In November 2015, the President signed the FY 2016 National Defense Authorization Act. Included among the thousands of items in the act was a significant change in the military retirement system. The change, based upon recommendations from the Military Compensation and Retirement Modernization Commission, is intended to provide Service members with a portable retirement benefit whether serving four years or forty years, while providing cost savings.
Current Retirement System
Our current retirement system consists of a 20 year cliff vested annuity (a defined benefit) with an optional defined contribution component in the form of the Thrift Savings Plan (TSP). This means that if you enter the Marine Corps and serve for at least 20 years, you will earn a monthly retirement annuity for the remainder of your life. The amount of your monthly payment is calculated by determining a monthly average based upon your three highest years of base pay and then multiplying the average monthly pay by 2.5 % for each year of service. So for 20 years of service you would receive 50% of the average of your highest three years of base pay (high three average x 2.5 x YOS). Each year of service in excess of 20 years nets you an additional 2.5% of your high three base pay. In addition, you have the option of contributing to the TSP to increase your retirement nest egg.
New Blended Retirement System
The new blended retirement system retains the 20 year cliff vested annuity, but reduces the multiple from 2.5% to 2.0%. Under the new plan you would receive 40% of the average of your highest three years of base pay after 20 years of service. Each additional year of service in excess of 20 years provides you with an additional 2% of your high three base pay. To offset the reduced defined benefit, the defined contribution component, TSP, becomes an integral part of the retirement plan.
Under the blended retirement system you will be automatically enrolled in the TSP with a 3% contribution rate. In addition, the Marine Corps will contribute an amount equal to 1% of your base pay to the account after 60 days of service. You may adjust your contributions at will via MyPay, but the 1% Service contribution is automatic and does not change. In addition, if you contribute to the TSP, you will receive government matching of those contributions after two full years of service. The match is equivalent to your contribution for amounts from 1% to 3%. If you contribute 4%, the government match is 3.5%. And, if you contribute 5%, the government match is 4%. Let’s do the math. You have completed two years of service and are actively contributing 5% of your base pay to TSP. The Marine Corps will also be contributing an amount equal to 5% of your base pay to your TSP account. You become vested in your TSP account after two years of service which means if you leave the Marine Corps the money the government has contributed to your TSP remains in your TSP.
Continuation Pay in New Blended Retirement System
The new system also provides continuation pay at the completion of 12 years of service. Continuation pay is a cash payment to you in return for a promise to remain in the Marine Corps for four additional years. The amount of continuation pay is calculated by multiplying your base pay by 2.5 if you are an active duty Marine, or by multiplying your base pay by .5 if you are a Reserve Marine. This payment is considered taxable income in the year received and must be repaid if you fail to complete the additional four years of service.
How You Get Paid Your Retirement in the New Blended Retirement System
The final element of the new blended retirement system is the option for lump sum payments at the time of retirement. You may choose to receive a 50% or 25% lump sum payment (discounted to present value) at the time of retirement in exchange for a reduced retired pay annuity until you reach full retirement age. Your retirement annuity returns to the full amount when you reach full retirement age which is currently 67 years old. There are significant factors to consider before choosing a lump sum distribution. You should discuss your options with your installation PFM or unit CFS prior to making a decision.
When Does This Take Effect? Who is Affected?
The blended retirement system takes effect 1 January 2018. If you enter service prior to this date, you are grandfathered into the current retirement system. Eligibility for the new retirement system is based upon pay entry base date (PEBD). If your PEBD date is on or after 1 January 2006 and before 1 January 2018, you may elect to enroll in the blended retirement system. During the period 1 January 2018 until 31 December 2018 you may enroll in the new system if you have less than 12 years of service or less than 4,320 retirement points. If you enter the Marine Corps on or after 1 January 2018 you will be automatically enrolled in the blended retirement system.
If You Are Eligible You Will Need to Make a Choice
If you fall into the eligibility to choose the new system, you will have a choice to make. The decision is unique to your individual career and retirement goals and there isn’t a single right answer for everyone. Training materials, to include calculators and comparison tools, will be available to help you make a decision beginning in early 2017. Your installation Personal Financial Management Office can assist you in making the right choice for your situation. More information is also available on the Defense Compensation website.
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