New Military Retirement System

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
deadlymonkey
Posts: 62
Joined: Wed Jan 30, 2013 4:22 pm

New Military Retirement System

Post by deadlymonkey »

The military retirement system is one of the best pension plans still around, but with this year's NDAA it has taken a major new change. Personally, I prefer, and am grandfathered into the old system so cannot change my status. However, I am sure I will need to explain and advise junior personnel about their options. I wanted to get the bogleheads view on the new system. At first glance it is no where near as bad as REDUX was, but does shift some of the responsibility to the market and off the government.

Current High 3:

after 20 years, 50% of average base pay from previous 3 years, every month for life.

50% increases by 2.5% every additional year of service for a max of 75% at 30 years.

New system:
DoD puts in 1% of base pay into TSP, matching up to 5% each month. (you put in 5, DoD puts in 5)
At 12 years you get 2.5 months base pay as a bonus (this could be invested)
At 20, you get 40% of average base pay from previous 3 years, every month for life.
this will increase by 2% every year for a max of 60% at 30 years.

This doesn't look too bad, assuming the market does good, but I prefer the guaranteed annuity than whatever that 5% match will become.

The bad part of this new plan is that it allows a service member to receive a lump bonus when they retire of a portion of their estimated total retirement package. (how this is calculated I don't know) and receive a reduced annuity. This is rife for abuse as people will be able to withdraw potentially tens or hundreds of thousands of future retirement payments now, for frivolous purchases. Some may use it for houses/businesses, but I think a lot of it would be wasted.



Thoughts?
ShenziNation

Re: New Military Retirement System

Post by ShenziNation »

I'm not military, but work with uniformed personnel and Guvvie civvies on a daily basis on a major AFB. Here are my thoughts, and also from conversations with afore-mentioned teammates (we go by the rule one team, one fight, regardless of what we wear).
The new system wants military personnel to have some 'skin in the game'. The more you contribute and get matched, the better for you.
The old system was defined benefit, the new one is defined contribution and defined benefit.
I think the best way to get a view is graphically. Perhaps OP or another b'head has the numbers to crunch.
Those who save and contribute early on may be better off on the long run in the new system than those who never contributed in the old system if they spent it all. Also, it may depend on rank, pay-scale, promotions, so many variables.
/$0.02
nanoanalyzer
Posts: 454
Joined: Sun Sep 28, 2014 4:14 pm

Re: New Military Retirement System

Post by nanoanalyzer »

Seems similar to the CSRS->FERS transition, with the addition of the 12 year bonus of around 20% and absence of OASDI. Protects the government from really high pensioners (60% max now) and puts more personal responsibility on future retirees to utilize the TSP. The same has already happened in the private sector about 10 years ago.

At 30 years, unless you think you can make up for 10% (75% minus the new 60% minus the 5% match) in the market, plus inflation (as the pension is indexed), every year, the old plan is likely a better deal.

At 20, you only need to make up for 5% in the market for the new plan to work better.

The sweet spot for the new plan is obviously right at 12 years, but only if you happen to be retiring or leaving the force for other reasons. One should plan for either a 12 or at least 20 year career. Less than 12 or between 12 and 20 won't be much of a good deal.
Last edited by nanoanalyzer on Wed Dec 09, 2015 10:05 am, edited 1 time in total.
"If you think stocks are like physics, you believe there must be smart people who can measure exactly where the Dow Jones Industrial Average will be in five months." -Morgan Housel
Maverick3320
Posts: 1115
Joined: Tue May 12, 2015 2:59 pm

Re: New Military Retirement System

Post by Maverick3320 »

It would be interesting to see the actual numbers on this for a typical service member. However the DOD spins this, it's for one purpose: to save the government money.

Could a service member come out ahead? I suppose it's possible, depending on market performance.
RedDog
Posts: 289
Joined: Sat Dec 05, 2015 3:36 pm

Re: New Military Retirement System

Post by RedDog »

Maverick3320 wrote:It would be interesting to see the actual numbers on this for a typical service member. However the DOD spins this, it's for one purpose: to save the government money.

Could a service member come out ahead? I suppose it's possible, depending on market performance.

It'll also be interesting to see how stable this system will be. Suspect there will be significant mid-term/long-term retention issues that will have to be addressed.

Very glad I pulled chalks/retired last year!
User avatar
BolderBoy
Posts: 6753
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: New Military Retirement System

Post by BolderBoy »

deadlymonkey wrote:This is rife for abuse as people will be able to withdraw potentially tens or hundreds of thousands of future retirement payments now, for frivolous purchases. Some may use it for houses/businesses, but I think a lot of it would be wasted.
In before the lock. Not actionable and it seems you are complaining about allowing people to make choices, even if they are bad choices.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
henry A
Posts: 36
Joined: Mon Feb 04, 2013 8:37 am

Re: New Military Retirement System

Post by henry A »

It is my understanding from recent press articles that the new system would reduce the 20 year retirement payout by 20%. Thus the new retirement system would begin paying out only 30% of base pay, not the 40% quoted above.

That being said, it's still a pretty good deal and the system definitely needed an overhaul. It will be interesting to see how retention holds up after bullets start flying though.
Topic Author
deadlymonkey
Posts: 62
Joined: Wed Jan 30, 2013 4:22 pm

Re: New Military Retirement System

Post by deadlymonkey »

henry A wrote:It is my understanding from recent press articles that the new system would reduce the 20 year retirement payout by 20%. Thus the new retirement system would begin paying out only 30% of base pay, not the 40% quoted above.

That being said, it's still a pretty good deal and the system definitely needed an overhaul. It will be interesting to see how retention holds up after bullets start flying though.

