As a finance and investment expert, I often get questions about military retirement plans. The U.S. military offers one of the most robust retirement systems, but it can be complex. In this guide, I break down how active duty military retirement works, compare the old and new systems, and provide calculations to help you make informed decisions.
Table of Contents
Understanding Military Retirement Systems
The military retirement system has two main plans: the Legacy High-3 Retirement System and the Blended Retirement System (BRS). The BRS took effect in 2018, meaning service members who joined before 2018 had a choice to stay with High-3 or switch to BRS.
The High-3 Retirement System
Under the High-3 system, retirees receive 2.5% of their average basic pay over the highest 36 months (3 years) of service for each year served. The formula looks like this:
\text{Annual Pension} = \text{Average of Highest 36 Months Basic Pay} \times \text{Years of Service} \times 0.025Example Calculation:
Suppose a service member retires after 20 years with an average high-3 basic pay of $60,000. Their annual pension would be:
This system rewards long-term service but offers no government-matched contributions to the Thrift Savings Plan (TSP).
The Blended Retirement System (BRS)
The BRS introduces a reduced pension (2.0% multiplier instead of 2.5%) but adds government-matched TSP contributions. The pension formula under BRS is:
\text{Annual Pension} = \text{Average of Highest 36 Months Basic Pay} \times \text{Years of Service} \times 0.02Example Calculation:
Using the same numbers as before ($60,000 average pay, 20 years of service), the pension would be:
The trade-off is that the government matches up to 5% of base pay in TSP contributions, which can grow significantly over time.
Comparing High-3 and BRS
To decide which system is better, we must compare long-term benefits. Below is a table summarizing key differences:
| Feature | High-3 Retirement System | Blended Retirement System (BRS) |
|---|---|---|
| Pension Multiplier | 2.5% per year | 2.0% per year |
| TSP Matching | No | Yes (up to 5% of base pay) |
| Continuation Pay | No | Yes (for mid-career retention) |
| Lump-Sum Option | No | Yes (partial pension buyout) |
Which One is Better?
The answer depends on career length and investment discipline.
- For 20+ year careers, High-3 typically provides a higher pension.
- For shorter careers or those who invest aggressively, BRS may be better due to TSP matching.
Thrift Savings Plan (TSP) Under BRS
The TSP is the military’s 401(k)-equivalent. Under BRS, the government matches contributions as follows:
- Automatic 1% contribution (even if you contribute nothing).
- 100% match on the first 3% of contributions.
- 50% match on the next 2%.
Example: If a service member earns $50,000 and contributes 5% ($2,500), the government adds:
\$50,000 \times 0.01 = \$500 \text{ (automatic)}
\$50,000 \times 0.03 = \$1,500 \text{ (full match)}
\$50,000 \times 0.02 \times 0.5 = \$500 \text{ (half match)}
Total match = $2,500
This means a 5% personal contribution yields a 5% match, effectively doubling investment growth.
Early Career vs. Late Career Considerations
Early Career Service Members
For those just starting, BRS is often advantageous because:
- They have more time for TSP compounding.
- They may not serve 20 years (only 17% of enlisted personnel and 50% of officers reach full retirement).
Mid-to-Late Career Service Members
Those closer to retirement may prefer High-3 if they are confident in serving 20+ years. Switching to BRS reduces their pension by 20%, so the TSP match must compensate for this.
Lump-Sum Buyout Option
BRS offers a lump-sum buyout at retirement, allowing retirees to take up to 25% or 50% of their discounted pension as a lump sum. This can be useful for debt repayment or investments, but it reduces future monthly payments.
Example Calculation:
If a retiree is due $24,000/year under BRS, they could take a 50% lump sum of the present value (assuming a 6% discount rate over 20 years).
This means they receive $137,639 upfront but lose $12,000/year in future payments.
Tax Implications
Military pensions are federally taxable but exempt from FICA taxes. Some states also exempt military pensions. TSP withdrawals are taxed as ordinary income unless using a Roth TSP.
Final Thoughts
Choosing between High-3 and BRS requires careful analysis. If you plan a full 20+ year career, High-3 may be better. If unsure, BRS provides flexibility and investment growth. Always consult a financial advisor before making decisions.
