Backers say the combination of traditional pension and investment accounts will be better for the 80 percent of service members who don’t stay for 20 years, falling short of the pension’s “20 or nothing” threshold.
About 1.7 million people serving in the U.S. armed forces have a big decision to make in the coming months, as the military undertakes a major overhaul of its retirement system.
Beginning in January, the military is switching from a traditional pension system, in which retirees receive a monthly check for life based on their pay and years of service, to one that also includes investment accounts, like those commonly available to civilian workers. The new “blended” system is based, in part, on recommendations by the Military Compensation and Retirement Modernization Commission.
The system needed updating, the commission said, because the military’s pension system now leaves the vast majority of service members with no retirement savings when they leave the military. Service members now must serve at least 20 years to get a pension — hence its “20 or nothing” nickname. More than 80 percent of service members leave the military short of that minimum, according to the Defense Department.
The new system still offers a monthly pension, but one calculated using a formula that reduces it by 20 percent, said Michael Meese, a retired Army brigadier general and chief operating officer of the American Armed Forces Mutual Aid Association, a nonprofit group that provides insurance and other financial services to military members. (The commission’s final report noted that while its benefits recommendations weren’t “budget driven,” they would nevertheless “substantially reduce” government spending.)
But service members will also receive contributions to the Thrift Savings Plan, the federal government’s version of an investment-based, 401(k) retirement plan. The military will contribute a minimum of 1 percent of the service member’s pay, even if he or she contributes nothing. The military will also chip inasmuch as 4 percent more in matching contributions, for a maximum government contribution of 5 percent.
(Service members already may contribute to the Thrift Savings Plan, known for its low-cost investment funds, but the military now makes no contributions.)
“It’s no longer all or nothing,” said Josh Andrews, an Air Force reservist and a certified financial planner with USAA, a financial-services company focused mainly on service members and their families.
Service members also will be eligible for midcareer bonuses aimed at encouraging them to extend their time in the military.
Another new, and somewhat controversial, component gives those who reach the 20-year retirement minimum the option of taking part of their pension as a lump sum in exchange for a reduced benefit. This option must be carefully considered, Andrews said, because while it could be helpful to meet an immediate financial need — like starting a business or paying off a large debt — it provides “less money in your pocket over time” than a pension taken in the usual way.
Men and women enlisting in the armed forces after Dec. 31 will be automatically enrolled in the blended system. (They’ll start getting the 1 percent contribution to the Thrift Savings Plan in 60 days, but must wait two years for matching contributions.) People with 12 or more years of service at the end of this year will be “grandfathered” into the current system.
Service members with less than 12 years of service, however, must decide whether to move to the new system or remain in the old one. In general, the decision to switch to the blended system is “irrevocable,” according to the Defense Department.
Both Andrews and Meese suggested that people who knew for sure that they did not want to stay in the military for 20 years would probably benefit from switching to the blended system. Those who are committed to remaining, however, may want to stay with the current plan — although there are still risks. The military, like private employers, can go through periods of downsizing, Andrews noted, in which case staying in the old system could leave you short.
It matters where someone is in his or her career, Andrews said. “If someone is at the 10-year point,” he said, “it’s much less risky to stay in the old system than if you’re one to two years in.”
Those who are unsure of their plans, Meese said, have some hard thinking to do. Are you likely to save 5 percent on your own to get the full matching contribution in the Thrift Savings Plan? If not, you may be better off in the old system. Merely getting the 1 percent automatic contribution is unlikely to make up for the 20 percent reduction in your pension if you do stay until retirement, he said.
To help weigh the options, the Defense Department is requiring all service members to take a two-hour online training course. “We want to make sure they make an informed decision,” said Henry Manning, operations officer for the assistant secretary of the Army for manpower and reserve affairs.
Here are some questions and answers about the military’s retirement system:
Q: When do I have to make a decision about switching?
A: Eligible service members can switch to the blended retirement system anytime in 2018. It makes sense, however, to make a decision as soon as possible because the military will begin making contributions in January to the Thrift Savings Plan for those who switch to the blended system. So those who wait until, say, July to opt in will have missed out on six months of retirement contributions. If you switch, “there’s a huge advantage to deciding earlier,” Meese said. “You might as well make a decision on Jan. 1.” (Those who don’t actively opt into the new system by the end of 2018 will remain in the old system.)
Q: Where can I find more information about the new system?
A: The Defense Department offers information on its website, along with a blended- retirement-plan calculator. Other tools include a calculator offered by USAA.
Q: Does the new system affect people serving in the reserves and the National Guard?
A: Yes. Eligibility for the new blended system is based on the number of retirement points earned by reservists and those serving in the National Guard. More information is available on the Defense Department’s website.