Military Retirement: What Do Families Need to Know?

Over the past year, proposed changes to the military retirement system seemed to take center stage. The Military Compensation and Retirement Modernization Commission (MCRMC) released a report last January suggesting changes to the traditional 20 year retirement system. As the year progressed, the Department of Defense (DoD), the House of Representatives, and the Senate each weighed in with their own versions of the plan. While the basic outline of each proposed plan was the same, there were differences in the details. It was clear a compromise was needed.

In October, representatives from the House and Senate met to resolve the differences in their respective proposals. The new compromise plan was included in the FY16 National Defense Authorization Act (NDAA), which the President signed into law on November 25, 2015.

Who is affected by the new retirement plan?

• Current retirees and anyone who entered the military before January 1, 2006 will be grandfathered into the current system. Nothing about those service members’ or retirees’ retirement will change.
• Service members who entered the military on or after January 1, 2006 will have the option of staying in the old system or choosing the new one.
• The new plan will be mandatory for service members entering the military on or after January 1, 2018.

What is different about the new system?

The new system replaces the traditional pension plan with a “blended” retirement.

• Service members who stay in the military 20 years or more will still receive a pension. However, under the new system the multiplier used to determine the amount of the pension is reduced. The current multiplier is 2.5%, but under the new system it will go down to 2%. For example, a military member serving 20 years will receive a pension of 40%  of base pay (multiplier of 2, times 20 years of service), rather than 50%, as they do now.
• The DoD will make automatic contributions to service members’ Thrift Savings Plans (TSP) and match employee contributions up to 4% of base pay. This will allow the majority of service members to accumulate savings for retirement.

What should I know about TSP contributions?

• Once a military member has served 60 days, DoD will begin contributing 1% of base pay to his or her TSP account.
• After the service member has completed two years, DoD will begin matching TSP contributions up to 4% of base pay. Service members will automatically start TSP contributions at this point and will have the option to adjust the contribution amount.
• At two years of service, service members are eligible to take their TSP accounts with them when they leave the military.
• All DoD contributions (automatic and matching) end when the service member completes 26 years.

Anything else we need to know?

• The plan includes provisions for continuation pay. At some point around 12 years of service, military members may be offered a cash incentive that would incur an additional service commitment.
• Service members will have the option of taking part of their retirement as a lump sum in exchange for a lower pension payment.

Service members who entered the military on or after January 1, 2006 will have a difficult decision to make. Should they opt in to the new system or stay with the current plan? The answer isn’t one size fits all; each service member needs to make the decision that’s right for them.

For this reason, we are calling on DoD to institute comprehensive financial literacy classes for service members and spouses to help them make this critical decision. Military families need information and resources to help them navigate this complex new system.

What are your thoughts on the new retirement system? Would you opt in?

Posted January 25, 2016