Since 1 January 2018, everyone entering the military has been part of the new “Blended Retirement System” (BRS), which includes a 401(k)-like defined contribution plan that vests at two years, provides a continuation bonus around the mid-career mark at 12 years of service, and then establishes a defined benefit pension at retirement after 20 or more years.
With such qualifications at stake, it is important to understand that, in essence, the BRS system offers FREE MONEY. So everyone should be doing it!
What you get: After the first 60 days in service the Military will contribute 1% of your base pay to TSP — no matter what — even if you don’t put in any of your own money in.
Do you really get free money? Yes, you could call it that. Your service will match up to 4% of your pay. 3% will match your contribution dollar-for-dollar, and the next 2% will be matched at 50 cents to the dollar. What does that mean? Here’s an example**:
If your E-2 base pay is $2,055.00
1% automatic = $20.55
3% = $61.65
That means the military will pay you $82.20!
Plus 2% at 50% match = $20.55
Your “free money” would total $102.70 per month.
** Please note that the figures above are shown as an example. This document is not meant to give tax or legal advice.
What does BRS look like in retirement?
Retired pay will be the average of the servicemember’s highest 36 months of basic pay times 2%. If you retire at 20 years of service, you get 40% of your final base pay. If you retire at 30 years of service, you get 60% of your final base pay. You can either get your full retirement when you’re eligible or opt for the lump sum option. If you take the lump sum, you will receive a reduced monthly retirement check until age 67. A lump-sum payment will also be discounted to allow for inflation. This means that your monthly retirement benefits and survivor benefits will be reduced.
Next let’s talk Roth vs. Traditional TSP
When you elect to put your money into the TSP, you must choose either a Traditional, Roth TSP, or a combination of both.
As of 2022, you can contribute up to $20,500 to these TSP funds in total. Did you know that if you put money in a retirement savings account similar to TSP, called an IRA, you can only contribute up to $6,000 annually, with no added matching contribution? That’s one more reason to take advantage of the higher savings potential of up to $14,500 more with your TSP!
Roth IRA — In this type of account, the money moves to your TSP after taxes have been taken out of your pay, meaning when you withdraw these funds at retirement you will not pay taxes.
Traditional IRA — In this type of account, the money moves before taxes have been taken out of your pay, lowering your current taxable income. But later, when you withdraw these funds, it will be taxed at whatever your tax bracket is at that time.
How will your TSP grow?
The TSP offers six investment funds to help build the right portfolio allocation. Your long-term career plans, your financial goals, and your risk tolerance level will impact your investment decisions. You can allocate your TSP savings into any combination of the following investment funds::
- Government Security Fund (G)
- Fixed Income Fund (F)
- Common Stock Fund (C)
- Small Cap Stock Fund (S)
- International Stock Fund (I)
- Lifecycle Fund (L)
The Federal Retirement Thrift Investment Board directly manages the G Fund — a lower-risk fund most similar to a cash investment. It buys government-guaranteed U.S. Treasury securities that provide interest income. The F, C, S and I Funds provide index fund options that come with varying levels of risk and return. Lastly, the L Fund invests in a combination of the five individual TSP Funds, according to your age and time to retirement.
While you will be working to be mission ready it is also important to know how to make your finances mission ready, too. This may be a difficult and personal question, but it’s one AAFMAA can assist you with if it feels like an overwhelming decision.
This article was originally published April 21, 2017.