New document came out to all our emails today with the above numbers. Not sure if that has changed recently.
BolderBoy wrote:
deadlymonkey wrote:This is rife for abuse as people will be able to withdraw potentially tens or hundreds of thousands of future retirement payments now, for frivolous purchases. Some may use it for houses/businesses, but I think a lot of it would be wasted.
In before the lock. Not actionable and it seems you are complaining about allowing people to make choices, even if they are bad choices.
Shouldn't be locked. The information is accurate and germane, I asked for opinions. I offered my opinion on one aspect of the new system that needs to be taken into account to judge the system as a whole. The financial education that the military provides junior personnel is very rudimentary, and this is something that can have profound lifelong financial impacts. It deserves to be discussed.
henry A
Posts: 36
Joined: Mon Feb 04, 2013 8:37 am

Re: New Military Retirement System

Post by henry A »

deadlymonkey wrote:
henry A wrote:It is my understanding from recent press articles that the new system would reduce the 20 year retirement payout by 20%. Thus the new retirement system would begin paying out only 30% of base pay, not the 40% quoted above.

That being said, it's still a pretty good deal and the system definitely needed an overhaul. It will be interesting to see how retention holds up after bullets start flying though.

New document came out to all our emails today with the above numbers. Not sure if that has changed recently.

Just to clarify, the info you received said the new system would start at 30% or 40%? I haven't received any information and surprisingly there doesn't seem to be much info released yet. I will try to check with my local finance office tomorrow.
ShenziNation

Re: New Military Retirement System

Post by ShenziNation »

henry A wrote:It is my understanding from recent press articles that the new system would reduce the 20 year retirement payout by 20%.
Then it is in line with SecDef wanting costs cut by 20%.
ShenziNation

Re: New Military Retirement System

Post by ShenziNation »

BolderBoy wrote:
deadlymonkey wrote:This is rife for abuse as people will be able to withdraw potentially tens or hundreds of thousands of future retirement payments now, for frivolous purchases. Some may use it for houses/businesses, but I think a lot of it would be wasted.
In before the lock. Not actionable and it seems you are complaining about allowing people to make choices, even if they are bad choices.
Why lock? It is a valid concern. Maybe just needs to be moved to Personal Finance?
I'll wait for more press releases and info, then use pay tables for a simulation.
jpelder
Posts: 1106
Joined: Mon Jan 26, 2015 2:56 pm
Location: Concord, NC

Re: New Military Retirement System

Post by jpelder »

henry A wrote: That being said, it's still a pretty good deal and the system definitely needed an overhaul. It will be interesting to see how retention holds up after bullets start flying though.
Based on what I've heard, besides reducing costs for the government, it's also intended to give the short-term enlistees a little more retirement savings than the old pension.
JPD
Posts: 18
Joined: Sun Apr 05, 2015 8:54 pm

Re: New Military Retirement System

Post by JPD »

I'll be surprised if it actually goes through this year. The bottom line though, is that the current system is unsustainable, so it has to change at some point.

I may find myself in the minority here, but I like the idea of "401k type pension" for military. From my perspective (4 years on Active duty so far) this is a much better deal for a lot of folks. There are thousands of reasons why people leave the military before 20 years. For the majority, I think the decision to get out doesn't come down to the pension. Life just happens. So in those cases, any extra retirement savings is better than nothing.

Also keep in mind if you were to retire with the full 20, you still receive the other benefits (healthcare, life insurance, etc). So in practice, the difference may not be that big between the two.
User avatar
BolderBoy
Posts: 6753
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: New Military Retirement System

Post by BolderBoy »

deadlymonkey wrote:Shouldn't be locked. The information is accurate and germane, I asked for opinions. I offered my opinion on one aspect of the new system that needs to be taken into account to judge the system as a whole. The financial education that the military provides junior personnel is very rudimentary, and this is something that can have profound lifelong financial impacts. It deserves to be discussed.
It seems to me that you are arguing in favor of a nanny-state-like system in which people are protected from themselves by having an omnipotent father-figure make their [retirement] decisions for them. AKA, "change is bad".

Is the new system the same gravy train that was the old system - of course not. So what? The new system is still a public pension system which is the toughest type of all to sustain over the long term (else they wouldn't have changed it from the old.) It'll get changed yet again down the road.

The fact that those retired military who will be covered in the new system can make stupid choices about their retirement holdings is no more a discussable issue than the fact that non-military retired folks can drain their retirement accounts for idiotic reasons as well.

The US government doesn't provide financial education to anyone, for the most part - why do you think the military owes such a benefit to the junior personnel? I'm willing to bet that if the junior persons who cared at all, actually asked around, they would be directed to others who can help to educate them.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
kevinpet
Posts: 107
Joined: Fri Jan 13, 2012 12:27 pm
Location: CA
Contact:

Re: New Military Retirement System

Post by kevinpet »

That's a huge benefit for those who end up not doing 20 years. For junior enlisted, 5% into the Roth with 5% match in deferred would be around $6k at the end of four years.
User avatar
Ketawa
Posts: 2521
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

Re: New Military Retirement System

Post by Ketawa »

It's pretty simple: the new military retirement system is a pretty large cut for personnel who stay in long enough to receive a pension, and a small benefit for personnel who do not.

You can make a crude comparison between the two systems by using the TSP's annuity feature to find how much it would cost in the TSP to buy an annuity to make up the difference in pensions. Here is an example. I'm copying numbers from a spreadsheet I made which was set up to mirror the TSP annuity calculation worksheet. All numbers based on 2015 pay tables.

CG officer, Academy graduate, makes O-4, gets out at 20 years. The annuity is a single life annuity with no additional features and increasing payments.

Code: Select all

High 36 base pay                                             7405
Pension amount, current system                               3702

Code: Select all

Age                                                            41
Monthly annuity factor per $1k account balance               3.22
Preliminary estimate of monthly annuity payment per $100k     322
Current monthly annuity interest rate                       2.125
Interest rate used in monthly annuity factor tables         5.000
Index increase (decrease)                                  -2.875
Interest adjustment factor                                  0.215
Adjustment multiplier                                      -0.618
Increase (decrease) to estimate                              -199
Annuity payment per $100k                                     123

Code: Select all

Market Value of Pension, Current System                   3010887
Market Value of Pension, Future System                    2408710
Difference                                                 602177
With a 2.5% multiplier, the pension is worth about $3.0M. With a 2.0% multiplier, it's worth about $600k less. This ignores other benefits like health insurance.

