The military is overhauling its retirement system next year, and members should be prepared for the biggest structural changes since World War II.
“[The reforms] came about over the last seven years or so, both to try to continue to retain outstanding people in the military while reducing the overall costs of military retirement for taxpayers,” retired Brig. Gen. Michael Meese, current EVP and secretary of the American Armed Forces Mutual Aid Association (AAFMAA), told FOX Business.
The new so-called “Blended Retirement System” (BRS) goes into effect on Jan. 1, 2018.
Here’s what will change and how members can take advantage of those changes.
Under the legacy retirement system, military members receive no retirement benefits unless they serve for 20 years, at which point they get a pension that’s equal to 50% of their last pay.
The blended retirement system allows members to start saving immediately. The defined contribution portion allocates at least a 1% match to all military members’ Thrift Savings Plans, which can be increased to as much as 5%, similar to enrolling in a traditional 401(k) plan. To incentivize military members to stay in service longer, between eight and 12 years they get a special, one-time contribution bonus equal to 2.5% of their base pay.
The “catch,” as Meese called it, is that if 20 years of active service is completed, instead of getting a pension worth 50% of your highest 36 months of pay, you only get 40%.
The last portion is what is intended to save taxpayers money, Meese pointed out, because after World War II former members had life expectancies of about 60 years. Now, as people live well into their 80s, the pension cut is expected to save taxpayers about $2 billion per year, he said.
“It’s actually the first entitlement reform that any part of our government has done,” Meese said.
Who is affected?
Military members will be sorted into three categories: those who have no choice but to enter the new blended retirement system, those who have no choice but to remain in the legacy system and those who can opt into the new program.
All service members who enter the military on or after Jan. 1 will be automatically enrolled in the BRS. Individuals who have already departed the military or who have been in service for 12 years or more, will stay with the old system. But those who are currently on active duty, or in the reserves, having served less than 12 years, will have the choice of opting into the new program.
According to Meese, about 1.1 million members will have the option of enrolling in the new BRS. However, if members fail to opt-in, they will, by default, be left in the legacy system.
The dilemma for those trying to decide whether to opt-in to the BRS is that maximizing benefits will depend on how long they plan to serve in the military.
“If you knew you were going to stay in for 20 years, then the old system would be better,” Meese said. “[But] most people in the military today, don’t know. In general, I think that the new system is better, especially for this generation of people that are joining the military who may be less sure of whether or not they are going to make the military a career.”
If you are enrolling in the new system, Meese said it is best to save 5%, or the maximum amount that the government will match.
Meese also advises those who plan to opt-in to the new plan to do so as early as possible. The government will begin matching contributions one month after the election is made, so members can stash away more cash by switching over as early as possible in 2018.
It is important to note, however, that once a member opts in to the new system, there is no pathway to opt out. The deadline to make the election is December 2018.
Overall, the retired brigadier general said the changes will improve financial knowledge in the military and allow everyone to have a retirement plan.