Life Hack
The Blended Retirement System
What Leaders Need to Know
By Major Courtney M. Cohen
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.
—Warren Buffett
For many years, retirement planning for military service members consisted of making sure you didn’t have an unintended break in servicethat would cause all of those valuable years of active federal service to wash down the drain. This is still the case for the majority of the current force, but a new military retirement system is radically changing the way future generations of military members will plan for their retirement. These junior members of our armed forces will inevitably have many questions, and leaders must be armed with a baseline understanding of the new system to ensure they are empowered to make the best choices for themselves and their Families. This article highlights significant changes in the Blended Retirement System (BRS) and provides tools for leaders to mentor their subordinates in this new world of long-term financial planning.
The Legacy Retirement System
Perhaps the best way to explain the new is to start with the old. To facilitate a later comparison, I will refer to the old system as the legacy retirement system, also called the High-3 System because retired pay is based on an average of a service member’s highest thirty-six months of pay.1 Most service members fall under the legacy retirement system and are familiar with it, but there may be a few under-appreciated details that make a difference when comparing it to the BRS.
First and foremost, the legacy retirement system is all-or-nothing. Service members must serve at least twenty years of active military service to be eligible.2 If they serve fewer than twenty years of active federal service, they are not eligible for the defined benefit annuity. If there is a break in their service, meaning they leave the service and return to military service at a later date, then calculating retirement points can be quite challenging and requires an attention to detail and proper memorialization that often leads service members to miss out on credit toward their military retirement.3
Second, the legacy retirement system is a defined benefit annuity. “Defined” means that the earned retirement amount is known to the government and to the service member based on a certain math equation, usually a percentage of the employee’s pay. “Benefit” implies that the employer provides the retirement pay to the service member at no cost to the employee. “Annuity” refers to the retiree receives the same amount of pay at equal intervals.4 In the military’s case, retirement pay is adjusted for inflation, and retirees receive retirement pay monthly. In a way, we all know the math equation used to calculate the defined nature of the benefit, but we may not know that we know it. Service members have all but been indoctrinated to know that retirement at twenty years of service earns retirees 50% of their base pay.
But does everyone know how we come to 50%, as opposed to 40% or 60%? For the legacy retirement system, the math equation used to calculate the defined benefit is the service member’s years of service multiplied by 2.5%, determining the percentage of the high-3 base pay that a retiree will receive. Twenty years of service multiplied by 2.5% equals 50%. If service members continue to serve to thirty years of service, they will receive 75% of their base pay every month, adjusted for inflation, in retirement.5
The problem is, only 19% of service members (across all services) actually serve to twenty years.6 Most service members serve a certain term and do not reenlist or otherwise continue to serve. Millions of service members volunteered to serve during the last twenty years of war, likely deployed far from their loved ones to combat, and may have participated in or seen tragic events. After serving honorably and offering significant sacrifice, they decide to move on to the next chapter of their lives. Due to the structure of the defined benefit annuity, these service members do not qualify for any retirement benefit from the federal government.
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Table 1: Defined Benefit10
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Defined benefit vesting
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20 years of service (YOS)
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Defined benefit multiplier
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2.0%
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Defined benefit working age annuity
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Active duty: Choice of full annuity or lump sum option (50% or 25%) at retirement; National Guard/Reserve: Lump sum based on annuity at age 60 (or earlier with creditable active service).
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Defined benefit retirement age
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Active duty: At 20 or more YOS; National Guard/Reserve: After 20 or more qualifying YOS and age 60 (or earlier with creditable active service).
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Defined benefit cost-of-living adjustment (COLA)
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Full COLA
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Defined benefit disability retired pay
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Disability rating (minimum 30%) capped at 75% or 2.0% multiplier
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Table 2: Defined Contribution14
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Defined contribution, DoD contribution rate
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1% automatic, plus up to 4% matching (Max=5%)
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Defined contribution, DoD contribution rate YOS
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1% automatic: Begins at 60 days of service through 26 YOS
Matching Starts after two TOS and continues through 26 YOS*
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Enrollment
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Automatic for members entering service on or after Jan. 1, 2018; automatic re-enrollment every January if member zeros out contributions
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Defined contribution member contribution rate
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3% automatic; full DoD match requires 5% contribution; default to Traditional TSP account, Lifecycle (L) Fund
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Defined contribution vesting
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Always vested in Service member contributions, DoD matching and any earnings. Vested in Service Automatic (1%) Contribution and any earning after two years in service
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Defined contribution forfeit of DoD contributions
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If you leave service before two years, you forfeit the Service Automatic (1%) Contribution and any of their earnings
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The Blended Retirement System
Congress approved a significant overhaul of the military retirement system in the National Defense Authorization Act for Fiscal Year 2016.7 Any service member joining the service after 1 January 2018 would automatically enroll in the BRS. In addition, service members with fewer than twelve years of service as of 31 December 2017 could choose to opt in to the BRS if they so desired. No one would be required to move from the legacy retirement system to the BRS if they wanted to remain under the legacy system.8
So, why is this new system called “blended”? The new system blends three approaches to retirement pay to reach the government’s desired balance of sustainable cost and availability to more service members.
