Retirement benefits are one of the greatest perks of joining the military.
There was a time when those benefits were only available to “lifers” – those who spent at least 20 years in the service. But in 2018, the U.S. transitioned to the blended retirement system (BRS). Now, most military service members can walk away with some sort of retirement help.
But as you decide whether to join the military or plan your financial future post-service, it’s essential you understand your military retirement benefits.
The Old Military Pension System
Until 2018, service members were eligible for a pension – lifetime monthly paychecks – with at least 20 years of qualified active-duty service. The government based your benefit amount on a multiplier of your in-service paycheck: For every year of service, the military added another 2.5% of your active-duty pay to your pension payments.
Members who joined the service before 1980 followed the final-pay pension model. The government based their pension on their paycheck amount at the time they retired. For example, an officer who retired after 25 years would collect monthly pension checks equivalent to 62.5% – 25 years multiplied by 2.5% – of their monthly earnings at the time they retired.
After 1980, the rules changed slightly. Instead of basing their pension on their paycheck at the time of retirement, the government based benefits on the average of their highest 36 months of paychecks throughout their career. But the calculation remained the same: 2.5% multiplied by the number of years served.
It was known as the “high 36” or “high three” pension model. Using the same example of a service member who retired after 25 years, if their highest three years of income involved two years (24 months) at $4,000 per month and one year (12 months) at $4,150 per month, they would receive 62.5% of $4,050 per month in retirement, or $2,531.25:
[(24 x 4,000) + (12 x 4,150) / 36] x 62.5%
If the service member worked only a fraction of a year, they used prorated increments of full months worked. Someone who retired after 25 years, six months, and three weeks got credit for 25.5 years.
In 1986, the Department of Defense (DOD) added a “REDUX” option under which service members could take a one-time bonus after 15 years of service. If accepted, it reduced service members’ monthly pension payments in retirement.
The old pension system worked great if you stuck around for at least 20 years to become vested in it – which only 17% of service members did, according to the military.
The New Blended Retirement System
To provide retirement plan benefits for its shorter-serving members without strapping itself with indefinite pension obligations, the DOD created a new system.
The BRS went into effect on Jan. 1, 2018, for new service members. Existing personnel who had served less than 12 years as of Dec. 31, 2017, had the choice to opt in to the new BRS before the end of 2018.
The BRS combines both the traditional defined benefit (pension) system with a more modern defined contribution plan.
Changes to the Pension Plan
The DOD left the high 36 pension plan largely intact with one significant change. Instead of multiplying years of service by 2.5% to arrive at the monthly benefit, they now multiply it by 2%.
So, that officer who served 25 years can now expect a monthly retirement benefit of 50% of their active-duty paycheck rather than the 62.5% they could expect previously. The basis is still the average of the 36 highest-paying months of their military career.
In other words, retired military personnel can expect a smaller monthly pension payment. But the news isn’t all bad for retiring service members.
The Thrift Savings Plan
Serving military members now get access to a tax-deferred retirement account called the Thrift Savings Plan (TSP). It works like a 401(k) account, right down to the contribution limits – $19,000 per year in 2019 for employees under 50, with an additional $6,000 allowed for those 50 and over. As with standard 401(k) accounts, military service members can choose investments among a limited set of options.
The TSP even offers a Roth option, allowing service members to pay taxes on contributions now and avoid them later on withdrawals.
When new service members enroll, the DOD sets a 3% voluntary contribution rate by default. Members can opt out of it if they prefer.
But interestingly, the military pays a 1% contribution almost immediately for new hires, starting within 60 days of enrollment. After two years, service members become eligible for matching contributions from the DOD.
The DOD matches up to 3% dollar for dollar on top of the 1% already paid. For employees who contribute between 3% and 5% of their paycheck, the DOD matches 50 cents on the dollar.
Therefore, a service member who contributes 3% of their paycheck can expect another 4% total contribution from the DOD – 3% matching plus the standard 1%. A service member who contributes 4% of their paycheck can expect a 4.5% total contribution from the DOD, and those who contribute 5% can expect the maximum 5% total DOD contribution.
Upon leaving the military, personnel can roll their TSP account into a traditional or Roth IRA, just like a regular 401(k).
The DOD threw out the old REDUX option in favor of a combination of two new options: continuation pay and a lump-sum option.
Continuation pay serves as an incentive to keep service members in the military longer. The DOD pays a one-time bonus to service members nearing the middle of their careers if they commit to at least another four years of service.
And by the time those four years are up, suddenly the 20-year mark for full pension vesting looks a lot closer.
While the specifics of continuation pay vary by branch and position, it typically becomes available after 8 to 12 years of service. The bonus amount varies as well. But for active-duty service members, it falls between 2.5 and 13 times their typical monthly paycheck. For reserve service members, the bonus falls between 0.5 and 6 times monthly pay.
The other way the BRS replaced the REDUX option is by offering a lump-sum payout at retirement.
Upon retiring with at least 20 years of service, military personnel can opt for a lump sum in exchange for lower monthly payments until they reach the full Social Security retirement age, which is usually 67. At that time, they become eligible for full military pension benefits again.
