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Welcome to part 2 in my series on the new Blended Retirement System (BRS). Part 1 covered the basics of the BRS – what it is, the implementation timeline, and where to go for more information. If you haven’t read part 1 yet, make sure you check it out so you are familiar with the terms.
Part 2 covers who is eligible for the BRS and the details for the Active and Reserve versions. Part 3 compares the BRS to the current High-36 retirement system and run some sample scenarios to estimate the possible value of the BRS. Finally, in part 4 I go over some frequently asked questions, separate some myths vs facts, and offer my opinions on the BRS.
There are three main groups of people: those who are not eligible for the Blended Retirement System and will remain under the High-36 plan, those who are eligible to opt into the BRS or stay with the High-36 plan, and those who will be automatically enrolled into the BRS and will not be eligible for the High-36. All members serving as of December 31, 2017, are grandfathered under the legacy retirement system. No one currently serving will be automatically switched to the Blended Retirement System, but if they are in group 2 they can decide to manually switch.
Note: a fourth group is those who’ve been in so long they fall under one of the older retirement systems. However, there are so few of them left that they likely aren’t reading this. If they are, they are probably doing it so they can mentor somebody in groups 1-3.
Group #1: Not eligible for the BRS
Active Component service members with more than 12 years since their Pay Entry Base Date and Reserve Component service members who have accrued 4,320 or more retirement points as of December 31, 2017 are grandfathered into the current High-36 plan. For Active Component members, assuming you didn’t have a break in service this means that if you entered service prior to January 1, 2006 you will remain in the High-36 system.
Group #2: Eligible to Choose
Active Component service members with fewer than 12 years since their Pay Entry Base Date and Reserve Component service members who have accrued fewer than 4,320 retirement points as of December 31, 2017 are grandfathered into the current High-36 plan. However, they will have the option to opt into the Blended Retirement System. The opt-in/election period for the BRS begins January 1, 2018, and concludes on December 31, 2018.
For Active Component members, this means you entered the service after December 31, 2005 and before January 1, 2018. Members of this group who fail to actively decide between systems by December 31, 2018 will be permanently grandfathered into the High-36 plan and will not be allowed to switch in the future.
Group #3: Auto-Enrolled in BRS
Those entering military service on or after January 1, 2018 will be automatically enrolled into BRS. They are not eligible for the High-36 or any previous military retirement plans.
Details of the Blended Retirement System Active and Reserve Versions
In part 1, I listed the four components of the BRS:
- Defined Benefit Annuity (the pension)
- Defined Contribution (TSP contributions from the government)
- Continuation pay
- An option to receive a reduced pension in exchange for a lump sum payout at retirement
I’ll now cover the details of both the Active Component and Reserve Component versions of the Blended Retirement System.
Once the member has reached 20 years of active service, they are eligible to retire with full retired pay. The pension is paid via a monthly pension check.
Under the Blended Retirement System, the calculation for figuring out the pension is 2% (the multiplier) times the number of years served times the average of the highest 36 months basic pay. For instance, someone who is retiring after serving 22 years and has an average highest 36 months of pay of $5,000 would receive $2,200 per month in retired pay.
2% x 22 years x $5,000 = $2,200
That means the pension under the BRS is smaller than the pension under the High-36 system. 20% smaller, to be exact. Under the High-36 system, the same person would receive a pension of $2,750. That’s 20% more than the BRS pension. The BRS makes up for the lower pension payout by providing government contributions to the member’s Thrift Savings Plan (TSP).
A new feature in the BRS is the automatic and matching TSP contributions from the government. This is the biggest change between the High-36 and the BRS. TSP contributions means the 81% of service members who don’t retire from the service will now receive government contributions to their retirement plan.
Basically, the government will contribute a small amount to your TSP account whether you contribute anything or not. And if you do choose to contribute to the TSP, they will match those funds up to a certain percent. That is FREE MONEY. Here’s how it works.
Everybody who enrolls in the BRS will start receiving a 1% automatic government contribution to their TSP plan as soon as they have 60 days of service. So if your basic pay is $3,000 per month, the government will contribute $30 per month to your TSP automatically. That might sound like a tiny amount, but it adds up over time. Plus, the government will kick in even more if you do too.
If you decide to individually contribute to your TSP, the government will match those funds. It’s a 100% match up to 3%, plus a 50% match up to 5%. That looks like this:
So going back to the example of someone with a basic pay of $3,000 per month, if they contributed 5% individually it would look like this:
Individual contribution of 5% = $150/month (5% x $3,000)
Automatic contribution of 1% = $30/month (1% x $3,000)
Matching contribution of 4% = $120/month (4% x $3,000)
Total contribution to TSP = $300/month
The keys to remember with the TSP portion of the BRS are:
- The automatic contributions start after 60 days of service.
- The matching contributions don’t begin until the start of the member’s third year of service. They end after 26 years of service.
- The member “vests” (qualifies to keep) the government’s TSP contributions after 2 years of service. They can keep the money if they separate from military service prior to retirement.
