How Does the Blended Retirement System Work?
Understand the U.S. military's Blended Retirement System. Learn how your service builds a future with pension, TSP, and investment options.
The Blended Retirement System (BRS) represents a modernization of the U.S. military’s retirement benefits, designed to provide financial security for a broader range of service members. The BRS aims to offer a retirement benefit not only to those who complete a full career but also to those who serve for a shorter duration. This system blends elements of the traditional military pension with a portable retirement savings plan. The purpose of the BRS is to expand the number of service members who receive a government retirement benefit, addressing the fact that a large percentage previously left service without any retirement compensation.
Core Components
The Blended Retirement System is structured around two main pillars: a defined benefit pension and a defined contribution plan through the Thrift Savings Plan (TSP). The defined benefit component provides a monthly annuity to service members who complete 20 or more years of service. This annuity is calculated using a multiplier of 2.0% per year of service, applied to the average of the service member’s highest 36 months of basic pay. For example, a service member retiring after 20 years would receive 40% of their highest 36 months of basic pay as a monthly pension.
The Thrift Savings Plan functions similarly to a civilian 401(k) retirement savings and investment plan. It allows service members to contribute their own funds and also receive contributions from the government. The TSP portion of the BRS provides a portable retirement savings plan that service members can take with them, even if they leave military service before reaching 20 years.
Government Contributions and Vesting
Under the BRS, the government provides specific contributions to a service member’s Thrift Savings Plan account. After 60 days of service, the Department of Defense automatically contributes 1% of a service member’s basic pay to their TSP, regardless of whether the service member makes their own contributions. This automatic 1% contribution vests after two years of service, which is known as vesting.
Beyond the automatic contribution, the government also provides matching contributions to the TSP. This matching begins after two years of service. The government matches dollar-for-dollar for the first 3% of a service member’s basic pay contribution, and then 50 cents on the dollar for the next 2% of basic pay contributed. This means a service member contributing at least 5% of their basic pay can receive a maximum government match of 5% (1% automatic plus 4% matching). These matching contributions also vest after two years of service.
Vesting rules determine when a service member gains full ownership of their retirement benefits. For the defined benefit pension, service members must complete 20 years of service to be vested and receive the monthly annuity. In contrast, all government contributions to the TSP, both the automatic 1% and the matching contributions, vest after two years of service. This means that if a service member leaves before 20 years, they still retain the vested funds in their TSP account.
Service Member Contributions and Investment
Service members play an active role in building their retirement savings within the BRS by contributing to their Thrift Savings Plan. Contributions can be made from various pay sources, including basic pay, special pay, incentive pay, or bonuses. Service members have the flexibility to choose how their contributions are taxed, with options for either pre-tax contributions through a traditional TSP or after-tax contributions through a Roth TSP. Traditional TSP contributions reduce current taxable income, with taxes paid upon withdrawal in retirement. Roth TSP contributions are made with after-tax dollars, meaning qualified withdrawals in retirement, including earnings, are tax-free.
The TSP offers a range of investment funds for service members to choose from. These include the G Fund (government securities), F Fund (fixed income), C Fund (common stocks), S Fund (small capitalization stocks), and I Fund (international stocks). Additionally, Lifecycle (L) Funds are available, which are professionally managed portfolios that automatically adjust their asset allocation to become more conservative as a service member approaches their target retirement date.
Service members have control over how their contributions and the government’s contributions are invested among these funds. They can adjust their investment choices for future contributions and reallocate existing funds within their account to align with their financial goals and risk tolerance. Regular review and adjustment of investment allocations are encouraged to adapt to market conditions and personal circumstances.
The Lump Sum Option
The Blended Retirement System includes an option for eligible service members to receive a portion of their retired pay as a discounted upfront payment, known as the lump sum option. This option is available to service members who complete 20 or more years of service and retire under the BRS.
Service members electing the lump sum can choose to receive either 25% or 50% of their estimated retired pay as a discounted upfront payment. The lump sum amount is calculated by discounting the total future retired payments expected until the service member reaches their Full Retirement Age (FRA), which is typically age 67.
The Department of Defense publishes an annual discount rate used for this calculation. A significant consequence of electing the lump sum is that the service member’s monthly retired pay will be reduced until they reach their Full Retirement Age. If a 25% lump sum is chosen, the monthly annuity is reduced to 75% of its full value; if a 50% lump sum is chosen, the monthly annuity is reduced to 50%. Once the service member reaches age 67, their monthly retired pay reverts to the full, unreduced amount. This lump sum payment is considered taxable income.