Everything About The Blended Retirement System

The Blended Retirement System is the retirement plan for service members who entered the military after 1 January 2018. It also includes some folks who were serving before 31 December 2017 and chose to switch to the BRS.

Retirement pay benefits for currently retired service members remain unchanged.

Understanding The Terms

The military’s new Blended Retirement System has both a defined benefit pension/retirement pay and a government match to its defined contribution plan. It’s important to understand these definitions:

A defined benefit plan is a plan that has a set amount of benefit based upon certain criteria. Most traditional pensions, including military retirement pay, are defined benefit plans. All defined benefit plans are tied to the employer. The individual funds are not attributed to an individual employee. The Department of Defense uses the term annuity for the military retirement pay system because it is a series of payments.

A defined-contribution plan is a special kind of investment account. The employee, and sometimes the employer, contribute various amounts to the account throughout the employee’s working career. Most current retirement plans, such as 401(k) plans, are defined contribution plans. The military’s Thrift Savings Plan (TSP) is a defined contribution plan. The employee owns the balance of the account (with vesting restrictions) and can transfer it with them between jobs.

How The Blended Retirement System Works

The BRS has three major components:

1. Government automatic contributions and government matching of Thrift Savings Plan (TSP) contributions
2. Military retirement pay for those who serve 20 years, medically retire, or are otherwise entitled
3. Continuation pay “bonus”

Together, these three parts of the BRS create a comprehensive retirement package that includes portable retirement savings for those who serve less than 20 years, together with a traditional pension-type annuity for those who serve to retirement.

There is a fourth component, a lump-sum distribution option. It’s such a bad idea that I just hope everyone forgets that it exists.

Thrift Savings Plan Contributions

An important feature of the BRS is the government contributions to the service member’s Thrift Savings Plan account. Once vested, money in the TSP belongs to the service member. It belongs to the service member no matter how long they serve. It can be kept in TSP after leaving the military, or moved to another tax-advantaged retirement plan.

TSP Accounts for Every Service Member

Under BRS, service members are automatically enrolled to contribute 5% of their base pay to their TSP account. If the service member stops or reduces the amount of their contribution to less than 5%, they will be switched back to 5% at the beginning each year. Disenrollment or reductions are only permitted after financial literacy education. Note: If you were a BRS member prior to 1 October 2020, and did not make any changes, you remain enrolled at the prior rate of 3%.

Service members have their contributions pre-set to go into the Lifecycle fund that corresponds to their current age. They may change this election at any time. If you are in the BRS, please take some time to learn about the TSP funds. Make sure you are in the fund that you want to be in.

Service member contributions are assigned to a Traditional TSP account by default, and the member may change his or her contributions to a Roth TSP account.  Government contributions will always go to the Traditional account.

Automatic Government Contributions:

The automatic government contribution equals 1% of the service member’s base pay and will begin after 60 days of military service. These contributions will continue until 26 years of service.

This money will be “vested” after two years of service.  Vesting is the point in time when the ownership of the money moves from the contributor to the TSP owner.

Government Matching Funds:

The BRS features a government match of service member contributions after two years of service and continuing through 26 years of service.  The government match of the service member’s contributions can be a little confusing, because it isn’t straight  one-for-one match.

You’ll sometimes hear people say “4% match,” and you’ll sometimes hear people say “match up to 5%.”  Neither one is exactly accurate.  The government will 1-for-1 match the first 3% of a service member’s contributions to TSP. Then they’ll match at half, or .50-for-1, service member contributions over 3% and up to 5% (so, 4% and 5%).  If a service member contributes 5% or more to TSP, the government match will be 4%.

Government matching contributions to members’ TSP accounts are vested immediately.

Military Retirement Pay

Military members who serve until retirement receive military retirement pay. The retirement pay amount is calculated using their highest average 36 months of pay, multiplied by the number of years they served, multiplied by 2.0%. Therefore, a service member who retires under the BRS would receive 40% of the average of their highest 36 months (three years) base pay. Retirees under the older, legacy retirement system receive 2.5% of their highest 36 months, so 20 years of service equals 50% retirement pay.

Continuation Pay

Continuation pay is a taxable bonus that will be paid to service members, mid-career, in exchange for an obligation to continue to serve for another three years. This obligation runs at the same time as any other service commitments. 

Continuation pay may be offered between eight and twelve years of service. Each year, each branch of service announces the timing and amount of their continuation pay. So far, every year, every branch has chosen 12 years of service.

Continuation pay will be calculated as a multiplier of monthly base pay. The law allows it to be between 2.5 and 13 times monthly base pay. So far, every year, every branch has used a 2.5 multiplier.

Continuation pay can be received in a lump sum or a series of equal annual payments, stretching over a maximum of four years.

Service members who fail to complete their obligated service may be required to repay the amount received.  A pro-rated repayment may occur in some situations and may depend on the reason for not completing the obligated service.

Fact and Fiction

There are still a lot of inaccuracies being shared about BRS. For example,

The new kids under BRS won’t get military retirement pay (aka, the pension.)

Nope, not even close. Military retirement is being tweaked to shift more of the responsibility to the service member, but military retirement still exists and it is still a great deal.

TSP is a lousy option because it has very few funds.

TSP is a great retirement savings tool. It has very low costs and the basic funds offer enough options for most investors. There’s even a new Mutual Fund Window that provides even more choice.

These changes are screwing the service member.

These changes have the potential to be great for almost all service members. For the 81% who leave active duty before earning retirement pay, they’ll have government dollars in a retirement account that belongs to them. For those who continue serving until retirement age, they’ll have substantial assets outside of their retirement, if they contribute enough to TSP to receive the full government match.

Summing It Up

The military’s Blended Retirement System is a comprehensive package that offers both a defined-contribution plan and defined benefit retirement pay. All service members who serve at least 60 days accumulate government-funded portable retirement savings that aren’t tied to 20 years of service. Then, those who earn retirement have the flexibility of an individually-owned TSP account plus the security of military retirement pay.

If you’re looking for information about the prior military retirement system, the Legacy retirement system, you can read this post: The Basics of Retirement Plans, and the Military’s Old and New Plans