Beginning January 1, 2018, the government introduced a new military retirement system that blends a defined benefit annuity with a defined contribution plan through the Thrift Savings Plan. If you enlist on or after January 1, 2018, you’re automatically enrolled in the new Blended Retirement System (BRS). If you are an active service member with fewer than 12 years of service as of December 31, 2017, or a National Guard and Reserve service member in a paid status who has accrued fewer than 4,320 retirement points as of December 31, 2017, you may opt-in to the BRS, or you can remain in the legacy retirement system. The opt-in window for BRS is from January 1, 2018, to December 31, 2018. If you remain in the legacy retirement system, your retirement benefits will not change.
Why did the military adopt the BRS?
According to the Department of Defense (DoD), 81% of servicemembers who join the military separate with no government retirement benefit. Under the BRS, about 85% of servicemembers will receive a government retirement benefit if they serve at least two years, even if they don’t qualify for full retirement benefits.
Deciding Whether to Opt-in to the BRS
The DoD provides a BRS Comparison Calculator that allows you to compare estimated benefits under both the legacy retirement system and the BRS. If you do opt-in to the BRS, you will need to complete the mandatory BRS Opt-In Course on Joint Knowledge online or your service branch’s Learning Management System (if available) and affirmatively opt-in to BRS anytime from January 1, 2018, to December 31, 2018.
Key Components of the BRS
Thrift savings plan (TSP):The BRS includes a TSP component. The TSP is a defined contribution retirement savings and investment plan that offers the same types of savings and tax benefits many private corporations offer their employees under 401(k) or similar plans. As a plan participant, you are automatically set up to contribute 3% of your basic pay to your TSP account, unless you opt for a different contribution percentage, or you elect not to contribute any part of your pay. After 60 days of service, the government automatically contributes an amount equal to 1% of your basic pay each month into your TSP retirement account. After two years of service, the government will match service member contributions up to an additional 4% (in addition to the 1% automatic government contribution). If you are a service member who opts-in to the BRS, the automatic 1% contribution and matching contributions begin the first pay period after opting in—there is no waiting period.
Annuity retirement payment:Under the BRS, the government is contributing money to your TSP, so the annuity payment available after 20 years of service isn’t as much as it is under the legacy retirement system. The formula for calculating retired pay uses a 2.0% multiplier for each year of service (2.5% under the legacy system), so the annuity payment under the BRS drops to 40%.
Continuation pay:As a way to encourage continued uniformed service, the BRS includes a continuation pay provision. Continuation pay is a direct cash payout, like a bonus. It is payable between eight and 12 years of completed service. Most servicemembers will be eligible for continuation pay, but the timing and the amount are determined by your service. As an active component service member (including Active Guard Reserve or Full Time Support) enrolled in the BRS, you will be eligible for a cash incentive of 2.5 to 13 times your regular monthly basic pay. If you are a reserve component member, you’ll be eligible for 0.5 to 6 times your monthly basic pay (as if serving on active duty). Each service branch will publish guidance related to continuation pay rates. If you accept the payment but do not complete your obligated service time, you may be required to repay a portion or all of the continuation payment.
Lump sum advance payment:You may choose to receive a portion of your retirement annuity in a lump sum. Ninety days prior to retirement, you may elect to receive either 25% or 50% of the discounted present value of your future retirement annuity payments. The discount rate for the lump sum is determined annually and announced by the DoD on June 1. The percentage is calculated from the date of retirement from the military to Social Security full retirement age, which is between 66 or 67, depending on your date of birth (for most, it will be age 67). This lump sum election is paid out no later than 60 days after retirement in exchange for reduced monthly retirement annuity payments. Monthly retired pay returns to the full amount when you reach your Social Security full retirement age. The lump sum payment is subject to ordinary income taxes, and you may elect to receive the lump sum in up to four equal annual installments.
Henssler Financial supports the brave who serve in our country’s armed forces. If you have questions, contact the experts at Henssler Financial: