Survey: Military Personnel Aren’t Ready for Blended Retirement System
Posted By GoodCall Contributor on March 21, 2017 at 3:49 pm
Many people serving in the U.S military will have a new option for their retirement benefit beginning Jan. 1. But a recent survey indicates most members are not adequately prepared for the change to a blended retirement system.
What the Blended Retirement System is
The Blended Retirement System is the new retirement plan for those serving in the military. It gets its name because it blends the existing pension plan with a member contribution.
Under the blended retirement system, service members decide how much they will personally contribute – similar to a civilian 401 (k) program. The system also provides a tiered matching contribution from the Department of Defense.
Military personnel still serving as of Dec. 31 are automatically grandfathered into the existing pension system. However, some personnel will have the option to switch to the blended retirement system. These include:
- Active duty service members who signed their contract to begin military service after Dec. 31, 2005.
- Reserve members who have accumulated less than 4,320 retirement points at the end of 2017.
Those who have the option to switch have the entirety of 2018 to decide whether to transition to the blended retirement system. Anyone who joins a branch of the military after Jan. 1 automatically will be enrolled into the BRS.
BG Michael J. Meese, USA, Ret., PhD, the chief operating officer and secretary of the American Armed Forces Mutual Aid Association (AAFMAA), explains, “The biggest benefit of the BRS is not for those who will retire from a career in the military. The BRS will enable everyone to have some retirement savings, even after just serving two year.”
He further explained under the old system only about 17 percent of service members retired and were eligible to receive any retirement benefits.
One downside of the blended retirement system: It features a 20 percent reduction in current guaranteed retirement pay generated by the old traditional pension in exchange for a variety of new benefits that include automatic and matching Thrift Savings Plan contributions, a mid-career continuation pay bonus and options to receive a portion of the reduced pension as a lump sum.
The change apparently has been confusing. Financial literacy survey results recently released by First Command Financial Services Inc. and First Command Educational Foundation overwhelmingly indicate the financial readiness of career military lags behind that of civilians.
Some findings of the survey, now in its sixth year, include the following:
- 7 of 10 military members surveyed were unable to earn a passing grade for financial literacy.
- The average grade of those with pay grades of E-5 and above with household incomes of at least $50,000 was 62. However, a survey last year found that millennials and Generation Z members in general lack financial literacy.
- The average score of civilian with comparable income was 76.
- Scores this year were at a record low for military participants.
- 5 percent of military and 17 percent of civilian respondents earned a perfect score
- 45 percent of military and 21 percent of civilian respondents reported completing some form of financial training
First Command Financial Services analysts, according to a press release, find this decreased level of preparedness especially worrisome because the Department of Defense has actively been facilitating financial training and education to specifically help service members understand the blended retirement system and prepare for the increased financial responsibilities they will face.
Considering the difficulty military spouses can have in establishing careers with retirement benefits, it is concerning that the plan has prompted confusion. Michael Ruzhansky, president and CEO of Iron Dome Financial Group, has been working with an organization to help provide financial education for military personnelin regards to the upcoming retirement changes. He recommends service members:
- Take advantage of the resources the military makes available, including personal financial consultants.
- Consider hiring a fee-only adviser who is not tied to product sales.
- Work with financial educators to understand the full potential of the Thrift Savings Plan (TSP).
Those considering opting in to the system should carefully consider the following factors:
- Whether they wish to remain in service for the full 20 years.
- Whether they will absolutely leave before serving the full 20 years.
- Whether they will save the allowable 5 percent.
After answering those questions, the service members should seek advice from a financial adviser with knowledge of both systems and request projections of both retirement plans before deciding.