retirement

Make the Most of the New Military Retirement Plan

The government is offering a new retirement option so that service members who leave the military before qualifying for a pension can still receive some benefits.

Question: I’m in the Navy, and I chose to enroll in the military’s new blended retirement system last year. How can I make the most of the new plan?

Answer: To get the most out of the new retirement system, make sure you contribute enough to the federal Thrift Savings Plan to qualify for a matching contribution—something the old system doesn’t offer—from the Department of Defense. You can also boost your retirement savings the longer you stay in the Navy.

Under the new blended retirement system, you—or anyone who joined the military in 2018 or later—will receive a smaller lifetime pension than you would under the old system. You’ll receive an annual pension of at least 40% of your base pay if you stay for 20 years, or 60% if you stay for 30 years. But you’ll also receive extra money in your Thrift Savings Plan, the tax-advantaged retirement-savings plan for members of the military and federal employees. Any member of the military can contribute to the TSP, but people who are covered by the blended retirement system will receive a matching contribution from the Department of Defense. The department will automatically contribute 1% of your base pay to the TSP after 60 days of service, and it will match your TSP contributions for the next 4% of your pay, which can continue for up to 26 years of service. You can keep the entire balance in the TSP—including the government contributions—as long as you remain in the military for at least two years.

Because the TSP benefits are matching contributions, people in the blended retirement system need to take some extra steps to receive the maximum—specifically, you have to contribute 5% of your pay each year to the TSP to receive a full match from the Defense Department. Try to contribute at least enough money to receive the full match each year. After all, that’s free money that can help you boost your savings. And if possible, it’s a good idea to invest even more in this tax-advantaged retirement-savings plan.The government offered a new retirement plan after finding that fewer than 20% of service members stayed long enough in the military to qualify for a pension. Under the traditional retirement system, service members receive a lifetime income of at least 50% of their base pay if they remain in the military for at least 20 years, and up to 75% pay for 30 years of service. But if they leave before 20 years, they don’t receive any retirement pay. People who joined the military before 2006 or didn’t opt in to the blended retirement system are still covered under the traditional plan.

People who chose to remain in the traditional retirement system don’t receive matching TSP contributions from the Defense Department. But they can still benefit from contributing to this low-cost, tax-advantaged retirement plan and can keep all of the money that is growing tax-deferred in the TSP, no matter when they leave the military. (You’ll have to pay a 10% early-withdrawal penalty if you withdraw money from the TSP before age 59 ½, unless you leave your job after age 55.)

Service members—whether in the new or old system—can contribute up to $19,000 to the TSP in 2019 (up to $25,000 if age 50 or older). And if they’re deployed and receiving tax-exempt pay while serving in a combat zone, they can contribute up to $56,000 to the TSP for the year. Deployed service members can also invest up to $10,000 in the military’s Savings Deposit Program; they’ll receive 10% annual interest while deployed and for up to three months after their return.

For more information about the Thrift Savings Plan, the military’s Savings Deposit Program for deployed service members, and other special saving and investing opportunities for members of the military, see the newest edition of our Financial Field Manual. I just updated the manual to include strategies for making the most of the new retirement system and how to make the most of other financial benefits, such as low-cost life insurance, education benefits, mortgages requiring no down payment, special legal protections and income-tax benefits. You’ll also learn about strategies to protect yourself from scams targeting military families, how to plan financially for deployment and ways to prepare your finances for the transition to civilian life.

SPECIAL REPORT: Personal Finance for Military Families

Most Popular

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021

Recommended

33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 6, 2021
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021
The Benefits of Working Longer
Empty Nesters

The Benefits of Working Longer

Delaying retirement for a couple of years—or even a few months—is the most effective way to improve your retirement security.
April 29, 2021
Biden Hopes to Eliminate Stepped-Up Basis for Millionaires
Tax Breaks

Biden Hopes to Eliminate Stepped-Up Basis for Millionaires

As part of his American Families Plan, President Biden wants to change the way capital assets are taxed when you die.
April 28, 2021