What would TSP returns (real) have to be to have $600k extra in your TSP due to the matching contributions? I assume the max continuation pay of 13 months is paid at the start of the 12th year to make the comparison as rosy as possible. I don't know the actual mechanics of this; I imagine 13 months will only be offered to personnel in specialties high in demand. It's also not necessarily realistic since it wouldn't be able to go in the TSP due to contribution limits, but it's just an estimate. The calculation is based on making O-2 after 1 year (it's really 18 months), O-3 after 4 years, O-4 after 10 years, and staying O-4 until 20 years. In the CG, O-4s are guaranteed 20 years even if they don't make O-5.

Code: Select all

Investment Return (real)
           16%
                                              Earnings   Earnings    Ending        
Years Service  Pay Scale    Base Pay  Match   on Match  on Balance   Balance
         0      O-1 < 2       2934      352       28                   380
         1      O-2 < 2       3381      406       32         61        879
         2      O-2 > 2       3850     2310      185        141       3515
         3      O-2 > 3       4434     2661      213        562       6951
         4      O-3 > 4       5219     3132      251       1112      11445
         5      O-3 > 4       5219     3132      251       1831      16658
         6      O-3 > 6       5470     3282      263       2665      22868
         7      O-3 > 6       5470     3282      263       3659      30071
         8      O-3 > 8       5744     3446      276       4811      38605
         9      O-3 > 8       5744     3446      276       6177      48504
        10      O-4 > 10      6659     3995      320       7761      60579
        11      O-4 > 10      6659     3995      320       9693      74587
Continuation Pay             90878                                  165465
        12      O-4 > 12      6991     4194      336      26474     196469
        13      O-4 > 12      6991     4194      336      31435     232434
        14      O-4 > 14      7221     4333      347      37189     274303
        15      O-4 > 14      7221     4333      347      43888     322871
        16      O-4 > 16      7354     4412      353      51659     379295
        17      O-4 > 16      7354     4412      353      60687     444747
        18      O-4 > 18      7430     4458      357      71160     520722
        19      O-4 > 18      7430     4458      357      83315     608852
About 16% returns for the TSP returns to match the value of the pension.

We should use a very low discount rate of 0% to 2% real to compare the two systems, representing the expected real return for a guaranteed investment, in this case the G Fund. The pension is a guaranteed benefit if you stay in 20 years.

At 0% real, the TSP has a balance that is $159k higher. At 2% real, it is $187k larger.

In other words, the pension is cut 20% in the new system. In a somewhat apples-to-apples comparison making very generous assumptions like 13 months of continuation pay, the matching contributions in the TSP make up about 4-6% of that difference, for an overall cut of about 14-16% depending on the discount rate.
User avatar
BolderBoy
Posts: 6753
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: New Military Retirement System

Post by BolderBoy »

Nice explanation and outline.

Can a new person joining up choose which system to be in? Can something be done to force the DoD to go back to the old system?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
User avatar
Ketawa
Posts: 2521
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

Re: New Military Retirement System

Post by Ketawa »

kevinpet wrote:That's a huge benefit for those who end up not doing 20 years. For junior enlisted, 5% into the Roth with 5% match in deferred would be around $6k at the end of four years.
I disagree that this is a large benefit. After 40 years, $6k at 5% real grows to $42k in today's dollars. That provides an extra $1700 a year at a 4% SWR.

Granted, this new system might encourage some people to contribute to the TSP who otherwise never would. I didn't bother with that for my example since I tried to make it apples-to-apples, and it was specific to my situation. I already max out my TSP every year under the current system.
Guill
Posts: 13
Joined: Fri Feb 04, 2011 10:11 am
Location: Alabama

Re: New Military Retirement System

Post by Guill »

Current High 3:

after 20 years, 50% of average base pay from previous 3 years, every month for life.

50% increases by 2.5% every additional year of service for a max of 75% at 30 years.
Minor correction ... changes to the current High 3 military retirement system extended the 2.5% increase out to a max of 100% at 40 years of service.

Interesting post on a very important topic (for those currently serving). I'm also grandfathered under the current system (25 years and going) so the new program isn't an option for me ... however I will certainly get smart on this so I'm able to advise junior/new personnel. Thank you for raising this important issue.
User avatar
Jerry55
Posts: 864
Joined: Tue Jan 27, 2015 12:56 am
Location: That Toddlin' Town

Re: New Military Retirement System

Post by Jerry55 »

If indeed as one poster said above, it certainly seems to resemble the new FERS employment, however,
they pay 4.4% (now) of pay towards their pension, along with TSP contributions. They also get Social Security.

If someone served 30 years would they get SS ???
Or maybe the better question is...
Does their military time count towards SS ???
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!
Guill
Posts: 13
Joined: Fri Feb 04, 2011 10:11 am
Location: Alabama

Re: New Military Retirement System

Post by Guill »

Jerry55 wrote:If indeed as one poster said above, it certainly seems to resemble the new FERS employment, however,
they pay 4.4% (now) of pay towards their pension, along with TSP contributions. They also get Social Security.

If someone served 30 years would they get SS ???
Or maybe the better question is...
Does their military time count towards SS ???

Yes, retired military members receive Social Security as we pay into FICA.
Wayson
Posts: 80
Joined: Thu Jul 10, 2014 11:33 am

Re: New Military Retirement System

Post by Wayson »

BolderBoy wrote:Nice explanation and outline.

Can a new person joining up choose which system to be in? Can something be done to force the DoD to go back to the old system?
I've heard that you have until 2018 to commit to either system. If you have the option of doing the old system and think that you'll do 20, this thread has fairly clearly established that the old system is vastly superior. If you intend to do only a single term of service and then check out to use your GI Bill or pursue other opportunities, then the new system would obviously be preferential.

