Intelligent Options for Maximizing the Blended Retirement System for Service Members
High-3 and New BRS
Did you know that the Department of Defense estimated that 83 percent of military personnel exit their service before 20 years? In fact, before 2018 people who joined the military and did not stay long enough to retire, basically got nothing towards their future retirement.1
Because of this to compensate for the all-or-nothing approach, the military began offering a Thrift Savings Plan (TSP) so that service members could supplement the TSP under the original High-3 system which offered no military contributions or matching elements on behalf of service members.
The High-3 system calculates retirement pay based on a percentage of the average salary from the highest 36 months (or 3 years), for those who have met the 20-year service requirement.2
In 2018, a new law was created with the goal of cutting expenses while increasing flexibility for service members to participate and get at least some retirement benefits, which is called the new Blended Retirement System or BRS.
The BRS consists of a blend of a new High-3 system, similar to the old but updated with a decreased defined benefit pension plan, plus new provisions for service member TSP contributions (to supplement the reduced High-3 defined benefit pension amount), including a 1% service automatic contribution and an employer match of up to 4%.
While the 20-year service requirement still remains in place to receive the High-3 pension annuity benefit under the BRS, a service member can take the TSP funds (including their own contributions, government contributions, and matches) upon exiting the military (assuming they meet the vesting requirements).
Under the BRS, retired pay will be 2% times the number of years of service. If you retire at 20 years' service you get 40% of your final base pay. If you retire at 30 years service you get 60% of your final base pay! You can either get your full retirement when eligible or opt to get a lump-sum benefit at retirement. If you take the lump-sum you will get a reduced monthly retirement check until age 67.
How to maximize your BRS
With the new BRS, what should military services members think about in order to maximize this benefit.3
1. Invest five percent of your pay into the Thrift Savings Plan (TSP). You are being offered an opportunity for the government to give you a 4% raise. All you have to do is save 5% of your pay in a tax-advantaged TSP account to get it. Whether you were automatically enrolled in BRS or you opted in, the minimum contribution you make to your TSP every year should be the one that gets you the maximum match. The military will contribute 1% of your base pay to your TSP no matter what you do, even if you don't put any of your own money in the TSP.
2. Learn how to invest within the TSP. The TSP offers a wide range of investment funds, including funds that invest in stocks and bonds. There are also guaranteed funds and Lifecycle funds you can use and are based on your projected retirement age. To optimize your retirement success, it’s best to come up with an investment plan and stick with it. Try not to switch things up in reaction to market swings and fluctuations. The TSP is an extremely low-cost retirement plan and you should take advantage of.
3. Make the most out of your continuation pay. Continuation pay is a mid-career payment you’ll receive in exchange for serving at least three more years in the military. When you reach 12 years of service and commit to 4 more years of service you will be eligible for a cash incentive of 2.5 to 13 times your regular monthly basic pay if you are active duty and 0.5 to 6 times your monthly basic pay if you are in the reserves.4
4. Be careful with the choice of a lump-sum payment. If you take a lump-sum payment it will be discounted to allow for inflation. If you take the lump-sum payment, your monthly retirement benefits (and survivor benefits) will be reduced. For many, it is better to have a guaranteed pension, so a lump sum may not be a good option. It might be better to invest more heavily in the TSP to supplement the pension.
5. Most important, stay in the military for at least 20 years! This can be a tough one for many. In most cases, you must serve at least 20 years to receive the pension portion of the BRS. To calculate your monthly pension payment, multiply two percent, times years of service, times retired base pay. Your pension amount can increase each year with the cost of living adjustments. If you leave the military before reaching 20 years of service, you will typically not be eligible for this benefit.
Saving for retirement is a critical part of your financial future. That’s why it’s so important to start planning for retirement early. Talk to a financial planner to learn more about how the new BRS and its fits into your retirement goals.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.