The military retirement program has remained mostly the same over the years, despite changes to most other government retirement programs. The current retirement system is largely the same as it was during World War II. However, that is about to change.
In Fiscal Year 2014, the current retirement system will receive a major overhaul, authorized by the National Defense Authorization Act.
Changes to the military retirement program first surfaced in early 2011, according to Michael Meese, a retired Brigadier General for the U. S. Army and COO of the American Armed Forces Mutual Aid Association.
Proposed Military Retirement Plan Changes
Following proposals in 2011, The Military Compensation and Retirement Modernization Commission reviewed the program and come up with proposals to modernize the current retirement program. The research provided by the Commission showed that many service members did not have retirement funds following their service because only those who served for 20+ years qualified.
Approximately 83 percent of service members left before fulfilling 20 years of duty, leaving them without any retirement funds. The Commission proposed changes that would allow better access to retirement and includes retention bonuses and defined contributions that allow military employees to contribute (similar to a 401k).
The new plan will modernize the outdated military retirement plan and provide benefits to all service members. Meese told reporters that the new plan is fair and provides better service for everyone. Individuals who serve in the military for at least two years will now be able to contribute to a retirement plan. The previous plan only offered retirement benefits to about 17 percent of all service members.
Currently, service members who have served 20 years get 2.5 percent towards retirement. The new plan allots 2 percent times the number of years served. Additionally, the military will now match contributions to help boost retirement funds for their federal employees.
TSP Contributions for Service Members
In addition, in the new plan, the military will contribute 1 percent of basic pay to service members’ Thrift Savings Plan and match up to 5 percent of their contribution between years 3 and 26 of service. Service members will also receive a pay bonus after 12 years if they commit to serving another four years.
This new plan is a boost for military members who serve shorter terms because they still earn a 5 percent 401k match that they can take with them when they leave for new employment. This is a huge improvement over the lack of any retirement funds in the past.
Federal employees will have to learn about various financial topics including investment, retirement and savings to maximize their plan, according to Meese.
“It requires financial education so that individuals understand what a 401k is, how different investment options matter, and how overall financial planning is critically important.”
The Department of Defense has the authority to change some of the contribution levels before January 1.
The National Defense Authorization Act approved the changes and the Department of Defense has until the end of the month to iron out the details before the plan is implanted on January 1.