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Dollars & Sense: Understanding New Military Pensions

By Roberta L. Nestor

The remainder of 2017 will have today’s 1.3million active-duty service members learning about the changes in their retirement benefits and they will have all of 2018 to decide which retirement  plan will be best for their future.  The good news is that they will still have the option of preserving the traditional military pension or they can choose to opt into the new “blended” benefits package.  However, anyone joining the military on or after January 1, 2018 will automatically be enrolled in the new plan.

The demise of traditional pension plans has been taking place since 401k(s) plans began in 1978.  It has been a long process to convert our workforce from defined benefit plans (pensions) to the defined contribution (401ks).  The new law for military pensions does provide a grandfather clause that offers all troops who entered service prior to 2018 the option to keep their traditional pension.  That pension check is only available for those with 20 years of service and it is equal to 50% of the soldier’s basic pay.

In addition, the actual pension calculation has also changed.  To calculate a military pension you would multiply your years of service by 2%.  That number is the percentage of your highest 36 month base pay average and that is what you would receive in retirement.  Prior to the 2017 National Defense Authorization Act, the multiplier used was 2.50%; going forward it will be calculated using the 2% multiplier.

The new plan, which will be the only option for new service members, will still offer a traditional pension that will be slightly less, 40% of base pay, versus the current 50% (again only with 20 years of service).  The blended portion of the new plan will allow members to contribute to what is called a Thrift Plan.  If they choose to contribute, they will receive a government match of up to 5% of pay.  Oops, that was the original proposal, changes were made in March of 2016, now it reads, and “Service members will receive an automatic 1% Defense Department contribution to their Thrift plan after 60 days of service.  At the start of the 3rd year of service, service members who contribute at least 5% on their own will receive a 4% match.”

Fortunately, there are several tools on military websites and a google search that will lead you to several articles about the pros and cons.  If you are not sure about how long you will stay in the military, the new blended plan might be your best option.  On the other hand if you anticipate serving for at least 20 years, you may opt to stay with the old plan.  Consult your financial advisor and start the number crunching!

To all of our military, THANK YOU FOR YOUR SERVICE as we honor you this Memorial Day!

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services.  She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser.  Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth.  Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice.  You should consult a legal or tax professional regarding your individual situation.  Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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