Component 1: Defined Benefit
Beginning with the most familiar aspect to us all, the BRS preserved a defined benefit component, but it changed the equation used to calculate the percentage of service members’ base pay they will receive in retirement. Instead of multiplying years of service by 2.5%, a service member’s high-3 base pay will be multiplied by 2.0%.9 You may be thinking, half a percentage point is nothing! But, this half a percentage point really adds up. Let’s calculate what a Soldier with twenty years of service would receive in retirement. Twenty years of service multiplied by 2.0% is 40%. For an O-5 retiring at twenty years of service in 2019, retirement pay under the legacy retirement system would be about $4,500.00 per month, or $54,000.00 annually. With the same facts, retirement pay under the BRS would be about $3,600.00 per month, or $43,200.00 annually. That’s almost $11,000.00 per year that the service member is now seeking to make up for elsewhere in their retirement income planning process. But remember, the defined benefit portion of the BRS is still all-or-nothing. If service members serve any less than twenty years of military service, they do not receive any of the benefit we just described.
Component 2: Defined Contribution
That brings us to the second component of the BRS. Considering most service members do not reach the twenty-year mark to qualify for the defined benefit retirement, the BRS offers a defined contribution aspect that allows service members to walk away from military service with some government-provided retirement pay. Here, “defined” refers to the percentage of the service member’s salary used to grow the retirement pay. “Contribution” describes how the retirement pay initially accumulates—the service member and the government each contribute a defined amount to an investment account, here, the Thrift Savings Plan (TSP). Unlike the defined benefit option, where the government bears all the costs of the retirement and service members only contribute their years of service, this defined contribution method sees the cost burden shift to service members to invest a percentage of their salary, paying for a portion of their own retirement. Similar to many private employers under what is commonly referred to as the 401(k) system, the government also contributes to the investment account.
Under the BRS, service members are automatically enrolled to contribute 3% of their annual base pay to their TSP account, and they can raise and lower this percentage as they deem appropriate for their individual circumstances.11 When service members reach sixty days of active federal service, the Department of Defense (DoD) will begin contributing the equivalent of 1% of the service member’s base pay to the TSP.12 When service members reach two years of active military service, the DoD will begin matching the service member’s contributions into the account, up to a total of the DoD contributing the equivalent of 5% of the service member’s base pay.13 The first 1% contribution from the DoD is “free,” meaning it is not matching the service member’s contribution. From there, the more service members contribute, the more the DoD will contribute, up to a total of 5% from the government. This chart depicts the benefits to the service member of the matching contributions from the DoD.
Component 3: Continuation Pay
The final component of the BRS is a mid-career incentive bonus, or continuation pay. This component of the retirement system provides service members between eight and twelve years of service with a lump-sum continuation bonus in exchange for continued service.16 For active duty service members, including Active Guard Reserve service members, the bonus could be anywhere from two-and-a-half times one month’s base pay up to thirteen times one month’s base pay.17 For Reserve and National Guard service members, bonuses may range from half of one month’s active duty base pay to six times one’s month’s active duty base pay.18 Services may consider specific retention needs in determining the amount of the bonus offered to certain service members.19 For 2019, active duty service members will be eligible for continuation pay at twelve years of service and will receive two-and-a-half times one month’s base pay for all services.20 Reserve component service members in the Army will be eligible for continuation pay at eleven years of service and will receive four times one month’s active duty base pay.21 All other services’ reserve components will only receive one-half of one month’s base pay, and at twelve years of service.22 All service members accepting the continuation pay will incur an additional four-year service obligation.23
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Table 3: DOD Contribution & Match Amounts15
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Your Contribution
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DoD Auto Contribution
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DoD Match
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Total Contribution
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0%
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1%
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0%
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1%
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1%
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1%
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1%
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3%
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2%
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1%
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2%
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5%
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3%
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1%
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3%
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7%
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4%
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1%
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3.5%
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8.5%
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5%
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1%
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4%
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10%
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Table 4: Continuation Pay24
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Continuation Pay multiplier (months of basic pay)
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Active duty (including AGR and FTS): Between 2.5 and 13 times monthly basic pay.