I'm honestly surprised that no one here has pointed out what I view as the biggest negative of the new system. The TSP contributions can only be accessed at age 55+ (59.5 if you don't use the early retirement provision), and moreover is structured so that the pension only approximates 50% retirement pay at age 60, instead of age 38-42-ish. This means that there's a good-sized chunk (20%-40%) of the 'new' pension that isn't paid out from military retirement until age 55-59.5, whereas the old system started paying as soon as you separated. It's a stealth cut to the total value of the pension

The only thing that would make DoD go back to the old system is if the new one was proven to be significantly impacting retention. And even then, we've seen (looking at you, USAF!) that senior leadership can remain willfully blind to problems for a long, long time past the point where damage starts being done.
User avatar
BolderBoy
Posts: 6753
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: New Military Retirement System

Post by BolderBoy »

Wayson wrote:
BolderBoy wrote:Nice explanation and outline.

Can a new person joining up choose which system to be in? Can something be done to force the DoD to go back to the old system?
I've heard that you have until 2018 to commit to either system. If you have the option of doing the old system and think that you'll do 20, this thread has fairly clearly established that the old system is vastly superior. If you intend to do only a single term of service and then check out to use your GI Bill or pursue other opportunities, then the new system would obviously be preferential.

I'm honestly surprised that no one here has pointed out what I view as the biggest negative of the new system. The TSP contributions can only be accessed at age 55+ (59.5 if you don't use the early retirement provision), and moreover is structured so that the pension only approximates 50% retirement pay at age 60, instead of age 38-42-ish. This means that there's a good-sized chunk (20%-40%) of the 'new' pension that isn't paid out from military retirement until age 55-59.5, whereas the old system started paying as soon as you separated. It's a stealth cut to the total value of the pension

The only thing that would make DoD go back to the old system is if the new one was proven to be significantly impacting retention. And even then, we've seen (looking at you, USAF!) that senior leadership can remain willfully blind to problems for a long, long time past the point where damage starts being done.
This answers what was going to be my next set of questions. I'm surprised there hasn't been a bunch in the press about all this as it is quite significant for the various reasons you cite.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
User avatar
Crushtheturtle
Posts: 333
Joined: Sat Mar 15, 2014 10:29 pm
Location: SC

Re: New Military Retirement System

Post by Crushtheturtle »

Maverick3320 wrote:However the DOD spins this, it's for one purpose: to save the government money.
This is the bottom line. Uncle Sam wouldn't be changing anything unless their bean counters told them it was a swell idea.

I am in the military and saw the announcement the other day. Those who entered service before 2006 have to stay with the current system. Those who enter after Jan 1, 2018 will have to use the "Blended Retirement System (BRS)." Only those who entered between 2006 and 2018 will have the option to choose.
- Boglehead meets Daytrader | - The opposite of love is apathy. I apathy the market
User avatar
Ketawa
Posts: 2521
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

Re: New Military Retirement System

Post by Ketawa »

Wayson wrote:I'm honestly surprised that no one here has pointed out what I view as the biggest negative of the new system. The TSP contributions can only be accessed at age 55+ (59.5 if you don't use the early retirement provision), and moreover is structured so that the pension only approximates 50% retirement pay at age 60, instead of age 38-42-ish. This means that there's a good-sized chunk (20%-40%) of the 'new' pension that isn't paid out from military retirement until age 55-59.5, whereas the old system started paying as soon as you separated. It's a stealth cut to the total value of the pension.
I don't understand why you would call this a stealth cut. I think it's just an obvious change to the system.

There are ways to access the TSP before age 55. Roll the account over to a traditional IRA and use Substantially Equal Periodic Payments (SEPP). I'm not sure if it's possible to do SEPP straight from the TSP; I haven't researched it.
navyasw02
Posts: 245
Joined: Wed Nov 19, 2014 10:38 pm

Re: New Military Retirement System

Post by navyasw02 »

Biggest downside for me for the Navy officer perspective is retention for smaller restricted line communities. In theory, someone could do a unrestricted line tour, lateral transfer to a different community, get a grad degree paid for, do the payback tour and still get out before the 12 year point with a masters, experience, and a transportable pension. What would be the point in staying in?

Also there's no details on the career incentive bonuses. I just saw up to 22x base pay somewhere I believe is the maximum, but what will it really be?
User avatar
Ketawa
Posts: 2521
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

Re: New Military Retirement System

Post by Ketawa »

navyasw02 wrote:Biggest downside for me for the Navy officer perspective is retention for smaller restricted line communities. In theory, someone could do a unrestricted line tour, lateral transfer to a different community, get a grad degree paid for, do the payback tour and still get out before the 12 year point with a masters, experience, and a transportable pension. What would be the point in staying in?

Also there's no details on the career incentive bonuses. I just saw up to 22x base pay somewhere I believe is the maximum, but what will it really be?
What do you mean by a transportable pension? You still need to stay in for 20 years to receive a pension. TSP matching contributions are small in comparison. After 12 years, you'll only have $40-50k extra in the new system if you receive the max match every year and earn about 5% real.

The documentation I saw said that max continuation pay is 13 months of base pay. I think it was a range of 2-13 months, presumably varying depending on specialty.
navyasw02
Posts: 245
Joined: Wed Nov 19, 2014 10:38 pm

Re: New Military Retirement System

Post by navyasw02 »

Ketawa wrote:
navyasw02 wrote:Biggest downside for me for the Navy officer perspective is retention for smaller restricted line communities. In theory, someone could do a unrestricted line tour, lateral transfer to a different community, get a grad degree paid for, do the payback tour and still get out before the 12 year point with a masters, experience, and a transportable pension. What would be the point in staying in?

