Everything You Need to Know About Blended Retirement Systems
Retirement plans are a modern luxury that many employers offer to attract skilled employees to their company.
The military is no different, and even though they operate as a department of the government, they are ultimately concerned with attracting the most skilled workers.
In order to do this, they have amped up their retirement plans in recent years, most specifically offering the Blended Retirement System, which took effect on January 1st, 2018.
In this article, we offer an overview of the Blended Retirement System, focusing on its features and drawbacks. We end with our thoughts on the future of retirement systems.
What is the Blended Retirement System?
The word “blended” refers to how this new retirement system will draw upon other government programs to provide service members with money during retirement.
In particular, the government offers service members the option of allocating some of their income to the Thrift Savings Plan (TSP), which is similar to a 401 (k) plan.
Additionally, the government offers service members an annuity after 20 years of service. This annuity is calculated using a percentage of the service member’s total years of employment.
The new Blended Retirement System merges these distinct plans, while also offering several new provisions to convince service members to work longer.
Specifically, under the Blended Retirement System, service members will receive a lower annuity if they retire, but the government will match contributions towards the member’s TSP plan up to five perfect of the member’s base pay. These matching contributions take effect after two years of service, though the service member’s own contributions start after 60 days of employment.
Furthermore, the new Blended Retirement System offers a bonus to service members after 12 years of employment. Depending on what kind of service member you are, this could be anywhere from half of your monthly base to 2.5 times your monthly pay.
The Benefits of the Blended Retirement System
The main benefit of the new Blended Retirement System offered by the government is that it offers a financial incentive for service members to work any length of time.
Essentially, even if you only work a few years in the military, you can still transfer the money you have invested in your TSP to a new retirement plan or account. Even further, service members can keep whatever contribution the government has made.
Previously, this ability to collect extra money from the government and to take the money from the TSP with you outside of the military was not allowed. This meant that many service members left the military with no retirement benefits since they didn’t work the necessary 20 years to receive an annuity.
This new blended system pays more money to service members in the short-term and less money to service members in the long term. Ultimately, the total amount of money that members receive will be contingent upon the stock market and financial status of international markets.
However, this new blended plan is not shortchanging any service member. It’s just distributing how the wealth is paid out to service members, trying to attract service members to work any length of time, even only a couple of months or a year.
What’s great about the Blended Retirement System is that the government matches the service members’ contributions. This translates to essentially free money in the service members’ pockets should they choose to leave the military for any reason.
The Drawbacks of the Blended Retirement System
The main drawback of the Blended Retirement System is that service members who plan on retiring with the Military will receive lower annuities when they do.
Some people might argue that this loss of money is compensated for by government contributions to the TSP. However, the performance of this plan is contingent upon the financial markets. If the markets perform poorly over a period of time, then the service member could actually lose this government contribution in addition to their own contribution.
In this sense, offering service members a higher annuity is a more reliable form of a retirement plan. Most importantly, it determines the service member’s retirement payout based on an average of the three highest years of pay. While base pay is influenced by the financial markets in some sense, ultimately it’s more stable and secure than relying upon a portfolio.
Some people argue that this new Blended Retirement System does not offer long-term incentives for service members to continue working with the military. This is because it incentivizes service members to work in the short-term and then leave in order to cash out what the government has contributed to their TSP.
Consequently, the military might experience a shift in the kind of service members that are attracted to the job. Long-term, veteran service members offer a different kind of value than more short-term service members. In particular, they are often more dedicated to the values of the job as well as more committed to the projects at hand.
How Can Service Members Join the Blended Retirement System?
Service members that joined the military before 2006 will remain under the current retirement system.
Service members that joined the military after 2006 but before January 1st, 2018 will have the option to stay with their current retirement plan or opt into the new Blended Retirement System.
Service members that joined the military after January 1st, 2018 will be automatically opted into the Blended Retirement System.
Educational Opportunities Regarding the Blended Retirement System
Another great feature associated with the rollout of this new Blended Retirement System is the associated educational opportunities offered by the government.
Essentially, since this new retirement system contains so many changes, the government will offer three courses for service members depending on how long they’ve worked.
These courses will walk service members through in-depth calculations to show them how their retirement payout and salary will be influenced by what retirement plan they select.
What’s great about these courses is that they are geared towards service members who have worked a similar amount of time with the military. This means that each course can specialize the presentation of its information to suit service members who will likely be interested in a certain kind of retirement plan.
Ultimately, these courses are unprecedented in the industry, as most employers don’t take the time to design such a comprehensive review of their retirement policies. This neglect can lead to workers not selecting the most ideal retirement policy, which could impact them financially in the long-term.
By offering such a comprehensive set of courses, the government has ensured that each service member will be knowledgeable concerning their retirement plans. This leads to better decision-making and happier service members in the long term, which only reflects positively on the military.
Our Final Thoughts on the Blended Retirement System
We think the success of the new Blended Retirement System for active service members will depend on the status of financial markets. Ultimately, investing more money in a TSP is a risky thing, especially when past retirement plans have emphasized payouts in the form of annuities.
If the financial markets are volatile and significantly fall over the next 20 to 30 years, then many service members could lose money by contributing to their TSP. Yet, because the TSP usually invests money in the safest, most secure sectors, this anxiety is likely ungrounded.
Ultimately, we think the Blended Retirement System is a good thing. The government even gives existing service members the option to choose if they want to opt into the new system. This is perfect for members that are used to the previous retirement plan and simply want to keep the status quo.
On a deeper level, we think retirement benefits are a fantastic amenity of modern jobs that we often don’t appreciate. Really, when you think about it, any kind of retirement benefit is a luxury, let alone one that promises you money in both the short-term and long-term.
When we dissect the details of various abstractions, it can sometimes be easy to forget the larger picture. Ultimately, whether service members are opting into the new system or staying with the old one, the whole point of both systems is to benefit the worker. When comparing plans, make sure you don’t forget that the differences are relative. You will likely benefit regardless of which decision you make.
It’s also important to note that retirement is becoming less and less frequent in today’s world. Even further, given how fast everything is changing, it’s not even clear if retirement money will be used the same way in 40 years than it is used in today’s world. This is not to say that you should ignore the decision to choose a retirement plan. Selecting a retirement plan is certainly an important decision.
But, remember that the world might look so different by the time you retire that your anxieties and indecisions might not be warranted.