The new retirement benefit for Massachusetts service members includes cash contributions to a Thrift Savings Account, is a major boost for the vast majority of the force that serves for six or eight or ten years but never reaches the 20-year mark to become eligible for a lifelong pension.
Your new retirement benefits: The biggest change in decades
Now and in the future, all service members entering the military are automatically enrolled in the new Blended Retirement System, or BRS. Only those with service prior to 2018 remain in the legacy, all-or-nothing 20-year pension plan.
BRS is a blend that combines traditional monthly retirement checks of the legacy system with some new features that allow military members to take some government benefits with them even if they don’t serve up to the 20-year mark to qualify for a retirement pension. Historically, only 19 percent of active duty service members and 14 percent of Guard and Reserve members serve long enough to get retirement benefits.
In 2018, more than 400,000 eligible service members opted in to the new BRS, out of the 1.6 million currently serving active duty and reserve troops who were eligible to make a choice between the legacy system and the new system.
Whether you opted in or are part of the new crop of service members automatically enrolled in BRS, you need to pay attention to the key elements of the BRS, because it’s a critical part of your retirement planning and financial future:
Under the new benefit, you’ll get the traditional monthly retirement pay for life if you serve for 20 years or more and earn a full retirement from the military. But it’s 20 percent less than what it is under the legacy system.
If you retire from active duty with 20 years of service under BRS, you’ll receive 40 percent of the average of your highest 36 months of active duty pay as your retirement pay, and that percentage increases by 2 percent for each additional year of service. The retirement pay has an annual cost of living adjustment. (The legacy benefit provided 50 percent of your highest 36 months of pay.)
The Thrift Savings Plan, or TSP, is like a private-sector 401 (k) retirement plan savings account. The TSP has been available to service members for years, but there was no government match until now. The money you contribute to your TSP is always yours. You own the DoD contributions after you serve at least two years.
Here’s how it works: After you have served for 60 days, a TSP account will be created, and automatic deductions of 3 percent of your basic pay start going to your TSP. (You can change that amount, but by law, you will automatically be reenrolled at 3 percent each year.) DoD kicks in 1 percent automatically, but will contribute up to an additional 4 percent of base pay to match your contributions.
So if you put in 5 percent of your base pay to your TSP, DoD also puts in 5 percent. Making your 5 percent contribution to your TSP is key to getting the maximum benefit out of BRS. BRS participants contributed more than $500 million to TSP accounts in 2018, and DoD added another $300 million in government automatic and matching contributions to those members’ TSP accounts.
While service members should contribute at least 5 percent of their basic pay to get the full DoD match – and not leave money on the table – everyone can contribute more, up to a limit of $19,500 in 2020. For those with civilian retirement accounts such as a 401(k) as well as a TSP, the contribution limits apply to the combined amounts.
The services will make a one-time payout of continuation pay when the service member reaches 12 years of service. To receive that continuation pay, which is similar to a retention bonus, you must commit to serve an additional four years.
Active-duty members get 2.5 times their monthly basic pay as of the first day of their 12th year of service. Reserve and Guard members get 0.5 times their monthly pay – except for those in the Army Reserve and Guard, who get 4 times their monthly pay. It’s the prerogative of the services to adjust that multiplier to meet their needs, such as retention. Continuation pay is taxable, but you can also contribute all or part of it to your TSP. You can receive it in a lump sum or, to help reduce your taxes, you can opt to receive continuation pay in four equal installments over four years.
Lump sum retirement pay option
When you retire under BRS, you can request an up-front lump-sum payment of part of the retirement pay you’d receive before you reach full Social Security retirement age, which for most people is age 67. You can receive either 25 percent or 50 percent of its “discounted present value.” That means the amount is cut by a discount rate published yearly. For 2020, it’s a 6.75 percent reduction.
If you take the lump sum, the retirement checks are reduced by either 25 percent or 50 percent, depending on what percentage you received, until you reach age 67. At that point, your retirement check returns to its full amount. The lump sum is taxable; retirees can choose to receive the money in up to four installments over four years to reduce the tax burden.
TIP: To get the most out of your BRS benefit, make sure you’re contributing at least 5 percent to your Thrift Savings Plan account, to get the matching DoD contribution of up to 5 percent. Why turn down free money?
Should you be in the midst of a Massachusetts military divorce or contemplating divorce, contact the Law Offices of Renee Lazar at 978-844-4095 to schedule a FREE one hour no obligation consultation.