Retirees have two options: a 25% and 50% option discounted to the present value based on rates published by the DOD each year. If they opt for the 25% lump sum, they receive 75% of their typical monthly retirement pay until full retirement age. If they take the more substantial 50% lump payout, they receive only 50% of their typical retirement paychecks.
In taking the lump sum, retiring personnel can choose a one-time payout or several annual payouts spread over a maximum of four years.
While the lifetime value of the standard monthly benefits is higher, some retirees would rather take the cash and invest it for themselves. For example, they can use it to buy a home to retire in or fund a business.
Disability Retirement Benefit Plan
Wounded service members who exit the military without reaching 20 years of service sometimes receive a separate set of benefits.
Depending on the circumstances, the government may separate (completely discharge) or retire them.
The military can recall retired military personnel to service if needed. The military classifies retired personnel as Category I, II, or III, based on their age and any physical disabilities. They’re least likely to recall Category III retired personnel: older retirees and those with disabilities.
The government can separate service members without benefits if their disability resulted from preexisting conditions, was not permanently aggravated by their service, and the member has served less than eight years. Additionally, disabilities suffered while disobeying orders or away without leave can also result in not being eligible for benefits.
If a member has served longer than eight years, the government can medically separate them with severance pay, known as medical retirement.
Severance pay typically involves a one-time payment of two months’ pay for every year served with a maximum benefit of 24 months of pay. It generally applies for members who have a disability rating under 30%, according to the Department of Veterans Affairs Schedule for Rating Disabilities.
Service members with a disability rating classified as 30% or higher or those with more than 20 years of service qualify for permanent disability retirement. These benefits use a multiplier of 2.5% of your highest 36 months of pay with a minimum benefit of 50% of that pay.
Also, Veterans Affairs (VA) disability benefits are entirely separate from these DOD benefits. Retired military personnel can apply separately to the VA for disability benefits. But if granted, they must surrender their DOD benefits.
Cost-of-Living Adjustments for Pensions
One of the best perks of armed forces retirement benefits is that they tie monthly payments to the effects of inflation. The buying power of the monthly pension rises along with the cost of living over time.
The amount adjusts annually based on the consumer price index. So, as costs like rent, gas, and milk go up, recipients receive more money in benefits. The Social Security Administration (SSA) issues the cost-of-living adjustment for the following benefits:
- Social Security benefits
- Supplemental Security Income (SSI)
- Military retirement pay
- VA disability rates
- Veterans pension benefits
- Federal service retirement pay
- Survivor benefit annuities
- Some Medicare and Medicaid benefits
- Some state and federal housing and food programs
Unfortunately, to slow the rate at which it’s outspending its revenue, the SSA has gradually diluted benefits for several decades now. A 2017 study by The Senior Citizens League found that from 2000 to 2017, the buying power of Social Security benefits dropped by 30%.
Health Care for Retired Military Personnel
While serving as active duty, service members get full health coverage under Tricare. When they retire, they can stay on a Tricare plan. But they usually have to pay for it.
There are three levels of Tricare available to retired military personnel who are not yet eligible for Medicare:
- Tricare Prime
- The U.S. Family Health Plan
- Tricare Select
Tricare Prime offers a managed care program similar to a health maintenance organization, commonly known as an HMO. It’s what active-duty personnel and their families generally receive, and retired service members can continue using it. But they must pay an annual enrollment fee plus per-service copays. Participants receive an assigned primary care manager who refers them to specialists as needed.
Military retirees with families can participate in the U.S. Family Health Plan, a subset plan within Tricare Prime. It’s only available in six regions and comprises a network of community nonprofit health organizations. If available, it makes for an affordable family option for health coverage with low annual enrollment fees and copays.
Tricare Select is a fee-for-service insurance plan under which participants can schedule an appointment with any Tricare-authorized provider without a referral. It comes with an annual deductible and cost sharing for services used. It’s better suited to retirees who live in an area with no Tricare Prime health care providers or who have additional health insurance from another source.
After reaching 65 and becoming eligible for Medicare, retired service members can utilize Tricare for Life, a Medicare supplement. All retired military personnel eligible for Medicare parts A and B automatically qualify for Tricare for Life, which offers wraparound coverage. When using an authorized provider, Tricare for Life picks up Medicare’s uncovered balance.
Military personnel give a great deal of themselves to the service. Fortunately for them, the service gives something back in retirement.
The new blended retirement system allows service members to immediately start saving pretax for retirement and take their retirement savings with them upon exiting the service. It’s a system that rewards savings, with a generous 5% maximum employer-matching contribution.
Career service members still collect a pension, even as they can now take advantage of the same tax-sheltered retirement savings accounts as civilians with a 401(k). And continuation pay and lump-sum options add incentives and flexibility for longer-serving personnel.
Retired military personnel also get favorable health insurance plans through Tricare, with relatively low-cost options. All in all, the U.S. military offers retirement benefits rarely seen in the private sector.