If you’ve served your country honorably or are considering doing so, you deserve to retire with dignity. But navigating the terrain of the active duty retirement system can be tough. Ultimately, the rules depend on when you joined the service. You may be eligible to collect a monthly pension check, contribute toward a thrift savings plan, earn a bonus or all of the above. This article will break down the military retirement system to help you make the best retirement decisions.
How Do Military Retirement Plans Work?
Currently, there are four different retirement plans for active duty members of the U.S. military. The date you joined the service determines which one you fall under. In general, each provides a monthly pension check equal to a percentage of your monthly base pay. However, you can leave the military much sooner and take some retirement benefits with you as a result of recent changes to the law.
We provide an overview of the different plans below.
Military Retirement Plans
|Date Entering the Service
|Military Retirement Plan
|Before September 8, 1980
|Final Pay Retirement System
|Between September 8th, 1980 and August 1986
|High 36 Retirement System
|Between Aug. 1986 and Dec. 31, 2017
|Choose High 36 or Career Status Bonus (CSB)/REDUX
|After Dec. 31, 2017
|Blended Retirement System (BRS)
Next, we’ll explain how each of these retirement plans works. Feel free to skip to the one that applies to you.
Final Pay Retirement System
In this system, your retirement benefits will equal your final monthly base pay multiplied by 2.5% for every year you’ve served. In other words, you’d get 50% of your base pay if you retire after 20 years of service.
This system works similarly to the Final Pay retirement plan. However, you calculate your monthly benefits by taking the average base pay for the three years (36 months) when your base bay was highest. You take that number and multiply it by 2.5%. You’d still get 50% of your “High 36” base pay if you retire after 20 years of service. That translates to 100% if you do so after 40 years of service.
This military retirement plan can get a bit complicated. So let’s start with the basics. This system keeps some components of the High 36 plan. So you calculate your pension pay based on the average of your base pay for the 36 months when they were highest.
The CSB/REDUX plugs in a Career Status Bonus (CBS) when you reach your 15th year of service. This bonus translates to $30,000 before taxes. However, this option would also reduce your monthly pay. Hence the REDUX bit.
Here’s how that works. Instead of calculating your base pay using 2.5% for each year of service, you’d use 1% for each year of service less than 30. Of course, this reduction does not apply if you’ve served for more than 30 years.
It’s important to note, however, that this plan has a subtle difference that can have a major impact on your savings.
All of the military retirement plans undergo an annual cost of living adjustment (COLA) based on the national Consumer Price Index (CPI). But this plan is adjusted by the CPI minus 1%. In other words, if someone on the High 36 plan sees a COLA increase on his or her retirement check around 1.70% one year, the person on the CSB/REDUX would see an increase of just 0.70%.
In addition, the 1% reduction disappears once you reach age 62, so you’re essentially on the High 36 plan at that point.
Blended Retirement System (BRS)
The Blended Retirement System (BRS) is the youngest of the military retirement plans. In fact, it went into effect on January 1, 2018. This plan combines components of the other plans and throws a thrift savings plan (TSP) into the equation.
A TSP is a tax-advantaged retirement plan that works very similarly to a 401(k) plan, except it’s available to federal employees and members of the armed forces. The government opens an account under your name. Moving forward, you can contribute toward your choice of investment funds built with stocks and government-backed bonds.
Under this plan, your monthly pension will equal a percentage of your final base pay. That percentage would be 2% times the number of years you served. So if you leave the service after 20 years, your monthly pension benefits would be 40% of your final base pay.
But you’d also have a TSP to turn to. After 60 days of service, the military will open a TSP account in your name. You’d also get an automatic government contribution equal to 1% of your basic pay transferred into the account each month. In addition, 3% of your own basic pay would be contributed toward your account each month.
You can adjust that percentage anytime, or stop contributing altogether. But you’d miss out on any additional government matches. After two years, the military will match your contributions up to 5%. At that point, you’re fully vested in the plan. So even if you leave the service, the TSP comes with you.
Generally speaking, you can begin making penalty-free withdrawals from your TSP once you reach age 55. But even if you retire from the service before reaching that age, your TSP is yours to keep.
In addition, the military may also provide you with “continuation pay” after 12 years of service. This would be a bonus depending on your branch of service and other factors. Speak to your personnel office for complete details.
Blended Retirement System Lump Sum Option
Those under the BRS have options when it comes to how they want to collect the pension portion of their retirement benefits. You may be able to take 25% or 50% of your gross estimated retirement pay in return for smaller monthly payments moving forward.
So if you take the 25% lump sum, your monthly payments will be 75% of what your normal retirement pay would have been.
However, the rate goes back to normal once you reach full Social Security retirement age. For most people, that’s age 67.
Following a career of service in the armed forces, no matter how short or long, should mean you get to retire with peace of mind. The military retirement system aims to do that, but it can be complex to comprehend. So it’s important to take a close look at which of these plans may best suit you. Be sure to weigh the pros and cons of each.
Tips on Achieving Your Retirement Goals
- If you’re a veteran looking to transition into civilian life, some places may be more comfortable than others. Check out our study on the best states for veterans.
- As you can see, military retirement plans can be quite complicated. But you don’t have to go in alone. A financial advisor can help you make the best decisions regarding matters like TSP funds and deciding when the right time to retire from the service can be. You can use our financial advisor matching tool. It links you with up to three local advisors who can help. The tool also provides you with their profiles. So you can evaluate their credentials before deciding to work with one.
Photo credit: ©iStock.com/asiseeit, ©iStock.com/DanielBendjy, ©iStock.com/videodet