Also there's no details on the career incentive bonuses. I just saw up to 22x base pay somewhere I believe is the maximum, but what will it really be?
What do you mean by a transportable pension? You still need to stay in for 20 years to receive a pension. TSP matching contributions are small in comparison. After 12 years, you'll only have $40-50k extra in the new system if you receive the max match every year and earn about 5% real.

The documentation I saw said that max continuation pay is 13 months of base pay. I think it was a range of 2-13 months, presumably varying depending on specialty.
Sorry - I misspoke. By transportable pension I should have said transportable 401k/TSP. The annuity portion doesnt start until hitting 20 years.
Topic Author
deadlymonkey
Posts: 62
Joined: Wed Jan 30, 2013 4:22 pm

Re: New Military Retirement System

Post by deadlymonkey »

Thanks everyone, especially Ketawa for putting numbers into a calculator. Outcome is what I assumed, and the new system is not as good an option. I will continue to advise junior personnel that ask to stick with the old system AND put a sizeable percentage into TSP.
mxs
Posts: 520
Joined: Tue Mar 24, 2015 1:54 pm

Re: New Military Retirement System

Post by mxs »

Don't forget to consider Roth IRA also. Lots of benefits with tax deduction and ability to take out contributions should the need arise.
gtwhitegold
Posts: 673
Joined: Fri Sep 21, 2012 1:55 pm

Re: New Military Retirement System

Post by gtwhitegold »

I don't see why they didn't put the military into FERS rather than creating an entirely new system. It would have been easier to manage I think.

I do that that the required financial training was a good idea though.
SPQR5
Posts: 2
Joined: Thu Dec 10, 2015 6:19 am

Re: New Military Retirement System

Post by SPQR5 »

I perused everyone's posts. I'm still unsure about 2 things

1- under the new plan you still receive pension immediately after retirement? is it 40% or 30%?

2- I see 2018 is the latest one can enlist into to be in the old program. Is there a specific date i've read actually dec 31 2017. after that automatically your in the new program.


SIDE NOTES:

Z- If I do 4yr active duty army then transfer to the USAF. do I only need 16yrs active duty USAF to retire with pension?
Y- If I do transfer branches would that make me change retirement plans?
furnace
Posts: 357
Joined: Tue Oct 20, 2015 3:38 pm

Re: New Military Retirement System

Post by furnace »

In the old days, and perhaps even today in some places, an army is paid based on performance. So if you win and conquer and area, you pillage what you can and split the spoils, and pay yourself that way. If you under perform and lose, you don't really have to worry about retirement because you're probably dead :shock:
RedDog
Posts: 289
Joined: Sat Dec 05, 2015 3:36 pm

Re: New Military Retirement System

Post by RedDog »

furnace wrote:In the old days, and perhaps even today in some places, an army is paid based on performance. So if you win and conquer and area, you pillage what you can and split the spoils, and pay yourself that way. If you under perform and lose, you don't really have to worry about retirement because you're probably dead :shock:

Can you imagine the press coverage if this retirement system was being implemented!
Wayson
Posts: 80
Joined: Thu Jul 10, 2014 11:33 am

Re: New Military Retirement System

Post by Wayson »

Ketawa wrote:
Wayson wrote:I'm honestly surprised that no one here has pointed out what I view as the biggest negative of the new system. The TSP contributions can only be accessed at age 55+ (59.5 if you don't use the early retirement provision), and moreover is structured so that the pension only approximates 50% retirement pay at age 60, instead of age 38-42-ish. This means that there's a good-sized chunk (20%-40%) of the 'new' pension that isn't paid out from military retirement until age 55-59.5, whereas the old system started paying as soon as you separated. It's a stealth cut to the total value of the pension.
I don't understand why you would call this a stealth cut. I think it's just an obvious change to the system.

There are ways to access the TSP before age 55. Roll the account over to a traditional IRA and use Substantially Equal Periodic Payments (SEPP). I'm not sure if it's possible to do SEPP straight from the TSP; I haven't researched it.
I call it a stealth cut because it's a cut without being overtly so. The rhetoric is that the missing percentage will be made up with TSP contributions that grow over time. But that's not really the case, is it? Sure, you can roll TSP over to a Trad IRA and do SEPP, but if you do that at age 42 you'll end up with a lot less money than you would have under the old system. Reason being, it hasn't had time to grow until age 60.

A simple change to the system would be if Reserve pensions were altered in this fashion. Since they only start paying out at age 60, there's no issue with substituting TSP for a portion of the (already small) payout. Because active duty pensions start paying immediately on retirement, the alteration must be recognized for what it truly is.
User avatar
Lancelot
Posts: 249
Joined: Thu Jul 05, 2007 9:09 pm
Location: Philippines

Re: New Military Retirement System

Post by Lancelot »

BolderBoy wrote:Nice explanation and outline.

Can something be done to force the DoD to go back to the old system?
A full employment economy with higher paying jobs :sharebeer

Like another poster mentioned, I suppose the new system is good for some one that does significant years in the service, but does not qualify for the defined benefit pension.

The DOD is doing this- well because they can. For a young person with few prospects, the US Military offers an attractive career path as compared with say, McDonalds..
No Where for Very Long...
navyasw02
Posts: 245
Joined: Wed Nov 19, 2014 10:38 pm

Re: New Military Retirement System

Post by navyasw02 »

SPQR5 wrote:I perused everyone's posts. I'm still unsure about 2 things

1- under the new plan you still receive pension immediately after retirement? is it 40% or 30%?

2- I see 2018 is the latest one can enlist into to be in the old program. Is there a specific date i've read actually dec 31 2017. after that automatically your in the new program.


SIDE NOTES:

Z- If I do 4yr active duty army then transfer to the USAF. do I only need 16yrs active duty USAF to retire with pension?
Y- If I do transfer branches would that make me change retirement plans?
1. Yes still immediately after retirement, annuity is 2%/year instead of 2.5%/year after 20 years of service.

