This year may be a momentous year, financially, for many Americans with possible changes to the tax code, health care, and the financial services industry some of 2017’s many wild cards. For members of our Armed Forces, 2017 brings an additional financial question and one that financial advisors may be able to help with.
Many of our servicemen and women face the decision this year on whether to transition to the new Blended Retirement System (BRS) or to remain under the tradition military pension.
Signed into law in November 2015, the new BRS is the biggest change in military benefits for several decades. Under the traditional pension system, after 20 years of service a service member was eligible for retirement benefits equal to their retirement pay (an average of the highest three years of service) multiplied by a factor of 2.5 for each year of service. Service member were also eligible to participate in the Thrift Savings Plan (TSP), the federal government’s defined contribution plan. If a service member left before 20 years of service they could take their TSP but were not receive any retirement benefits.
The BRS reduces the crediting factor from 2.5 down to 2, effectively reducing the benefits by 20% for those with at least 20 years of service. To offset this cut, service members will now receive a 1% auto-contribution to the TSP and the same TSP matching offered to other federal employees: 100% of the first 3% and then 50% on the next 2%. They are also eligible for a continuation bonus, a lump sum available between the eighth and twelfth year of service. All service members who join after December 31, 2017 will be under the new system. However, many current service member will have a choice.
Service members who joined the military prior to January 1, 2006 will remain under the traditional military pension system. Service members who joined between January 1 2006 and January 1, 2018 will have the choice to remain under the old system or to opt-in to the BRS. The Department of Defense is offering online education about the new program, its benefits and how to opt-in.
The First Command Financial Behaviors Index found that of those who took this course, 76% indicated they were likely to seek help from a financial advisor about their decision to opt-in or not. Of those who had yet to take the course, 50% also said they would look to a financial advisor for help deciding what to do. This is a huge opportunity for financial advisors to come along-side our women and men in uniform and help them make a decision that will impact their retirement.
What are some of the pros and cons to consider? The old pension system would pay a significant increase in retirement benefits, but only for those with at least 20 years of service. These are career military families, and surveys show a strong preference for the traditional pension. For these families, they would be giving up a more secure retirement benefit and shouldering more of the risks for retirement savings. For many this is not a good trade-off.
One of the primary benefits of the BRS cited is its flexibility but probably the biggest benefit would be for those service members not likely to serve 20 years or more. For many service members, this is hard to predict. With projected force reductions, despite on-going conflicts, and little certainly among the general population on whether defense budgets will be cut or increase, many younger service members may wonder whether they will be able to reach retirement.
For this group, the help of a financial advisor to weigh the pros and cons of their situation may be valued advice at a critical time. For some early in their career, the decision may be easy but not as clear for someone in their tenth or eleventh year with far less time to accrue savings in the TSP. In any case, they will have this year to make their decision.
This is a great opportunity to serve those serving our country and help them make a good decision about their future retirement. If you need help advising federal employees, The Retirement Analysis Kit (TRAK) retirement planning software for federal advisors has unique features to engage this unique market.