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December 4th, 2018 | 5 min. read
The Blended Retirement System (BRS) is the new standard retirement package for all branches of the military. It replaced the traditional pension program, which was a long-running military benefit allowing for guaranteed, lifelong monthly pay after 20 years of service.
Since the majority of service members serve less than 20 years, only 19 percent of those on active duty actually received any benefits under the traditional plan. In an effort to reach more service members, the Department of Defense rolled out the BRS, which continues to offer a generous—but reduced—pension for career military members, with additional supplementary programs. For those who do not serve the full 20 years, the BRS ensures that you can leave the military with retirement savings similar to those you might accrue in the private sector.
What does this mean for you? We’ve outlined eight key things you need to know.
1. For members who serve 20 years or more, the BRS provides a guaranteed lifelong pension. This pension, which has been reduced by 20 percent from what was offered in the previous retirement plan, is calculated by multiplying your high-3 by years of service, times two percent. For example, with a high-3 average base pay of $53,088 and 20 years of service, your monthly pension would be $4,424 ($53,088/12) x 20 x 2% = $1,770.*
2. The Thrift Savings Plan (TSP) is a defined contribution retirement savings plan, much like a 401(k) offered at many private companies. After 60 days of service, you are eligible to begin monthly contributions from your basic pay. Unless specified, your contributions will default to three percent of your monthly pay. These contributions can be adjusted at any time. The money you contribute to the plan is not subject to a vesting schedule, so if you separate from the service, it belongs to you.
3. Whether or not you contribute to the TSP, the government will contribute one percent of your salary on a pre-tax basis every pay period, beginning 60 days after your start date. This one percent is an automatic contribution, and you don’t have to do anything to receive it. The automatic contributions are fully vested after two years. At that time they are yours to take with you if you leave the service.
4. The BRS offers matching contributions in the TSP. This means that after two years of service, the government will match your pre-tax contributions dollar for dollar up to the first three percent and 50 cents on the dollar up to the next two percent. In other words, if you contribute five percent of your own pay to your TSP account, you will actually be investing an amount equal to 10 percent of your pay (5 percent individual contributions + 4 percent matching contributions + 1 percent automatic contributions). Better yet, these matching contributions are immediately vested.
5. Service members decide where the money in their TSP is invested by choosing among a selection of investment funds.
6. TSP contributions can be put into a traditional retirement account, Roth account, or both. If your contributions go into a traditional retirement account, they come out of your paycheck before you pay taxes on them. You don’t pay taxes on either the contributions or the earnings until you withdraw the money. In contrast, money that is put into a Roth account has already been taxed, and your earnings are withdrawn at retirement tax-free (as long as the Internal Revenue Code requirements are met).
7. A continuation pay bonus is paid mid-career (between 8-12 years) in exchange for a commitment of continuing service of at least three years. This bonus is equal to 2.5 times your monthly base pay for those on active duty and 0.5 times monthly base pay for those in the Guard or Reserve.
8. There are three options for receiving retirement pay: (1) full monthly payments, (2) a 25 percent lump-sum payment and monthly payments based on 75 percent of retired pay, and (3) a 50 percent lump-sum payment and monthly payments based on 50 percent of retired pay. For both lump sum options, the reduced retirement pay remains in effect until you reach full retirement age, which is currently 67. At that time, retirement pay will be restored to the full amount.
As you can see, the structure of the BRS makes it necessary for service members to be active in preparing for their financial future. There are multiple decision points that will require increased financial engagement, disciplined savings behaviors and smart investment choices.
Luckily, the complexity of the BRS is not a puzzle you need to—or should—solve on your own. Your Financial Advisor can help you make sense of it all and provide customized recommendations for you and your family.
*Active duty military receive their pension after military retirement. Members of the National Guard and Reserve are eligible to receive this benefit at age 60.
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