The Big Pension Decision Military Service Members Must Make in 2018

Service members who joined armed forces in recent years must decide whether to stay in the military’s old retirement system or join the new one. Here’s how to choose the system that’s best for you.

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Question: I’ve been reading about the new military blended retirement system. When do I need to decide whether to switch to the new system, and how can I figure out which plan is better for me?

Answer: If you joined the military from 2006 through 2017, you have from January 1 to December 31, 2018, to decide whether to switch to the new “blended retirement system.” If you don’t do anything, you’ll continue to be covered under the old plan. (People who join the military after January 1, 2018, will automatically be enrolled in the new system, and those who entered the military before 2006 remain in the old system.)

The current military retirement system provides a generous pension—starting at 50% of your base pay every year for life if you stay in the service for 20 years or up to 75% if you remain for 30 years. But if you leave the military before 20 years, you get nothing—and about eight out of 10 service members don’t stay long enough to collect a pension, says Joshua Andrews, USAA’s advice director for military life.

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The new system reduces the pension payouts to 40% of your base pay if you stay for 20 years or 60% if you stay for 30 years. But you’ll also get an automatic contribution of 1% of your base pay to the federal Thrift Savings Plan after 60 days of service, and matching contributions for the next 4% of your pay, which you can keep after two years of service. (People who joined the military before 2018 can keep the matching contributions right away without waiting for two years.) The matching contributions continue for up to 26 years of service.

If you don’t plan to stay in the military for 20 years, then you’ll come out ahead with the new system. If you think you may stay that long, compare payouts under the old and new system, and calculate how much you’d need to save in the TSP to make up the difference. Be realistic about the chances that you’ll actually stay for 20 years, says Andrews.

USAA has a calculator that can help active-duty service members and members of the Reserves and National Guard run the numbers. Also see the Defense Department’s Blended Retirement System guide for more information. Members of the Reserves are eligible for the new plan based on the retirement points they have earned—see the Department of Defense’s Reserve Component factsheet for more information.

If you pick the blended retirement system, plan to contribute at least 5% of your pay each year to the Thrift Savings Plan, so you can get the maximum match. “Otherwise, you’re leaving free money on the table,” says Andrews. You can always contribute more than that to your TSP to build up additional retirement savings. “USAA recommends putting at least 10% of your basic pay into your TSP,” he says.

You can contribute up to $18,500 to your Thrift Savings Plan in 2018, plus $6,000 if you are 50 or older. If you receive tax-free income while deployed to a combat zone, you can contribute up to $55,000 to your TSP for the year. For more information about the TSP and other special savings, tax and legal benefits for service members, see 10 Best Financial Benefits for Military Families.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.