The Defense Department laid out its’ final details for its new blended retirement system for military personnel. This new system will automatically enroll new service members and gives existing troops the option of enrolling. This new policy will take effect January 1, 2018.
Defined Benefit Portion
Retirement pay will be two percent times the number of years of service. If a person retires with 20 years of service, their pension is equal to 40 percent of their final base pay. Under the current system, a retiree can receive a monthly pension check equal to 50 percent of their basic pay after 20 years of service.
Retirement pay can be paid in a couple of ways:
- Pension payment—a lump sum, then a smaller pension until the full Social Security retirement benefits are available
- Full amount—a larger lump sum, then no payment until the full Social Security retirement
The TSP account will begin 60 days into their service. After two years, the department will make matching contributions based on how much the service member contributes of their own pay. Government contributions can reach as high as five percent, assuming the member also contributes five percent.
Defined Contribution Portion
The military will contribute one percent of a person’s base pay to the service member’s TSP. At enrollment, there is an automatic contribution equal to three percent of the base pay. A person can choose to raise or lower the TSP contribution or terminate the individual contribution to the TSP. The military will match up to five percent of the individual contribution after two years of service. Also, after two years of service, the participant will be vested.
There is also a continuation of pay component. After 12 years of service, active duty members signing up for an additional four years of service will receive a bonus equal to 2.5 months of basic pay.
Those who stay in the military for 20 years, and are entitled to a pension, would receive a less generous calculation for their annuity. This new system moves away from the 20 year “all-or-nothing” system currently in place. Only about 17 percent of troops serve for 20 years and become eligible for that benefit.
The blended system is not an option for anyone who has already served more than 12 years. In that case, the troop is required to stay with the pension-only system and won’t have to take the DOD’s training courses.
Current members are grandfathered into the existing “legacy” system but can opt into the new one. They will have all of 2018 to make their decision.
Switching to this new system would make the most sense for service members who don’t intend to serve long enough to earn a pension (or 20 years). This is because they would earn at least some government contributions toward their retirement.
The blended system would give some retirement savings to about 85 percent of the military, the vast majority of whom serve less than 10 years.
Leaving Military Service
If a person leaves the military before completing 20 years of service, all money in an individual TSP fund belongs to that person. The government will match up to five percent of member’s contribution. All service members will receive at least one percent of their base pay through a government contribution to their TSP. There is also an option of moving the TSP to another 401k plan.
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