Military service members might want to start thinking a little more deeply (and often) about their plans for the future, as the time approaches when changes to the armed forces’ retirement system will take effect.

Although the new system doesn’t kick in till 2018, that leaves little more than a year for service members to consider how those changes might affect their plans to serve—or to depart for the civilian workforce. And make no mistake: the changes are substantial.

While those on the pro side are pleased that the new system will offer a way to save that doesn’t require 20 years of service (the current system is an all-or-nothing one, with those who depart the military before serving 20 years getting nothing), those on the con side point out that some aspects of the new system are not as generous as the old, despite the other opportunities it might offer.

Current service members have the option to stay in the old plan or be switched to the new, and they’d be well advised to consider the changes before they decide which will be most beneficial to them.

There are three basic changes that make a big difference; they are matching thrift savings plan (TSP) contributions, a decreased pension multiplier and a career retention bonus.

While one aim of changing the existing system was to provide service members who don’t serve 20 years with some sort of retirement benefit, as they would have in the private sector, another was to save money for the government—something current active-duty soldiers and sailors need to remember.

Only about 17 percent of those serving in the military actually hang in there for the full 20 years that are required to receive a pension. One of the changes is using the TSP more like a 401(k), complete with matching contributions—something the current plan does not provide.

Under the new plan, service members would automatically be enrolled in the TSP, and after two years of service would begin receiving matching contributions of up to 5 percent of their pay. This would allow more like 75 percent of service members to get some kind of retirement benefit when they leave.

But there’s a catch (isn’t there always?).

In exchange for a richer TSP, service members would get a lower multiplier for the pension they’ll get when they leave—meaning that their pension will be smaller. But, according to TheMilitaryWallet.com, that could actually result in a larger overall retirement benefit for some retirees.

There’s also the option of a career continuation bonus, which would kick in upon a reenlistment for four more years by service members who have already served 12 years. They could either get this as a lump sum or as annual payments during the term of reenlistment—but if they fail to serve the required length of time, recoupment could be in order.

Then there’s the lower multiplier. The current system uses a 2.5 percent multiplier, so those serving 20 years would receive a pension equal to 50 percent of base pay. The new system would switch to a 2.0 percent multiplier, cutting that to 40 percent.

Last but not least, service members can change how they receive their retirement benefits—as a monthly annuity (like the current plan), a smaller monthly annuity with a lump-sum payment or as a larger lump sum with no monthly annuity. In the latter instance, they would be eligible for the full monthly annuity they would have gotten once they’re old enough to collect Social Security.

The trick here is how that lump sum is calculated. Actuaries have gone on record warning that the personal discount rates the military plans to use when determining the value of those lump sums could make them worth far less than a comparable civilian retirement lump sum.

Service members already far from enamored of the new plan have been coming down, by and large, on the side of being grandfathered into the old plan. Changes made back in February to allow delay of contributions for younger service members and ending matching contributions for career military after 26 years of service were not popular. It remains to be seen how well the new system does for military members—who should take advantage of the lead time to make a wise decision.

Instant Insights /

Changes to military retirement require thought, planning

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