Blended Retirement or High 36?

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Find out more about the Blended Retirement System on militarypay.defense.gov or http://www.militaryonesource.mil/

By Carol Church

As most service members will have heard by now, major changes are coming to the military’s retirement system. As of January 2018, the new “blended retirement system” will be in full effect, and all those who enlist after that date will be enrolled in the blended system. At the same time, those who enrolled before Jan 1, 2006 will be grandfathered in to the old system; they will remain with the High 3s plan.

But service members who joined after 2006 but before January 1, 2018 (this is many people active today!) will need to make a decision. They’ll have to decide whether to stay with the so-called High 36 or High 3s system or change over to the blended system.

Why the change?

Currently, more than 80% of service members leave the service before reaching the 20-year mark, meaning they never qualify for a military retirement pension. This is a huge number of people leaving service with no retirement savings (at least none provided by the military)!

The military knew this, and wanted to do something about it. So, under the new blended plan, shorter-term members will be able to build savings through contributions from the DoD to their TSP plan, plus matching funds from the military for contributions they make themselves. This is basically a defined contribution system, like the 401K plans many workers in the private sector have access to. (However, there are also some reductions in later pension benefits.)

Under the new plan, the military starts contributing 1% of base pay to service members’ retirement after 60 days, adding it to their TSP plans. At the beginning of the third year of service, the military will also start matching service member contributions to TSP plans (up to 4% of pay, for a total of up to 5% of pay being matched/contributed by the DoD). After two years of service, service members vest, and all money contributed by the DoD belongs to the service member and will go with him or her.

Why Stick with the High 3s?

If a service member is close to 20 years already, or feels very confident that he or she will remain with the military for the full 20 years, then the high 3s plan is likely to be the best option. Why? Because its pension pays out at a higher monthly rate—2.5% times years served (minimum 20) times the “high 3” pay (the average of the member’s highest 36 months of base pay). Meanwhile, the pension members will get under the blended system is less—2% times years served times the high 3 pay.

That may not seem like much of difference at first glance, but remember that this plays out every month. So, for example, under the High 3s plan, someone with a retired pay base of $6,000/month who retires after 20 years will receive a monthly pension of $3,000. Meanwhile, under the blended plan, someone with a retired pay base of $6,000/month who retires after 20 years will receive a monthly pension of only $2,400. Over the course of just one year, that’s a difference of $7,200.

Another reason the High 3s may be preferable to some is that it is not necessary to manage your own portfolio. This is not something everyone wants to do or feels comfortable doing. However, it’s important to note that the military plans to provide investment education.

In addition, it should never be forgotten that under this plan, if a member retires before 20 years, he or she receives nothing from the military. Twenty years is a big commitment.

Why Choose the Blended System?

This plan is very helpful to members serving shorter terms. If a service member does not want to commit many years to the military, or just isn’t sure, it is definitely the best choice. The fact that members vest after just 2 years is great—the plan is “portable,” like most private retirement options, and can be rolled into a new employer’s 401k plan. Members also have the option to leave their money in the TSP plan and continue to contribute to it there. The option to receive matching funds up to 4% of pay is also great. Members who are good at saving are likely to do well with the plan.

Of note, the blended plan also provides mid-career incentives intended to help retain more service members. At 12 years of service, members receive a bonus if they choose to continue their service for 4 more years. The amount is equal to 2 1/2 months of pay for active members and ½ month of pay for those in the reserves.