National Guard/Reserve: Between 0.5 and 6 times monthly basic pay (as if on active duty)
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Continuation Pay Commitment
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Any member who elects to receive continuation pay will incur an additional service obligation of not less than three years, as determined by the member’s Service
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Continuation Pay
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Eligible for continuation pay when complete between eight, but no more than 12 YOS, calculated from Pay Entry Base Date (PEBD)
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Table 5: Lump Sum28
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Lump Sum Options
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May choose a lump sum of either 25% or 50% of the discounted present value of future retirement payments, in exchange for reduced monthly retired pay, until full Social Security retirement age, which for most is age 67
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Lump Sum Election
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Active duty: Lump sum election must be made no less than 90 days before retirement, National Guard/Reserve: No less than 90 days before receipt of retired pay
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Lump Sum Eligibility
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Active duty: At retirement after 20 or more YOS
National Guard/Reserve: Upon becoming eligible to begin receiving retired pay at age 60 (or earlier with creditable active service)
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Component 4: Lump Sum
A final aspect of the BRS is the decision whether to receive their military retirement pay as designed, i.e., a monthly annuity, or to receive either twenty-five or fifty percent of their military retirement pay as a lump sum payment upon retirement.25 This component of the BRS is only available to service members who reach twenty years of service and qualify for military retirement. Those who choose this option will see their monthly retirement checks decrease by twenty-five or fifty percent per month, respectively.26 The lump sum option is likely not the best choice for most retiring service members. Keep in mind that retirement pay is adjusted for inflation as the years go by, so the future raw dollar amount retirees will receive will gradually grow over time. Compare that to the lump sum option, where the lump sum payment will be discounted to the dollar’s present value. The DoD publishes the discount rates annually. The discount rate for retirements in 2019 is 6.81% and the discount rate for retirements in 2020 is 6.75%.27 Even if a service member has an eye on a down payment for a home or other similar large expense that may look like a good investment of the lump sum, most service members will see greater value in receiving a lifetime of inflation-adjusted monthly retirement annuity payments.
Why Leaders Need to Know
Why would JAG Corps leaders, most of whom will be under the legacy retirement system, need to understand the seemingly more complex BRS? A few facts demonstrate the growing relationship between leadership and financial readiness counseling.29 The American Psychological Association found in its annual “Stress in America” study that a majority of Americans experienced stress related to money, and specifically, retirement.30 Further, Blue Star Families, which researches the “unique challenges of military family life,” found in 2018, for the first time ever, financial issues was the top lifestyle stressor facing military Families.31 Financial stressors can impact every facet of service members’ lives, from familial relationship stability to military readiness. If not empowered to make the best decisions for themselves and their Families, service members will either suffer added stress and distraction from the mission, or they will leave money on the table, potentially adding stress to life after the military, or both. It is incumbent on all leaders to educate themselves about the BRS, not only for their own future planning, but to help lift up those around them to find the best plan to provide stability for their Families. The Army has identified this as a responsibility of leadership to the extent that it has created a pocket card for leaders to reference when they are inevitably approached with questions from members of their formations who are new to the military, new to investing, or both.32
Conclusion
Judge advocates, paralegal noncommissioned officers, warrant officers, and civilian paraprofessionals can all learn from the resources available on the BRS. The more service members educate themselves, even if the information is not directly applicable to that person’s retirement planning choices, the more persuasive the knowledge will become. Conversations about the BRS should occur at physical training, at leader professional development sessions, at the metaphorical water fountain, and beyond. Only by discussing these options and checking in on service members enrolled in the BRS to make sure they understand the consequences of their decisions will leaders truly demonstrate their care for the development of their teams. Leaders have the opportunity to make a lasting impact on not only the future lives of service members enrolled in the BRS, but potentially for generations to come, by instilling an understanding of and dedication to deliberate financial readiness in their formations and offices. Take the leaders’ pocket card, educate yourself, and empower those around you. You will not regret it. TAL
MAJ Cohen is an associate professor in the Administrative and Civil Law Department at The Judge Advocate General Legal Center and School, Charlottesville, Virginia.
Notes
1. Military Compensation, Dep’t of Def., https://militarypay.defense.gov/Pay/Retirement/ (last visited July 26, 2019).
2. Eligibility for Retirement Pay, Def. Fin. & Acct. Serv. https://www.dfas.mil/retiredmilitary/plan/eligibility.html, (last visited July 26, 2019).
