How Does Military Retirement Pay Work?

Among the benefits that come with military service, military retirement pay is often at the top of the list. Even better, military retirements enjoy protection from inflation through annual Cost of Living Adjustments (COLAs). Let’s look at what makes up military retirement pay. Then we’ll cover why it’s important, and how to make the most of these benefits if you’re considering a career in the military. 

Get to Know Military Retirement

In 2018, the United States military underwent a significant transformation in its approach to military retirement pay planning. This led to the introduction of the Blended Retirement System (BRS). Transitioning from the traditional 20-year cliff-vesting pension system marked a shift towards a more flexible military retirement pay framework. Understanding the this new system can feel overwhelming, but it’s essential for service members as they navigate their career paths and plan for their financial futures.

For decades, the military’s retirement system revolved around the concept of a 20-year cliff-vesting pension. With this option, service members became eligible for retirement benefits after completing 20 years of service. While this system provided a stable and guaranteed source of income for career personnel, it also posed challenges for those who left the military before reaching the 20-year mark, offering no retirement benefits.

Recognizing the need for a more inclusive and adaptable retirement system, Congress enacted the National Defense Authorization Act (NDAA) of 2016, paving the way for the implementation of the Blended Retirement System.

The Blended Retirement System

The Blended Retirement System introduced several fundamental changes aimed at modernizing military retirement pay and planning. 

Defined Benefit: If you retire from active duty at 20 years under the BRS, you receive 40 percent of the average of your highest 36 months of basic pay as your defined benefit. This percentage increases by 2 percent for each additional year of service. That pay will start immediately after your retirement and will be a monthly payment for the duration of your life.  

Defined Contribution Component: Unlike the traditional pension system, the BRS incorporates a defined contribution component. This is called the Thrift Savings Plan (TSP), a retirement and savings plan. The plan offers Federal employees the same type of tax benefits and savings as a 401K. Under the BRS, after 60 days of service, service members are automatically enrolled in the TSP. With that they begin receiving government matched contributions for their own contributions, up to five percent of their pay.  For example, when you contribute 2% of your pay, there is an automatic 2% contribution match combined with the 1% automatic contribution. That total now goes to 6%. 

Continuation Pay: To incentivize retention beyond the initial years of service, the BRS offers a one-time Continuation Pay bonus. This option is offered to service members who commit to serving an additional period of service. The bonus is payable upon reaching specific career milestones, typically around the 12-year mark.

Portable Retirement Benefits: One of the most significant advantages of the BRS is its portability. Service members who leave the military before reaching 20 years of service can still retain their TSP accounts and the government matching contributions. This provides a valuable retirement savings vehicle regardless of their length of service.

Financial Literacy Training: Recognizing the importance of financial preparedness, the BRS includes mandatory financial literacy training for all service members. This training equips personnel with the knowledge and tools necessary to make informed decisions about their military retirement pay, planning, investment strategies, and overall financial well-being.

Opt-In and Opt-Out Flexibility: Service members entering the military after January 1, 2018, are automatically enrolled in the BRS. Those with prior service have the option to opt into the new system or remain under the legacy pension system. This flexibility allows individuals to choose the retirement plan that best aligns with their career goals and financial objectives.

The Transition to Military Retirement

To make the most of the new framework for military retirement pay, service members should consider the following steps:

Educate Yourself: Take advantage of the resources and training available. It’s important to understand the nuances of the BRS, including its impact on retirement benefits, eligibility criteria, and available options.

Assess Your Goals: Evaluate your career aspirations, financial goals, and long-term plans. Then, determine whether the BRS aligns with your objectives. Consider factors such as length of service, likelihood of reaching the 20-year mark, and appetite for investment risk.

Utilize Tools and Calculators: Use online calculators and retirement planning tools provided by the military. These can help you estimate the potential benefits of the BRS compared to the legacy pension system. These tools can help you make informed decisions about opting into or remaining under the new retirement framework.

Seek Guidance: Consult with financial advisors, counselors, or peers who are knowledgeable about the BRS. Their expertise can help you navigate the complexities of military retirement pay and make informed choices.

The Bottom Line

When it comes to military retirement pay and planning, military personnel have some of the best options compared to other industries. The introduction of the BRS has brought flexibility and empowerment to service members, allowing them to tailor their retirement strategies to align with their goals. It’s crucial to understand your choices, set goals, and calculate your retirement pay. By staying informed, you can confidently pave the path to a secure retirement.