Big decisions

Big decisions

There are some big changes coming to military retirement planning.

The 2016 National Defense Authorization Act will transform the military’s traditional 20-year retirement system to a new blended system. The blend mixes the old (a defined pension) with the new: a Department of Defense (DoD) matching contribution to the military’s version of a 401(k), the Thrift Savings Plan (TSP). 

What does that mean? Servicemembers will need to take a more active role in deciding how they finance their retirement, and those in the gap between the old and new plans have to decide which plan suits them better.

The blended plan begins in 2018 and has these changes: 

  • Retirement pay (pension) Servicemembers will be eligible for a retirement benefit after 20 years of service. Smaller than the current benefit, it will be calculated using a 2-percent multiplier instead of the current 2.5 percent. (Multiply your years of service by 2 percent. That number is the percentage of your high-36 average base pay that you’ll receive in retirement.) 
  • Matching contributions Servicemembers will receive an automatic 1-percent DoD contribution to their TSP after 60 days of service. At the beginning of their third year of service, servicemembers who contribute at least 5 percent on their own will receive up to 4 percent in matching TSP contributions. 
  • Continuation pay After 12 years in the military, servicemembers will receive continuation pay if they commit to serving four more years. This one-time retention bonus will be worth at least two-and-a-half months’ basic pay for active-duty personnel and at least a half-month’s basic pay for reservists. The amount could be higher for in-demand positions.
  • Partial lump-sum option Retirees can choose to receive a full retirement annuity each month, or they can opt for a smaller pension along with a lump-sum payment. Details are still being worked out, so it’s unclear what this would mean from a tax standpoint.  

With any change, there are positives and negatives. On one hand, the new plan will benefit more servicemembers. The overhaul aims to provide some retirement funding to about 85 percent of servicemembers. Plus, the design should encourage them to save for retirement on their own since they’ll need to make a personal contribution of 5 percent to get the full match. Being better prepared for retirement is always a positive. 

On the other hand, retirees will probably get less. Under the new system, that could equate to a six-figure difference over their lifetimes. This is based on someone entering the service in 2016, opting for the new system and serving 20 years. However, it’s worth noting that today less than 20 percent serve long enough to qualify for full military retirement.

The new plan doesn’t take effect for two years, so what should you do now? 

  • If you entered the military before 2006, carry on. You’re locked into the current retirement plan. 
  • If you’re entering service in 2018 or later, you automatically fall under the new plan. Make sure you contribute enough to your TSP to get the match, and put in more if you can.
  • If you entered between 2006 and 2017, you’ll have a choice to make in 2018: the old plan or the new one. Crunch the numbers and consult your financial adviser. If you’re committed to serving at least 20 years, opting to stay in the old system may make sense. If you’re uncertain about your plans in the military or have only served a few years, the new blended plan could be best. 

Either way, retirement should be top of mind. Contributing as much as possible to your TSP will boost your efforts. If you’re not contributing already, go to myPay and start.  

 

J.J. Montanaro is a certified finanical planner with USAA Financial Planning Services, one of the USAA family of companies. USAA is The American Legion’s preferred provider of financial services.