militarysaves.org/for-savers/set-a-goal-what-to-save-for/save-for-retirement/blended-retirement-system – Tons of info here.

BRS Opt-in Course. Everyone will be required to take this if they are going to opt into BRS. Everyone should take it regardless. CAC Required Version; Non-CAC Version

Official .gov website for BRS http://militarypay.defense.gov/BlendedRetirement/

BRS vs High 3 Online Calculator http://militarypay.defense.gov/Calculators/BRS/