Major Changes to the Military’s Retirement Policy
Starting in January, there are going to be some major changes to the United States military’s retirement policy. These changes, inspired by the Military Compensation and Retirement Modernization Commission, will affect the lives of the almost 2 million people currently serving in the armed forces, as well as former military personnel.
The military’s retirement policy currently follows a traditional pension system, which has proven to be quite problematic. Traditional pension systems allow for the disbursement of one check to a service member every month for the rest of his or her life. The amount of this check is dependent upon the length of service, as well as the salary the military personnel received while he or she was in the military. While this pension system may sound effective, in reality it means that military personnel are unable to save for retirement while actively working. The traditional pension system is actually nicknamed “20 or nothing” because military personnel have to serve for two decades before they even qualify for a pension. Unfortunately, less than 20% of military personnel meet this qualification.
For these reasons, the military plans to switch to a “blended” pension system in 2018, which includes features previously only available to civilian workers, such as investment accounts. The new pension system is not radically different from its predecessor- members are still entitled to a monthly pension- but the amount members receive per month will be reduced by a shocking 20%. Although this reduction is supposedly not budget driven, it will undoubtedly decrease government spending. This news was confirmed by retired Army brigadier, general Michael Meese. Meese serves as chief operating officer at a nonprofit organization called American Armed Forces Mutual Aid Association that assists military personnel with accessing financial services.
However, this blended pension system will also allow for other changes. The government will place 1% of service members’ pay into the Thrift Savings Plan and will match service members’ own contributions of up to 4%, which means the government could potentially contribute up to 5%. While service members could contribute to the Thrift Savings Plan, which is an investment-based 401(k) retirement plan, with the traditional pension system, the military did not contribute under this system. Members of financial services companies that deal with service members, such as USAA, have confirmed that with the changes to the military’s pension system, it is no longer “all or nothing.” The military will now offer bonuses before the 20 year service mark to encourage members to retire later and there is even an option, albeit a controversial one, that allows military personnel to receive half of their pension as a lump sum when they retire. However, if they choose this option, they won’t receive as many benefits. Depending on an individual’s situation, this option can either be a blessing or a curse. In general, it would provide more money immediately, but less in the long-run.
Beginning on December 31st, those who enlist in the military will be immediately registered for the blended pension system. Within 60 days, they will begin receiving the 1% government contribution to the Thrift Savings Plan, although they will need to wait two full years to see any matching contributions from the government. Military personnel who have been serving for 12 years or more by December 31st will be “grandfathered” into the traditional system. The option to choose either the blended or traditional system is only available to those who are currently enrolled in the military, but have less than 12 years of service. It is quite a heavy decision to make, as there is no changing your mind once the decision has been made. Experts say that the blended system would really only benefit military personnel who are confident that they will spend less than 20 years in the military. There are risks associated with the traditional system, such as the effects of military downsizing, but in the end, it would leave you with more money if you serve for the full 20 years. The longer you have been serving, the less risk there is with sticking with the traditional pension system.
For those with the option to either switch to the blended system or remain in the traditional system, there are quite a few factors to consider. They must take into account whether they would get the full benefits of the blended system, such as the 5% matched government contributions to the Thrift Savings plan. For example, if a service member cannot raise the initial 5% themselves, they will not benefit from this aspect of the blended system. If you only receive the 1% government contribution, you will be taking a hefty loss from the 20% reduction in your pension that is a main facet of the blended system.
However, the Defense Department is offering a two hour training course mandatory for all military personnel prior to making their decision about their pension system. This is to guarantee that whichever decision is made, it is well informed. If you serve in the reserves or The National Guard, the new system affects you as well. However, you must use your retirement points to learn whether you are eligible for the blended pension system. You can learn more about this process on The Defense Department’s official website.
If you are an active service member who has served for less than 12 years, you have an important decision to make. While you can make this decision any time before the end of 2018, the sooner you decide, particularly if you are switching to the blended system, the sooner the government begins contributing to your Thrift Savings Plan.
There are several online tools available to help you decide which plan to choose, such as blended plan retirement calculators offered by The Defense Department and the USAA. However, contacting a financial professional may benefit you as well since they can help to guide you toward retirement planning options that are right for you.