- TSP contributions will be treated, by default, as a Traditional tax-deferred contribution. If the member wants to switch to a Roth, they have to do so manually. (click here for more information on Traditional and Roth tax treatments)
- The government contributions are always tax-deferred Traditional contributions. This is true regardless of which tax treatment the member chooses for their individual contributions.
- All new accessions into the military after January 1, 2018 will be automatically enrolled into the TSP, with an automatic individual contribution of 3%. The 3% contributions go into effect with the first pay period following their 60th day of service. This is money coming out of their paycheck and going into their TSP – it’s separate from any government contributions. If the member doesn’t want to contribute to the TSP, they have to actively stop the contributions.
- This is really interesting. From what I can tell, anybody who is subject to the automatic enrollments (new accessions after January 1, 2018) will be reenrolled every year. Meaning, if they stop their contributions in 2018, they will be reenrolled into automatic 3% contributions on January 1, 2019. I guess they really want people to contribute to the TSP! (me too)
- They can decline reenrollment for the following year, but they have to wait until December 1st. So basically, they will have one month to decline automatic enrollment. And they will have to do this “each year of a member’s career.”
Members of the Uniformed Services who are covered by the BRS are eligible to receive a one-time, mid-career bonus payment in exchange for an agreement to perform additional obligated service. This one-time bonus payment is in addition to any other career field-specific incentives or retention bonuses. The member has to have completed at least 8 years, and less than 12 years, of service to qualify for Continuation Pay.
Additionally, they have to agree to serve no less than three years in the Active Component to receive the bonus. The service commitment runs concurrently with any other service commitments, unless the other commitments preclude concurrent obligations.
The Continuation Pay may be paid in a single lump sum or a series of equal installment payments. The installment payments will not exceed four annual payments over 4 consecutive years.
The amount of the Continuation Pay is determined by the applicable Service Secretary, as is the duration of the active duty commitment. The amount will be not less than 2.5 times and not more than 13 times the monthly basic pay of that member based on the member’s current paygrade and years of service.
Example: if the member is receiving $3,000 monthly basic pay and the Continuation Pay multiplier is 8, the member would receive $24,000 in exchange for signing the active duty service commitment.
Finally, a member who receives the Continuation Pay and then fails to meet the terms of the agreement may be subject to full or partial repayment.
Lump Sum Payout in Exchange for a Reduced Pension
Another new feature of the BRS is the ability to receive a lump sum payout at the time of retirement in exchange for receiving a reduced pension. To be eligible to elect the lump sum a member must be covered under the BRS, and qualify for an active duty retirement or Reserve retirement.
In order to take the lump sum, the member must make the election not later than 90 days before either 1) the date upon which the member retires (active duty retirement); or 2) the date upon which the member first becomes eligible to receive retired pay (Reserve retirement).
Determining the Lump Sum Rate
If a member elects to receive a lump sum payout at retirement, they will receive a reduced pension and the discounted present value of that portion of the retired pay. The discount rate will be calculated and published annually – it is not a set rate. Essentially, it is based on how well bonds are performing over a 7-year average. This is not something I would worry about now, as the first person eligible to receive the BRS lump sum is more than 7 years out from retiring. For now, just know that the member can receive the discounted value of either 25% or 50% of the pension in a lump sum. I’ll discuss when this is a good idea in Part 4 of this series.
Other details of the Lump Sum Payout
- The payout can be received all at once or in annual installments over no more than 4 years
- The lump sum will be paid no later than 60 days after the date on which the member retires for active retirements. For Reserve retirements, it is the date on which the member becomes eligible to begin receiving retired pay.
- This is the big one: if the member elects to receive the lump sum payout, the pension will return to its full, non-reduced amount on the first day of the month following the month when the member reaches full retirement age. Right now, full retirement age is 67 for most members of the military. Keep in mind that full retirement ages can and do change over time.
In general, the Reserve Component of the Blended Retirement System follows the same basic rules as the Active version. However, there are some differences. This is a list of the differences I’ve been able to find. If anybody is aware of any others, please leave a comment.
- No surprise here – the Reserve pension starts later, just like with High-36. For Reserve Component retirements, if you complete 20 qualifying years of service your monthly retired pay starts at age 60. The pension may be paid earlier based on qualifying active service.
- Members of the Reserve Component covered under BRS are considered continuous participants in BRS while in a paid status. These members will not be re-enrolled at the automatic 3% individual contribution level each time they transition from a paid status in the Selected Reserve to active service or from active service back to a paid status in the Selected Reserve. Their previously-elected TSP contribution levels will carry-over through transitions related to activation and deactivation, unless and until the member elects to modify their own contribution level.
- In order to receive the Continuation Pay, the Reserve member must agree to serve no less than three years in the Selected Reserve (not the Active Component)
- The amount of Continuation Pay is “the equivalent amount, as if the member was on active duty, which is not less than 0.5 times and not more than 6 times the monthly basic pay of a member of the same grade and years of service on active duty.” A Reserve Component member performing active Guard and Reserve service will be paid continuation pay at the rate of an Active Component member provided they agree to serve not less than an additional 3 years in active service.
That’s all for today. I know – it was a lot! And not the most fascinating info, either. But basically you have here in 2200 words what the government wrote in 31 pages. So…this is better? Hopefully you think so too.