Retirement Planning for Veterans and Military Clients
Each year, Americans pause on November 11 to mark Veterans Day as a time to honor those who served in the U.S. military. For advisors who offer retirement planning for veterans and military clients, the holiday is also a good reminder to deepen your understanding of military retirement benefits—especially the Uniformed Services Blended Retirement System (BRS).
Veterans and service members have unique planning needs. Whether you already serve these niche clients or are planning to in the future, understanding the ins and outs of the BRS is critical in order to help guide them toward financial security in military retirement. Here’s what you should know.
Who’s Eligible for the BRS?
The BRS began on January 1, 2018, and applies to active members of the uniformed services. This includes members of the Navy, Air Force, Army, Marines, Coast Guard, and National Guard; and cadets and midshipmen at service academies; and members of the National Oceanic and Atmospheric Administration and the U.S. Public Health Service.
Uniformed service members. Those who started active service in 2005 or earlier were grandfathered into the legacy pension system. Those who joined active service between 2006 and 2017 and had less than 12 years of service before 2018 could choose either the legacy pension or the BRS. Because this choice was irrevocable, service members had to complete mandatory training and make the selection between January 1, 2018, and December 31, 2018. Service members who did not make an affirmative choice remained in the legacy pension. Anyone who joined the uniformed services in 2018 or later is automatically enrolled in the BRS.
Reserve and National Guard members. Eligibility depends on how many retirement points were earned as of December 31, 2017. Reservists and National Guard members who had at least 4,320 retirement points were grandfathered into the legacy pension. A total of 4,320 retirement points equaled 12 years of service. National Guard Members with fewer than 4,320 retirement points could choose between the legacy pension and the BRS.
Service academy cadets and midshipmen. Eligibility depends on their enrollment date. Cadets and midshipmen enrolled before December 31, 2017, are grandfathered into the legacy pension. Cadets and midshipmen enrolled before December 31, 2017, but commissioned after 2018, could choose the BRS within 30 days of their commissioning date. Cadets and midshipmen who entered a service academy after January 1, 2018, are automatically enrolled in the BRS.
Calculating the Benefits
Introduction of the BRS marked the first change to military’s retirement plan in 70 years. So as part of retirement planning for veterans and military clients, it’s important to familiarize yourself with how the benefits are calculated and what they include. To begin with, the BRS uses the same formula, but a different multiplier, than the military’s traditional legacy defined benefit pension. It also features a Thrift Savings Plan (TSP) with automatic and matching contributions from service branches.
The baseline. The formula for the legacy pension serves as a starting point:
Pension = 2.5% × Years Served × Retired Base Pay
Here, the Retired Base Pay factor is the average of the highest 36 months of base pay. Base pay does not include housing and other allowances. At 20 years of service, this formula yields a pension that is 50 percent of a service member’s retired base pay. For example, the pension for a service member with a retired base pay of $100,000 is $50,000:
$50,000 = 2.5% × 20 Years × $100,000
The BRS formula. The BRS uses the same formula but reduces the multiplier from 2.5 percent to 2 percent:
Pension = 2% × Years Served × Retired Base Pay
For a service member with a retired base pay of $100,000, switching to the BRS decreases their pension to 40 percent of the average of their highest 36 months of base pay:
$40,000 = 2% × 20 Years × $100,000
The BRS, however, added automatic and matching contributions to the TSP. These contributions can be invested in a traditional pretax IRA or an after-tax Roth IRA. The guidance you provide here may be a particularly helpful aspect of retirement planning for veterans and military clients, since what they do with their TSP determines the overall value of portable retirement assets. Keep in mind that individual contributions cannot exceed the annual deferral limit set by the IRS.
Matching contributions. The TSP contributions can bridge the difference between the legacy and BRS multipliers. Here’s how it works.
Each service branch makes an automatic contribution and a matching contribution to a service member’s TSP account. The service branch’s automatic and matching contributions are a percentage of base pay only. The automatic service contribution equals 1 percent of a service member’s base pay. Service members who opted into the BRS immediately received the automatic 1 percent contribution. If the service member already had two years of service, the automatic contribution vested immediately. For new service members, the automatic 1 percent contribution begins after 60 days and will vest after two years of service.
Service members may contribute a portion of their base pay to their TSP. After two years of service, the service branch will match up to 4 percent. The maximum contribution from any service branch is 5 percent (1 percent automatic plus 4 percent matching). A service member’s own contributions vest immediately, no matter their length of service. The service branch’s matching contributions also vest immediately for personnel who have two years of service and opt in to the BRS. All vested automatic and matching TSP contributions are portable and may be rolled into a qualifying retirement account.
Lump-sum option. The BRS also has a lump-sum option that the legacy pension does not offer, so here’s where your military clients may need some additional guidance. Retirement from the military often occurs several years before social security full retirement age. A retired service member may elect to receive either 25 percent or 50 percent of their pension as an up-front cash lump sum. This payment reduces the monthly pension to 75 percent or 50 percent, respectively, of the full amount. The monthly pension returns to its full amount when the retired service member reaches full social security retirement age.
Since the BRS will cover service members born after 1960, their full social security retirement age is 67. The lump sum may be taken in one year or spread over four years to mitigate the tax consequences. (Note that the military’s discount rate for 2021 is 6.73 percent, and a higher discount rate means a smaller lump sum.)
Be a Resource and Guide
Former and current service members have complex choices to make in order to manage and optimize their benefits—from deciding whether to invest TSPs into traditional pretax or after-tax Roth accounts to determining whether to take the 25 percent or 50 percent cash lump sum and coordinating benefits with social security. By being a resource and thoughtfully explaining these options, you can help veterans and service members position themselves for financial security in military retirement.
Commonwealth Financial Network®does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
This material is for educational purposes only and is not intended to provide specific advice.