3. Ryan Guina, Understanding Guard and Reserve Points – How to Earn Points, and How they Affect Your Retirement, The Military Wallet (Apr. 10, 2019), https://themilitarywallet.com/guard-reserve-points/.
4. Kristy Kamarck, Cong. Research Serv., RL34751, Military Retirement: Background and Recent Developments (2016), https://apps.dtic.mil/dtic/tr/fulltext/u2/1013561.pdf.
5. Estimate Your Retirement Pay, Def. Fin. & Acct. Serv., https://www.dfas.mil/retiredmilitary/plan/estimate.html (last visited July 26, 2019).
6. Military Compensation and Retirement Modernization Committee, Final Report (2015), https://docs.house.gov/meetings/AS/AS00/20150204/102859/HHRG-114-AS00-20150204-SD001.pdf.
7. National Defense Authorization Act for Fiscal Year 2016, Pub. L. No. 114–92 §§ 631–635., 129 Stat. 726, 842-855.
8. Office of Financial Readiness, A Guide to the Uniformed Services Blended Retirement System (2017), https://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/A%20Guide%20to%20the%20Uniformed%20Services%20BRS%20December%202017.pdf?ver=2017-12-18-140805-343.
9. Id.
10. Id.
11. Id.
12. Id.
13. Id.
14. Id.
15. The “Match”—Taking Advantage of Free Money, Official Website Ass’n Mil. Banks Am., https://www.ambahq.org/four-pillars-of-financial-readiness/future-planning/the-match-taking-advantage-of-free-money/ (last visited July 25, 2019).
16. Office of Financial Readiness, Continuation Pay (2017), https://militarypay.defense.gov/Portals/3/Documents/ BlendedRetirementDocuments/Fact%20Sheet-Continuation%20Pay.pdf.
17. Id.
18. Id.
19. Id.
20.Office of Financial Readiness, Continuation Pay Rates—2019 (2019), https://militarypay.defense.gov/Portals/3/ Documents/BlendedRetirementDocuments/2019-01-07.pdf?ver=2019-01-16-092802-143.
21. Id.
22. Id.
23. Id.
24. Office of Financial Readiness, A Guide to the Uniformed Services Blended Retirement System (2017), https://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/A%20Guide%20to%20the%20Uniformed%20Services%20BRS%20December%202017.pdf?ver=2017-12-18-140805-343.
25. Office of Financial Readiness, Lump Sum Option (2017), https://militarypay.defense.gov/Portals/3/Documents/ BlendedRetirementDocuments/Fact%20Sheet-Lump%20Sum.pdf?ver=2017-12-08-134755-853.
26. Id.
27. Memorandum from Acting Deputy Assistant Secretary of the Army to Deputy Assistant Secretary of the Army for Military Personnel and Quality of Life, et al., subject: Blended Retirement System Lump-sum Government Discount Rate for 2019, 30 May 2018, https://militarypay.defense.gov/Portals/3/Documents/ BlendedRetirementDocuments/CY19%20Lump%20Sum%20Discount%20Rate%20(Signed).pdf?ver=2018-05-31-084423-813; Memorandum from Acting Deputy Assistant Secretary of the Army to Deputy Assistant Secretary of the Army for Military Personnel and Quality of Life, et al., subject: Blended Retirement System Lump Sum Government Discount Rate for 2020 (29 May 2019), https://militarypay.defense.gov/Portals/3/Documents/ BlendedRetirementDocuments/CY20%20Lump%20Sum%20Discount%20Rate%20Memo.pdf?ver=2019-07-09-220124-717.
28. Office of Financial Readiness, A Guide to the Uniformed Services Blended Retirement System (2017), https://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/A%20Guide%20to%20the%20Uniformed%20Services%20BRS%20December%202017.pdf?ver=2017-12-18-140805-343.
29. Office of Financial Readiness, Leader Card (2017), https://militarypay.defense.gov/Portals/3/Documents/ Blended%20Retirement/FINRED-LeaderCard-31Aug17-Final.pdf?ver=2017-09-07-101041-543.
30. American Psychological Association, Stress in America The State of Our Nation (2017), https://www.apa.org/images/state-nation_tcm7-225609.pdf.
31. Blue Star Family et al., Military Family Lifestyle Survey Comprehensive Report (2018), https://bluestarfam.org/wp-content/uploads/2019/03/2018MFLS-ComprehensiveReport-DIGITAL-FINAL.pdf.
32. Office of Financial Readiness, Leader Card (2017), https://militarypay.defense.gov/Portals/3/Documents/ Blended%20Retirement/FINRED-LeaderCard-31Aug17-Final.pdf?ver=2017-09-07-101041-543.