2. There's a transition window. I dont remember the exact time windows but it was along the lines of if you're over 12 years after the implementation point you have to stick with the original retirement plan, between 12-low single digits years of service at that point you have an option, after 1 Jan 2018 you have to be in the new plan. I saw a flier in PDF over email about it at work, but I cant remember the exact specifics

Z/Y - yes, 20 years of service regardless of branch. I think the only difference between services is the retention/continuation pay amounts.
Maverick3320
Posts: 1115
Joined: Tue May 12, 2015 2:59 pm

Re: New Military Retirement System

Post by Maverick3320 »

henry A wrote:It is my understanding from recent press articles that the new system would reduce the 20 year retirement payout by 20%. Thus the new retirement system would begin paying out only 30% of base pay, not the 40% quoted above.

That being said, it's still a pretty good deal and the system definitely needed an overhaul. It will be interesting to see how retention holds up after bullets start flying though.
You're applying the percentage drop to the wrong number.

OLD SYSTEM: If I retire at 20 years with a high 3 salary of 100k/year, my pension would be 50k/yr (100k*0.50).
NEW SYSTEM: If I retire at 20 years with a high 3 salary of 100k/year, my pension would be 40k/yr (100k*0.40).

50k - 40k = 10k

10k/50k = .2, or 20% drop.
Maverick3320
Posts: 1115
Joined: Tue May 12, 2015 2:59 pm

Re: New Military Retirement System

Post by Maverick3320 »

BolderBoy wrote:
deadlymonkey wrote:Shouldn't be locked. The information is accurate and germane, I asked for opinions. I offered my opinion on one aspect of the new system that needs to be taken into account to judge the system as a whole. The financial education that the military provides junior personnel is very rudimentary, and this is something that can have profound lifelong financial impacts. It deserves to be discussed.
It seems to me that you are arguing in favor of a nanny-state-like system in which people are protected from themselves by having an omnipotent father-figure make their [retirement] decisions for them. AKA, "change is bad".

Is the new system the same gravy train that was the old system - of course not. So what? The new system is still a public pension system which is the toughest type of all to sustain over the long term (else they wouldn't have changed it from the old.) It'll get changed yet again down the road.

The fact that those retired military who will be covered in the new system can make stupid choices about their retirement holdings is no more a discussable issue than the fact that non-military retired folks can drain their retirement accounts for idiotic reasons as well.

The US government doesn't provide financial education to anyone, for the most part - why do you think the military owes such a benefit to the junior personnel? I'm willing to bet that if the junior persons who cared at all, actually asked around, they would be directed to others who can help to educate them.
In both my active duty and National Guard time, we had personal financial education classes and professional help freely available.
Maverick3320
Posts: 1115
Joined: Tue May 12, 2015 2:59 pm

Re: New Military Retirement System

Post by Maverick3320 »

Ketawa wrote:It's pretty simple: the new military retirement system is a pretty large cut for personnel who stay in long enough to receive a pension, and a small benefit for personnel who do not.

You can make a crude comparison between the two systems by using the TSP's annuity feature to find how much it would cost in the TSP to buy an annuity to make up the difference in pensions. Here is an example. I'm copying numbers from a spreadsheet I made which was set up to mirror the TSP annuity calculation worksheet. All numbers based on 2015 pay tables.

CG officer, Academy graduate, makes O-4, gets out at 20 years. The annuity is a single life annuity with no additional features and increasing payments.

Code: Select all

High 36 base pay                                             7405
Pension amount, current system                               3702

Code: Select all

Age                                                            41
Monthly annuity factor per $1k account balance               3.22
Preliminary estimate of monthly annuity payment per $100k     322
Current monthly annuity interest rate                       2.125
Interest rate used in monthly annuity factor tables         5.000
Index increase (decrease)                                  -2.875
Interest adjustment factor                                  0.215
Adjustment multiplier                                      -0.618
Increase (decrease) to estimate                              -199
Annuity payment per $100k                                     123

Code: Select all

Market Value of Pension, Current System                   3010887
Market Value of Pension, Future System                    2408710
Difference                                                 602177
With a 2.5% multiplier, the pension is worth about $3.0M. With a 2.0% multiplier, it's worth about $600k less. This ignores other benefits like health insurance.

What would TSP returns (real) have to be to have $600k extra in your TSP due to the matching contributions? I assume the max continuation pay of 13 months is paid at the start of the 12th year to make the comparison as rosy as possible. I don't know the actual mechanics of this; I imagine 13 months will only be offered to personnel in specialties high in demand. It's also not necessarily realistic since it wouldn't be able to go in the TSP due to contribution limits, but it's just an estimate. The calculation is based on making O-2 after 1 year (it's really 18 months), O-3 after 4 years, O-4 after 10 years, and staying O-4 until 20 years. In the CG, O-4s are guaranteed 20 years even if they don't make O-5.

Code: Select all

Investment Return (real)
           16%
                                              Earnings   Earnings    Ending        
Years Service  Pay Scale    Base Pay  Match   on Match  on Balance   Balance
         0      O-1 < 2       2934      352       28                   380
         1      O-2 < 2       3381      406       32         61        879
         2      O-2 > 2       3850     2310      185        141       3515
         3      O-2 > 3       4434     2661      213        562       6951
         4      O-3 > 4       5219     3132      251       1112      11445
         5      O-3 > 4       5219     3132      251       1831      16658
         6      O-3 > 6       5470     3282      263       2665      22868
         7      O-3 > 6       5470     3282      263       3659      30071
         8      O-3 > 8       5744     3446      276       4811      38605
         9      O-3 > 8       5744     3446      276       6177      48504
        10      O-4 > 10      6659     3995      320       7761      60579
        11      O-4 > 10      6659     3995      320       9693      74587
Continuation Pay             90878                                  165465
        12      O-4 > 12      6991     4194      336      26474     196469
        13      O-4 > 12      6991     4194      336      31435     232434
        14      O-4 > 14      7221     4333      347      37189     274303
        15      O-4 > 14      7221     4333      347      43888     322871
        16      O-4 > 16      7354     4412      353      51659     379295
        17      O-4 > 16      7354     4412      353      60687     444747
        18      O-4 > 18      7430     4458      357      71160     520722
        19      O-4 > 18      7430     4458      357      83315     608852
About 16% returns for the TSP returns to match the value of the pension.

