Explaining Military Retirement, Part I

Military Retirement System(s)

The defined benefit retirement system, in place for service members who entered service prior to 2018, is relatively straightforward to understand:

If you entered prior to September 1980 you are eligible for the Final Pay retirement system. Under this system, your retirement pay is your final base pay times 2.5% for every year of active duty. Under this system, if you retire at 20 years you get 50% of your final base pay. If you retire at 30 years you get 75% of your final base pay.

If you entered between September 8th, 1980 and August 1986 you are eligible for the High 36 Under this system your retirement pay is the average of your highest 36 months of base pay times 2.5% for every year of active duty. Under this system, if you retire at 20 years you get 50% of the average of your highest 3 years base pay. If you retire at 30 years you get 75% of your highest average 3 years base pay.

If you entered after August 1986 you are under the REDUX system, which means you have the option to choose either the High 36 retirement system above, or the Career Status Bonus/REDUX (CSB) retirement system. The CSB/REDUX system pays a $30,000 bonus on the 15th year of active service, but it also reduces the retirement pay to 40% of the average of your highest 3 years of base pay. If you retire at 30 years you would get 75% of your highest 3 years base pay.

However, if you have elected to transition to the blended retirement system or entered the service under this system, you have substantially more responsibility than just stay until twenty years and retire. First, let’s explain the new military retirement system. The new military retirement system is based off of three pillars:

1. Defined Benefit:
   • Retired pay will be 2% times number of years of service. If you retire at 20 years you get 40% of your final base pay. If you retire at 30 years you get 60% of your final base pay.
   • Retired pay could be paid in different forms (constant pension payment; lump sum, then smaller pension until full social security retirement, then full amount; larger lump sum, then no payment until full social security retirement, etc.).
2. Defined Contribution:
   • The military will contribute 1% of your base pay to your Thrift Savings Plan (TSP) account.
   • You will be automatically enrolled with a 3% base pay contribution to your TSP. (You could raise or lower contribution or terminate individual contribution.)
   • The military will match up to 5% of your contribution, after of 2 years of service.
   • You will be vested in TSP after completion of 2 complete years of service, which means that you would have to complete at least 2 years service to get the government contribution.
3. Continuation Pay:
   • At 12 years of service, active duty servicemembers who commit to 4 additional years would receive a bonus equal to 2.5 months basic pay.
   • Services can increase continuation pay bonuses, if needed.

Two of these three pillars, the defined pension benefit and continuation pay, are relatively straightforward to understand. However, the defined contribution portion is much more in-depth. First, let us begin with the government’s matching contributions. After 60 days, the government will put 1% of your base pay into the TSP, regardless of what you put in. If you put in 0% of your base pay or 50%, the government will still contribute this 1%. After two years, the government will match your contribution up to 4%. So if you put in 2%, the government will put in the original 1%, plus an additional 2%. Ideally, you will contribute 4% and receive an immediate doubling of your money in the form of the government match. Let’s follow a hypothetical example.

The Mandatory 1% Contribution, No Servicemember Contribution

In the below example, we assume a starting base pay of $22,000 with a cost of living adjustment (COLA) of 1.5% per year. We assume the servicemember makes no contribution to the TSP.

Year	Annual Base Pay	Government Automatic/Mandatory TSP Contribution
1	$22,000	$220.00
2	$22,330.00	$223.30
3	$22,664.95	$226.65
4	$23,004.92	$230.05
5	$23,350.00	$233.50

The servicemember receives $1,133.50 of government contributions in this example.

Servicemember Contributes 4% with Government Match

In the below example, we assume the same criteria as the above ($22,000 starting base pay, 1.5% COLA). In addition, we assume the servicemember immediately contributes 4% of their base pay from the start of service.

Year	Annual Base Pay	Government Automatic/ Mandatory TSP Contribution	Servicemember Contribution	Government Matching TSP Contribution
1	$22,000	$220.00	$880.00	$0.00
2	$22,330.00	$223.30	$893.20	$0.00
3	$22,664.95	$226.65	$906.60	$906.60
4	$23,004.92	$230.05	$920.20	$920.20
5	$23,350.00	$233.50	$934.00	$934.00

The servicemember receives $1,133.50 of automatic/mandatory government contributions, contributes $4,534 of their own money, and receives $2,760 in government matching contributions.

In summary, the differences when retiring at 20 years are:

Current systems:

1) A defined benefit pension that will amount to 50% of the average of your highest three years base pay (for a majority of Soldiers).

2) Any money in the TSP is contributed from the Soldier with NO government match.

Blended Retirement System:

1) A defined benefit pension that will amount to 40% of the average of your highest three years base pay.

2) All government mandatory/automatic contributions into the Soldier’s TSP account.

3) All government matching contributions (up to 4%) of the Soldier’s contributions.

4) All of the Soldier’s contributions to the TSP (which are matched up to 4% by the government in point #3).

In exchange for a 20% reduction in a Soldier’s pension benefit, the government will now contribute 1% of ALL Soldiers’ base pay to their TSP account and match up to 4% all Soldiers’ contributions after two years of service.

You can find a comparison calculator and a blended retirement calculator here.

Part II on what to do with your contributions in the TSP coming soon! For now, stop by a financial counselor through Army Community Services (ACS).