Blended Military Retirement System

Under the new “blended” retirement system, military members may be able to save more than the current system; however, it requires action on the service member and an exposure to market risk—both concern me.

The current retirement system allows us to retire at 20 years, and is called a defined benefit retirement system.  If we serve less than 20 years, we get nothing.  The value of the current retirement is abstract.  It is calculated at 50% of base pay, with an extra 2.5% a year, up to 75%.  We can also contribute to the Thrift Savings Plan (TSP) up to the maximum contribution limit ($17,500 in 2016).  Check out my blog post here where I explain how much a military retirement is worth.  I compare it to a 30-year bond.  Right now, the interest rates (and inflation) are low, making the current value of a military retirement valuable.  When inflation rises, our retirement loses value, or in economic terms, we are exposed to inflation risk.  The main reason for a change is to escape the “all or nothing” scenario, where a military member honorably serves for 1-19 years and 11 months and gets nothing if he or she gets out. 

I also feel that this change is designed to cost costs since the American public sucks at saving money.  The blended retirement system requires action on us, which after nearly 2 decades of helping people with finances, concerns me a lot.  It also pours money into the stock market through the TSP funds, and what government wouldn’t want more control over the financial system right?

For members entering service after 1 Jan 2018, the blended retirement reduces the defined portion of the retirement to 40% at 20 years.  No government system would be complete without the corrupt misguided option of offering us a lump sum payment.  We have the redux under the current retirement system.  A lump sum payment is a way for the government to save money, by not inflation-adjusting the payment.  You’d have to put that lump-sum payment to serious work to ensure you keep up with inflation.  I still haven’t met someone who took the redux and made that $30K earn more than a traditional retirement.

The Department of Defense (DoD) will put 1% of every military member’s paycheck into the TSP.  We will be auto-enrolled into 3% of our pay, which we’ll have to update annually.  The 4%, the 1% DoD and 3% auto-enroll, will be ours, and we keep that portion if we were to separate before 20 years.  A 4% retirement-savings rate is not ideal but at least it will “force” military members to start saving for retirement.  The best part of the blended system is that we’ll finally get a matching TSP contribution.

I refuse to share any graphic created by the DoD that shows a comparison between the two retirement systems because the DoD assumes an unstainable rate of return from the stock market.  While the stock market generally goes up, a good portion of our retirement is now reliant on the bond and stock market.  Additionally, I’ve spent nearly 2 decades trying to get military members to save more for retirement, and it’s not happening quickly.  For this new blended retirement system to be “better”, we must save more and hope for good market returns.

Should you opt-in?  If you know, with all your heart that you’ll be separating before hitting 20 years then yes.  But remember, like nearly everyone I met still serving after 10 years, I was only supposed to be in for 6 years, and now I’ve been in for 16 years.  The current system is still superior thanks to the 50% plus 2.5% each year (versus 40% and 2% each year) and the TSP contributions.