We should use a very low discount rate of 0% to 2% real to compare the two systems, representing the expected real return for a guaranteed investment, in this case the G Fund. The pension is a guaranteed benefit if you stay in 20 years.

At 0% real, the TSP has a balance that is $159k higher. At 2% real, it is $187k larger.

In other words, the pension is cut 20% in the new system. In a somewhat apples-to-apples comparison making very generous assumptions like 13 months of continuation pay, the matching contributions in the TSP make up about 4-6% of that difference, for an overall cut of about 14-16% depending on the discount rate.
Excellent. Thank you for running the numbers!
Maverick3320
Posts: 1115
Joined: Tue May 12, 2015 2:59 pm

Re: New Military Retirement System

Post by Maverick3320 »

SPQR5 wrote:I perused everyone's posts. I'm still unsure about 2 things

1- under the new plan you still receive pension immediately after retirement? is it 40% or 30%?

2- I see 2018 is the latest one can enlist into to be in the old program. Is there a specific date i've read actually dec 31 2017. after that automatically your in the new program.


SIDE NOTES:

Z- If I do 4yr active duty army then transfer to the USAF. do I only need 16yrs active duty USAF to retire with pension?
Y- If I do transfer branches would that make me change retirement plans?

Under the new plan, you would still have to do 20 active years to gain access to the pension. The big change would be in the "multiplier":

OLD SYSTEM: 2.5x (#yrs service, min 20) = 50% of high 3 paycheck.
NEW SYSTEM: 2.0x (#yrs service, min 20) = 40% of high 3 paycheck

You only need 20 years of total active service, regardless of whether it was in the Army, Navy, etc, to gain the pension. It's all the same. Where it gets complicated is when someone does active duty and Guard/Reserve time. Also, as long as you entered service before 2006, you wouldn't have to lose the "old" pension plan.

Hope this helps.
navyitaly
Posts: 279
Joined: Fri Jun 13, 2014 7:18 am

Re: New Military Retirement System

Post by navyitaly »

Nobody on active duty as of today or before 1 Jan 2018 has to choose the new system..that's clear we're all grandfathered.
dharrythomas
Posts: 1223
Joined: Tue Jun 19, 2007 4:46 pm

Re: New Military Retirement System

Post by dharrythomas »

We're leaving out an important point here and as someone who retired in 2014 as a Colonel from the Army Reserves, I was in the privileged class.

A private company could never get away with the old system. The bulk of the benefits flow to a highly paid minority of plan participants. The documents from the pay commission indicate that under the old system 85% of Service Members got $0.00 in retirement benefits. It also indicated that A much higher % of officers than enlisted served long enough to draw a pension. These are people that did the heavy lifting.

The change will cost the minority some and spread the benefits over the much larger population of veterans who currently get nothing.

Private companies have been pushed for years to reduce the vesting schedule and the military maintained a cliff vesting at 20 years along with an up or out promotion and retention system. Why not the military?

I've thought we needed to make changes for years so that someone who served for a few years when they were young had some retirement benefits.

Many of the loudest defenders of the current system are those who benefited the most from it.
SPQR5
Posts: 2
Joined: Thu Dec 10, 2015 6:19 am

Re: New Military Retirement System

Post by SPQR5 »

few questions....

1- When would I be considered Active Duty the day I ship out for basic? or when I graduate? Cause i definitely want to make a career out of the military so I want to opt for the current program. I just don't know how AD works. I don't want to get on the bus thinking i'm active duty when I'm not.

2- This multiplier 2.0 or 2.5 that's just for every year over 20yrs right? If I retire at 20 under new system If my base pay was 1,000 i'd get 400$ a month under current program it would be 500$?

3-has anyone here retired from military with 20 years or on there way? what was your rank/branch?
z- what is the lowest rank one can retire with?
y- Share your experience!
x- what tips would you have for current person thinking of retirement
1- how to deal with the 20yrs
2- how to deal with deployments.
3- what are things you did you wish you didn't do ( buy nice car or spend money on stupid stuff or get it in bad with an officer or higher rank)
4- what are things you didn't do you wish you did ( kiss more ass? networked more?
5- ANYTHING & EVERYTHING YOU WANT TO SHARE OR WISH SOMEONE TOLD YOU BEFORE YOUR JOURNEY TO RETIREMENT
bowtieman81
Posts: 53
Joined: Sat Dec 13, 2014 3:44 pm
Location: FL

Re: New Military Retirement System

Post by bowtieman81 »

As an active duty Navy guy I wanted to address the comment that the govt. does not provide financial education. In the Navy all service members are required to have a basic finance class immediately after boot camp. It has been a while since I went thru that class, but it did cover a decent range of topics. That being said I don't recall hardly anything about retirement planning or how the military retirement system works. I think the Navy is more concerned with keeping sailors out of debt and above water because that has negative impacts for sailors and the Navy both. The education is more of a "hey don't do this, or you need to do this" with little explanation as to how and why.

After that required finance class following boot camp is where the help drops off. We have annual required training on quite a few topics (which any active duty person loathes), but finances is not one of the topics. The other issue is that even though we have personnel that serve as command finance specialists those people hold that job as a secondary duty and they receive their training thru a short course put on by the Navy. I have been more financially knowledgeable (and I am certainly not a finance genius) than any of the command specialist I have met or spoken to. I got tired of the lack of finance education that I started putting on presentations at my command with good results and feedback.


