For active duty and military veterans, retirement planning presents unique challenges and opportunities. And in January 2018, a new option—the Blended Retirement System (BRS)—will come on stream, making for an even more complex system of choices.
Determining which investment options to leverage in your quest for a comfortable retirement requires an understanding of the various programs available to you, as well as the additional factors that will affect your retirement outcomes—age, salary, years of service, etc.
Understanding that military retirement is far from a one-size-fits-all proposition, let’s dive into these considerations and more.
Retirement savings opportunities for active duty and reservists
The key component of the Military Retirement System is the pension plan. Unlike most private sector pensions, benefits start the day you retire—regardless of your age. There are now several pension formulas in place, but all share the common thread of providing a pension benefit if you stay in the military for at least 20 years.
Differences among pension options
- If you joined the military between September 8, 1980 and August of 1986: You are eligible for the High 36 pension system, which offers a pension of 50% of your highest 36-months pay plus a 2.5% bonus for every year of service over 20 years.
- If you joined the military after August of 1986: You are eligible for the Career Status Bonus (CSB)/Redux system. By year 15 of your service, you should decide which calculation would be most beneficial under this system:
- the High 36 calculation described above (the default choice if no choice is made), or
- the CSB/Redux option, which offers a pension of 40% of your highest 36 months of compensation, an additional 3.5% for years 21-30 of service plus an additional 2.5% for any years over 30. (Note: There is also a $30,000 bonus once you hit 15 years of service.)
- If you joined the military between December 31, 2005 and January 1, 2018: You (as well as certain other active service members) will have the option to choose between the “legacy” CSB/Redux system and the new Blended Retirement System (BRS) described below.
- If you will enter the military after December 31, 2017: The new BRS offers a pension of 40% of base pay after 20 years, a matching contribution to your Thrift Savings Plan (TSP) contributions plus a bonus of 2.5% of your base pay after 12 years of service. The BRS will count on contributions to the TSP by the service member as a key component of their retirement nest egg, much like the private sector and its 401(k) plan offerings.
Under the current system, service members who retire with less than 20 years of service receive no pension, which means that they have no retirement benefit at all if they haven’t contributed to the TSP. This is the main difference between the new BRS and the legacy system.
Several factors to consider in choosing the right program for your needs include: the cost of living adjustment, the bonus opportunity, pension factors, matching opportunities, age, salary, years of service (current and future), savings habits, and more.
Financial planning needs
When deciding which retirement program to opt into, take a look at your situation and “crunch the numbers” between the three options to see which results in the best financial outcome.
Professional financial advice can also be invaluable for those nearing the point in their career where they need to make a choice regarding one of the two pension formulas available to them, and those considering the new BRS system will likely benefit from financial counsel who can help you decide whether this in your best interest.
While the military does provide financial counseling programs, a consultation with a financial professional well-versed in the needs of service members and veterans can be money well-spent.
For those who become disabled while serving, the military may determine that they are unable to serve. These service members are eligible for disability retirement benefits and a one-time lump-sum severance payment—a determination that is made by the military and cannot be applied for.
For those commissioned officers who become disabled while serving, at least 10 years of commissioned service as an officer is needed in order to retire at their current rank, a factor that can impact the amount of their pension.
Challenges and opportunities
Among the most common financial challenges for active military service members is the 20-year service requirement to be eligible for a pension. For those with a number of years of active and reservist service, it is difficult to leave and maintain your potential for retirement benefits without accruing 20 years.
Service members who may have been frequently deployed might find it difficult to establish roots and determine what post-military career path is right for them. They also may not be prepared for all the day-to-day financial issues of civilian life.
However, veterans who can successfully transition to private-sector employment, or employment in another government sector, can add retirement benefits such as a 401(k) or similar retirement plan. Many of those who have stayed in the military for the full 20 years are still young enough to transition to another career in the private or public sector, collect their pension and then build additional retirement benefits in their new career.
Active military and veterans have a number of retirement and post-military benefits available to them, and everyone’s situation is different. Active military, reservists and veterans would be wise to seek appropriate financial planning and help as needed from trained military counselors and outside financial planners with knowledge in this area.