The military blended retirement system (also known as blended retirement system) is a symbiosis of the two sources of retirement income. The first one is the Thrift Savings Plan, and the second one is the present annuity provision available to those who retire after working for 20 years.
Since there is a blending of two retirement income sources, this system is also known as the “blended retirement system."
When and why was the blended retirement system introduced for the military?
The blended retirement system came into effect on January 1, 2018. Before it was introduced, those who served in the military used to qualify for retirement benefits after working for 20 years. But in the new system, nearly 85% of service members are eligible for retirement benefits even though they are not entitled to get full retirement benefits.
How does the TSP work in the blended system?
TSP is a 401(k) retirement account run and managed by the government. It allows individuals to invest in government securities and stocks. Plus, the employers can contribute to the retirement savings account.
The blended retirement system enrolls military service members into the Thrift Savings Plan automatically.
People who join the military prior to 2006 will remain in the traditional retirement system.
Those who join the military between 2006 and 2018 can choose between the two retirement systems. They can either choose the traditional retirement system or the blended retirement system.
Military service members who joined on or after January 1, 2018, are automatically enrolled into the new system.
What about the continuity pay bonus? How does it work in the new system?
This is yet another attraction of the blended retirement system. There is a continuity pay bonus which members can get after 12 years of service if they decide to re-enlist and continue for four more years. The active component member will receive the cash payment of 2.5 months of basic pay. The reserve component member will receive a month’s basic pay.
How does the annuity payment work in the blended retirement system?
Military service members will receive a monthly annuity payment at a reduced rate.
Here is the formula for annuity payment calculation:
2% times of the total years served in the military service. So if a military service member works for 20 years and then retires, he or she will get 40% of their final base pay. If someone works for 30 years, they are likely to get 60% of their final base pay, which is not a small amount. They can use the money for several purposes. The money can be used to pay off debts or cover necessary expenses.
Another formula is in the highest average of basic pay received in 36 months.
How much does the government contribute along with the service members?
Military service members who started working from January 2018 are automatically enrolled into the TSP. After completing 60 days of service, the government will contribute 1% of the individual’s base pay into a TSP automatically. In addition to this, the government will match up to 4% of his or her base pay to make a 5% contribution.
After working for two years, a military service member becomes vested. Even if he or she leaves the military after the two years, there’s no need to worry. They are entitled to the entire TSP account.
The Thrift Savings Plan is available to the service members who have opted for the traditional retirement system, but the Department of Defense won’t make any contribution to this system.
Pros and cons of military blended retirement system
When a military service member opts for the blended retirement system, the defined benefit amount is likely to be a lower. However, the account will have access to government securities, contributions and a matching benefit to their thrift savings plans. This is a significant benefit of the military blended retirement system.
The military service members who decide to stick to the traditional retirement system will get a higher defined benefit amount but they will not qualify for the government contributions as well as the matching benefit of the TSP.
Some other tricky details of of the blended retirement system
The military service members can receive retirement benefits in various forms, such as continuous pension payments. First, a lump sum payment, then a small pension until the service member reaches full social security retirement age.
Military service members have to do the compulsory BRS Opt-In Course on Joint Knowledge Online to know about the plan. They can also use a blended retirement system comparison calculator to know how much you can save in both the systems.
They can take the lump sum payout for four years in up to four years to reduce their tax burden.
There are a few tricky intricacies of the blended retirement system that service members need to understand before making a final decision. For example, their joining date and total years of service play a significant role in determining which retirement system they qualify for. These factors also help them understand what benefits they can get.
If a military service member works for 20 years, the traditional retirement system is the best choice.
If he or she is not sure about length of service, it’s best to opt for the blended retirement system.
For example, if someone works for 16 years and then decides they can’t work here anymore, they will get nothing as retirement benefits from the military.
Although the 2018 deadline to opt for a blended retirement system is over, reserve members who are deployed can still make a decision on it. But one thing is clear. Once a decision is made, it can’t be changed.
Lyle David Solomon is a licensed attorney in California. He has been affiliated with the law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, he gives advice and writes articles to help people solve their debt problems. You can connect with him at Linkedin or tweet him at @lyle_solomon