Break


SPQR5, to answer the question about active duty the military uses an ADSD (active duty service date) as the start of your career. The ADSD begins on day 1 of your boot camp. I am not retired yet so I cannot answer your remaining questions. I will let the retirees on the board give their input.
User avatar
BolderBoy
Posts: 6753
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: New Military Retirement System

Post by BolderBoy »

bowtieman81 wrote: I have been more financially knowledgeable (and I am certainly not a finance genius) than any of the command specialist I have met or spoken to. I got tired of the lack of finance education that I started putting on presentations at my command with good results and feedback.
Congratulations and thank you! When I was in the USAF (dino times), there was zero of this sort of info available to us other than, "Don't spend more than you earn."
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
navyasw02
Posts: 245
Joined: Wed Nov 19, 2014 10:38 pm

Re: New Military Retirement System

Post by navyasw02 »

bowtieman81 wrote:As an active duty Navy guy I wanted to address the comment that the govt. does not provide financial education. In the Navy all service members are required to have a basic finance class immediately after boot camp. It has been a while since I went thru that class, but it did cover a decent range of topics. That being said I don't recall hardly anything about retirement planning or how the military retirement system works. I think the Navy is more concerned with keeping sailors out of debt and above water because that has negative impacts for sailors and the Navy both. The education is more of a "hey don't do this, or you need to do this" with little explanation as to how and why.

After that required finance class following boot camp is where the help drops off. We have annual required training on quite a few topics (which any active duty person loathes), but finances is not one of the topics. The other issue is that even though we have personnel that serve as command finance specialists those people hold that job as a secondary duty and they receive their training thru a short course put on by the Navy. I have been more financially knowledgeable (and I am certainly not a finance genius) than any of the command specialist I have met or spoken to. I got tired of the lack of finance education that I started putting on presentations at my command with good results and feedback.


Break


SPQR5, to answer the question about active duty the military uses an ADSD (active duty service date) as the start of your career. The ADSD begins on day 1 of your boot camp. I am not retired yet so I cannot answer your remaining questions. I will let the retirees on the board give their input.

Really? I've had financial GMT every year for almost 20 years. You're right it sucks, but it's better than nothing, but pretty thoroughly explains the TSP funds, compound interest, investment types, and retirement benefits. Also most, if not all, commands have a person who is the command finance counselor as a collateral duty. While not experts, they have some training and can provide some higher than basic level of financial help. There's also Fleet and Family Support Center that has financial counselors as well. Finally, God forbid people take initiative to learn on their own instead of waiting for the Navy/govt to spoon feed them. Every sailor has the internet on their smartphones and Google knows everything. Bottom line - there's no excuse for not knowing a basic level of knowledge about where your money goes and your financial future.
User avatar
DiscoBunny1979
Posts: 2054
Joined: Sun Oct 21, 2007 10:59 am

Re: New Military Retirement System

Post by DiscoBunny1979 »

BolderBoy wrote:Every sailor has the internet on their smartphones and Google knows everything
I know this is a little off topic, but I find this comment quite amusing. So, that's where as a Nation we have advanced to - the need to carry smartphones and rely on Google for all our information? Heaven forbid we run out of electricity to power up these devices.
BolderBoy wrote:there's no excuse for not knowing a basic level of knowledge about where your money goes and your financial future.
I'm glad that the military has offered at least one training class to help understanding these issues, but I remember in the 1980s there was absolutely nothing, except where your pay went. But I don't believe that many of the enlisted folks understand finances unless they have a brain to understand such - which is why the Military gives testing to all enlisted folks to see where their aptitudes are best. Some just don't get math and therefore to assume that there's 'no excuse' misses the reason why folks sign up for the Military in the first place - that some don't have math skills and the only skills that matter to them are their MOS.

I also would like to suggest here that while it's great to have a Pension from the Military, it doesn't necessarily help for people to enlist in the Military only because of the Pension benefit. That's what I found many did while I was in the Army. Folks couldn't wait for their next stripe or Star - not because of the added "Responsibility" but because of the retirement benefit pay. Therefore, we have been creating another group of folks dependent upon the Government - like welfare - like free Health Care - etc. The Military has become another Government Welfare program - by offering free health care to family, their children, off post housing based upon where one is "assigned" not necessarily where they work (i.e. assigned to San Diego Camp Pendelton, but works at 29 Palms Marine Base therefore housing is based on San Diego pricing, not 29 Palms) and other perks.
navyasw02
Posts: 245
Joined: Wed Nov 19, 2014 10:38 pm

Re: New Military Retirement System

Post by navyasw02 »

DiscoBunny1979 wrote: I also would like to suggest here that while it's great to have a Pension from the Military, it doesn't necessarily help for people to enlist in the Military only because of the Pension benefit. That's what I found many did while I was in the Army. Folks couldn't wait for their next stripe or Star - not because of the added "Responsibility" but because of the retirement benefit pay. Therefore, we have been creating another group of folks dependent upon the Government - like welfare - like free Health Care - etc. The Military has become another Government Welfare program - by offering free health care to family, their children, off post housing based upon where one is "assigned" not necessarily where they work (i.e. assigned to San Diego Camp Pendelton, but works at 29 Palms Marine Base therefore housing is based on San Diego pricing, not 29 Palms) and other perks.
You bring up several different points here, first being excessive military costs. I dont see why CONUS commissaries and base housing are necessary. Cost of living variance can be including in housing allowance. Even when I lived overseas I could count the number of times I went to the commissary to buy stale food shipped from the US. Also I dont see why TRICARE doesn't charge a premium for every dependent. The second point you bring up is the flawed promotion system which rewards time instead of competence and achievements.
User avatar
mickeyd
Posts: 4898
Joined: Fri Feb 23, 2007 2:19 pm
Location: Deep in the Heart of South Texas

Re: New Military Retirement System

Post by mickeyd »

I have read about the new retirement system on the MOAA newsletters and other places and I am gad that I am grandfathered in under the "old system." Current Pentagon thinking seems to be geared toward reducing military strength/manpower. It is not clear what is going to be done with the saved/reduced money.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
Post Reply