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The Blended Retirement system.  Thumbnail

The Blended Retirement system.

Key Takaways

  • Defined Benefit.   Retired pay will be 2% times the number of years of service times your final base pay.
  • Defined Contribution.  The service will contribute 1% to your TSP no matter what and will eventually match up to 6% of your contribution with a 5% service contribution.
  • Continuation Pay.  When you reach 12 yrs of service, if you commit to 4 more years you will be eligible for a cash incentive of 2.5 to 13 times you monthly base pay.
  • Lump Sum Payment.  You can take a lump sum payment at retirement in exchange for reduced monthly retirement benefits.

What is the new blended retirement system?

The military instituted the new Blended Retirement system on Jan 1, 2018.  At this point all new military members are by default enrolled in the BRS and those that were at various points in their career when the BRS was rolled out have made their decision to stay in the traditional retirement system or change to the blended retirement system.  The name, Blended Retirement System is based on the plan blending two major sources of retirement income, the existing annuity plan for those who retire after 20 years of service and the addition of the Thrift Savings plan.  The annuity for the BRS is reduced compared to the traditional retirement plan and the service contributions to the TSP is added to make up the difference.   The annuity for the Blended Retirement System is 2% times your years of service times your final base pay.  The traditional retirement was 2.5% times years of service times your base pay.  At 20 years under the traditional retirement, you would have received 50% of your base salary but under the Blended Retirement System you receive 40%.   The military makes mandatory 1% of your salary contributions to the TSP plan.  You receive this 1% whether or not you contribute.  If you contribute from 1% to 3% you receive a matching contribution to the amount you contributed plus the 1% mandatory contribution.  If you contribute 4% or 5% you will receive a matching contribution of 3.5% or 4% plus the 1% mandatory contribution.  

Why is the TSP an excellent addition to the military retirement plan?

There are 4 main reasons why the TSP is an excellent addition to the military retirement plan.   The first is the portability of it.   Most military members do not complete 20 years of service and become eligible for retirement.  Those individuals who did not stay and become eligible for military retirement left the military with no retirement benefits under the traditional retirement system.  Under the Blended Retirement System between the mandatory and matching service contributions, and the voluntary individual contributions the service member leaves the service with a valuable retirement account that can then be left on its own, rolled into a new employer’s plan or into an IRA.  The second main reason the TSP is an excellent plan is the low cost of the TSP plan.  In the investing world 1+% management fees are overwhelmingly common.  The Thrift Savings Plan costs generally around .04%.   That means for $100,000 invested in the plan, the TSP charges $40 versus $1,000 for a 1% management fee.  The third great feature of the Thrift Savings Plan is the simplicity of its investments which are also comprehensive.   The TSP allows investments into funds which focus on small and midsized stocks, large stocks, international stocks, Short-Term government securities and Long-term fixed income securities.  This investment mix overs most of the investing sphere.  The fourth great feature of the TSP for military members is the matching features of it.  Every member receives a 1% of salary contribution from the service whether the member contributes or not, for a member that contributes a percentage of their base pay you can easily double your contribution when you consider the matching service contribution.    

Some key features of the Blended Retirement System.

There are a couple of lesser-known features of the blended retirement system.  The first feature is the offer of continuation pay.   Continuation pay is a lump sum payment in return for the service member agreeing to serve a certain number of years into the future.  Continuation pay applies to Active Duty and reserve military members and occurs between 8 and 12 years of service based on their Pay Entry Base Date (PEBD).  The amount is 2.5 to 13 times the monthly base pay for Active Duty and between .5 and .6 times monthly base pay as if on active duty for reservists and national guard.   In return for this payment the service member agrees to continue serving no less than 3 years, each individual service determines the specifics of the program.   The second feature of the blended retirement system is the lump sum payment option at retirement.  The service member may choose a lump sum payment of either 25% or 50% of the discounted net present value of future retirement payments.  The service member accepts a lower payment in exchange for this option.  Once the service member reaches full Social Security retirement age, which is 67, the payment is reset to the full amount.  The election must be made no less than 90 days before retirement and is available to both Active Duty and reservist/national guard.  

Summing it all up.

In general, I am not a fan of reducing military benefits.  I see each reduction as making it easier for future reductions in benefits.   I look at the Blended Retirement System overall as an increase to the benefit of being in the military.  1 of 6 military members stay long enough to obtain retirement benefits.  Under the traditional system those 5 others left the military with no retirement benefits.   Now members who serve, but not the full 20 years to receive military pension will be able to walk away with a retirement benefit commensurate to the time and amount they elected to put into the system.