As Veteran’s Day is fast approaching our team at Ascend Advisory would like to thank our veterans and service members for their sacrifice and time given to our great nation. They are America’s finest; thanks to them we can live with the freedoms we enjoy daily. Our team would also like to thank our very own veterans, Jason Daron, Financial Advisor, and Brad Shook, Financial Advisor, who both served in the US Army and Ohio Army National Guard. We know that retirement planning from within and outside the military can be daunting; however, our team is here to help.
While there are many advantages to serving, this article will primarily focus on one of the most significant benefits: the retirement plan. While the legacy pension is well known, the National Defense Authorization Act for Fiscal Year 2016 created a new retirement system for armed forces members. This system, called the Blended Retirement System (BRS), combines the pension, a defined benefit, also known as the “High-3” system with a defined contribution benefit called the Thrift Savings Plan (TSP). The primary difference between the BRS and the legacy “High-3” system is that the BRS adjusts the years of service multiplier from 2.5% to 2% for calculating monthly retired pay. In addition, the BRS includes automatic contributions of 1% of base pay and government matching contributions of up to 5% to a service member’s TSP account.
While the change in pension benefits may sound like a decrease in benefits paid, it actually increases benefits rewarded to most veterans as the new plan greatly increases eligibility. Before the BRS, fewer than 20% of service members who joined the military received retirement compensation while under the BRS about 85% of members will receive benefits. In order to receive compensation from the defined benefit or pension portion of the plan, service members will still need 20 years or more of service. If the service member is in the National Guard or Reserve, they will need to have served 20 years of qualifying years and generally be at least 60 years old before the pension is paid. To calculate the monthly pension benefit a service member should multiply years served by 2% and then multiply that number by the average of the highest 36 months of base pay. For example, 20 x 2% x 8,000 = a monthly benefit of $3,200. This means the longer a veteran serves, the larger their pension will be. An important aspect of this benefit is that it comes with an annual cost of living adjustment (COLA) based on changes in the Consumer Price Index.
The second part of the BRS is the Thrift Savings Plan (TSP). The TSP is a defined contribution plan that offers the same types of savings and tax benefits that many private corporations offer their employees such as the 401k. Similar to a 401k, there is a vesting schedule. All contributions made by the service member are 100% vested and all contributions made by the government vests fully after 2 years of service. As mentioned earlier, there is up to a 5% match on contributions into the account, and service members can contribute as much as $22,500 in 2023 with a $7,500 catch-up provision if the service member is 50 or older. These contributions can be invested in either a Roth or Traditional component similar to a 401k.
An important note for guardsmen and reservists is that even if they have a civilian workplace retirement plan they are generally subject to the same total annual deferral limits on a cumulative basis set by the IRS. This means a reservist would not be able to put $22,500 into their TSP and another $22,500 into a 401k. A TSP account is also limited by its investment options compared to most Individual Retirement Accounts (IRAs). The TSP offers only two investment strategies, Lifecycle funds, and Individual funds. Life cycle funds are similar to retirement date allocation funds commonly found in retirement plans while there are five individual funds that can be selected. Upon retirement or separation of service, service members are able to transfer and/ or rollover their TSP into other retirement plans. Service members and veterans are encouraged to seek professional financial guidance when selecting from these options.
There are a few other components of the BRS that should be considered. Under the BRS, service members may be eligible to choose to receive a portion of their retirement pay in a lump sum. This lump sum, however, is fully taxable and cannot roll over into another retirement plan. Service members may choose to receive 25% or 50% of a portion of their retirement payments upfront or over the course of 4 years at the cost of reducing their monthly benefit. All benefits will be restored however at the age of full social security retirement, which for most individuals is 67. Another key note about the BRS is that generally speaking, there is no reduction of Social Security benefits because of military benefits. Service members pay social security taxes throughout their military career and even if after they separate from service or retire and find employment in the private sector, veterans are fully entitled to social security benefits. Exceptions can exist if the service member or veteran finds other employment in the public sector due to offsets just like everyone else.
This article has covered many facets of the BRS however there are still many other aspects to a successful retirement and life after the military. If you or someone you know is currently serving in the military, has separated from service, or retired and has questions about their retirement or investment plan we are here to help. Our team at Ascend Advisory cannot thank the members of the military enough and truly appreciate all they have done for our country. Thank you.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Ascend Advisory Group is a separate entity from WFAFN.