Hundreds of thousands of U.S. armed forces personnel will soon experience big changes to the way their retirement benefits are earned and distributed. The crux of these military retirement changes is a shift away from all-or-nothing pension-style plans toward a more portable 401(k)-style plan for new service members.
A provision of the national defense budget signed into law in 2016 will end the present all-or-nothing retirement system as of Jan. 1, noted Michael Meese, a retired brigadier general who serves as executive vice president and secretary of the American Armed Forces Mutual Aid Association.
Currently, military retirees are paid 50% of their base pay after 20 years of service. If they remain in the service for 35 years, they can receive 87.5% of their pay in retirement.
Those are very generous retirement benefits you don’t see too often now that pensions have grown less commonplace. But they do nothing for the four out of five service members who don’t make it to the 20-year mark in the military.
The new system “provides retirement savings for virtually everyone who joins the military, not just the less than 20% who stay to a 20-year retirement,” said Meese. “Right now it’s all or nothing. If you don’t stay 20 years, you have nothing for retirement pay.”
Under the updated retirement program, people who serve in the military for as few as two years will receive retirement benefits through 401(k)-type investments in government Thrift Savings Plan accounts. The defined-contribution plan provides an automatic account contribution equal to 1% of annual pay, but Meese noted that the military will match individual contributions of up to 5% of one’s salary.
Meese calls the new system a blended retirement plan, since it combines components of a pension with savings and investment components. The government’s Thrift Savings Plan — originally for civilian employees only — provides the same type of savings and tax benefits that many private businesses offer their workers.
At least 85% of those serving in coming years will leave the military with retirement benefits, compared with less than 19% under the old system, reported Time Magazine. And the changes will help service members who serve honorably but wouldn’t qualify for a pension under the old program, said John Cooney, a financial planner based in Maine.
Military retirement changes – and choices
Longtime military service members may be worried about losing those valuable pension benefits. The good news is, the new system will preserve the retirement plans of current active duty troops and retirees, said Meese.
Current military members with more than 12 years of service automatically will remain a part of the old pension-style system as well, while people who join the military after Jan. 1, 2018, will automatically be placed into the new plan.
Service personnel with less than 12 years in the military as of Jan. 1, meanwhile, have a choice to make: They will have a year to decide between remaining in the old pension-style system or moving into the new one.
Preserving that choice for these individuals is important, because the old retirement program provides more generous benefits than what’s envisioned under the new system — if only to those who make it to the 20- or 35-year mark.
By electing to move into the new system, service members guarantee that they can leave the service with some benefits, even if they aren’t able to serve for the full two decades required for pension pay.
If they decide to stay in the old system, they would reap more benefits if they make it to full retirement — but risk being left empty handed if unforeseen circumstances force them to leave the military before they reach the 20-year mark.
Saving money for Uncle Sam
Although the new system will extend benefits to more people, it’s expected to save the government about $2 billion annually, Meese added. That’s because the pensions for people who stay in the military for 20 years or longer will be smaller under the new system.
Traditional pension plans provide income for life, and recipients don’t need to worry about how their funds are invested. Under the new blended retirement plan, service members must take on greater responsibility for saving a percentage of their salaries and making sound investment choices – much like private-sector employees contributing to and managing their 401(k).
Meese holds that this is a positive development. The new system will empower service members to take charge of their financial futures, he said. “There will be increased awareness of economic conditions.”
One of the best things about the new retirement system is that it yields a retirement benefit that is portable. According to The Hill, when service members retire from the military, they’ll be able to roll over their government benefits into civilian retirement plans. This is expected to help with armed forces recruitment, since not everyone who enlists wants to have a long military career.
Making a decision
Military personnel who have the choice of remaining in the current system or shifting to the new one should review their options carefully before making a decision, said Cooney.
If they decide to go with the new savings and investment program, “they should opt-in earlier rather than later, so that they can start to immediately begin receiving the government contributions,” he said.