How Military Pensions Work

While pensions are a thing of the past for most working Americans, one of the biggest draws of serving in the military is the potential to earn a retirement pension for life, whether you continue to work in the civilian world after the military or not.

However, the U.S. military retirement system is complex and can be difficult to understand. Pensions and other plans have changed over the years, and what you’re entitled to depends on when you joined the military and how long you served, among other factors. 

Key Takeaways

• Service members have access to two different retirement vehicles: a pension, which is only available to those who retire after at least 20 years of service, and a Thrift Savings Plan, which is similar to a civilian 401(k).
• Most service members today are on one of two plans: High-36 or the Blended Retirement System.
• Under the High-36 plan, someone who retires at 20 years will receive 50% of their base salary as a pension, but each additional year they stay in, they will receive a multiplier of 2.5% more toward their retirement. If they make it to 40 years, they’ll receive their full base salary as a pension.
• The Blended Retirement System is similar, but the multiplier for each year of service decreases from 2.5% to 2%. When retiring at 20 years, retirement pay is 40% of base pay, rather than 50% as with the old plan. The pension coming from the government is less in this plan.

How Military Retirement Works

The military retirement system works a bit differently than in the private sector. Service members have access to two different retirement vehicles: 

1. A pension (defined benefit), which is only available to those who retire after at least 20 years of service. It is fully funded by the government and is paid out as an annuity for life, on a monthly basis.
2. A Thrift Savings Plan (TSP), a tax-advantaged retirement savings account, much like a 401(k). TSPs were introduced in 2001, and are now a mix of self-funding and government contributions. It’s not required to serve for 20 years to receive this benefit; this money belongs to the service member. 

The exact rules and benefits have varied over the years, with several different plans phasing in and out. The type of retirement plan you’re on depends on when you entered the military.

One plan, “High-36,” was only available if you chose to opt in during the transition period. Only those who have served for at least 20 years were eligible to receive the pension, which equaled 2.5% times the number of years someone served, multiplied by the average of the highest 36 months of basic pay (hence “High-36”).

A new plan was phased in during 2017 called the Blended Retirement System (BRS). The pension piece of it is still reserved for those who serve for at least 20 years, but its amount is slightly reduced in exchange for the government contributing to the TSP (hence “blended”). The TSP money belongs to the individual, even if they retire well before 20 years. The BRS also offers a “continuation pay” bonus that kicks in after 12 years of service if a service member decides to reenlist.

Note

Retirement plans work differently for reservists and those who are deemed disabled.

Types of Active Duty Military Retirement Plans

While there have been some other plans in the past, the two main types of pension plans active duty service members are currently on are High 36 (or “High 3”), the legacy plan some could opt into, or the BRS, which was phased in a few years ago.

Here’s how these two plans compare.

Previous Plan: High 36

Qualifications: This legacy pension plan is for those who entered the military between Sept. 8, 1980, and Jan. 1, 2018, and served at least 20 years. While it was being phased out, some service members had the option to stay with this plan or switch to the BRS.

Pension: According to the Department of Defense, retirement pay from this plan “equals 2.5% times the number of years of service times the average of the member’s highest 36 months of basic pay.” Since this is usually the last three years of service, it’s often called “High 3.” 

Under this plan, someone who retires at 20 years will receive 50% of their base salary as a pension, but each additional year they stay in, they will receive a multiplier of 2.5% more toward their retirement. That means if someone makes it to 40 years, they’ll receive their full base salary as a pension.

TSP: The government made no contributions to TSP, so anything contributed is solely up to the service member.

Current plan: Blended Retirement System

Qualifications: This is the only retirement plan for those who entered service starting on Jan. 1, 2018, but those already serving (with 12 years or less under their belt) had an opt-in period where they could choose to stay with the prior plan or switch to the BRS.

Pension: The BRS is similar, in that retirement pensions are calculated using the last 36 months of pay. However, the multiplier for each year of service decreases from 2.5% to 2%. This means the pension coming from the government will be less under this plan. When retiring at 20 years, retirement pay is 40% of base pay, rather than 50% as with the old plan.

TSP: To make up for a smaller pension, the government automatically contributes 1% of the service member’s base pay to their TSP account each month. After two years of service, the government matches TSP contributions up to 4%, while continuing to give the 1%. So as long as you put in at least 4% of your income to TSP, you’ll get 5% added for free (the match plus the government contribution). The money in the TSP is yours to keep, so even if people leave the service before 20 years and miss out on a pension, they’ll still have this money in an investment account for retirement.

Other differences: The newer BRS system has added another incentive called continuation pay. This happens at 12 years of service and provides a cash payment for those who decide to reenlist in the military for several more years (the exact number of years can vary). BRS also has a lump sum payment option through which retirees who make it to 20 years can select to receive a portion of their retirement pension upfront (25% to 50%) with smaller checks over time.

Note

Lump sum payments are fully taxable as income, and may result in a higher income tax bracket.

Be Aware of Tax Implications

Retirement pensions are received as soon as the service member retires from the military after 20 years. If they enlisted at age 22, that means they can begin receiving their pension at age 42.

With your TSP, you decide when to start taking out your money once you leave the military. You can choose from several options for accessing it; you can withdraw money once or in regular payments, leave it to grow, or purchase an annuity with the balance. However, if you withdraw money before age 60, you may pay a penalty. On the flip side, once you reach age 72, you’re required to start taking minimum withdrawals. Each option has various tax ramifications, so it’s smart to seek out professional advice.

Why Did the Military Switch to BRS?

While there are a few factors, a significant reason for Congress’s decision to switch was the finding that in the legacy systems, 51% of officers and 83% of enlisted service members didn’t make it to 20 years of service. This means they received no retirement pension. In order to make the military more aligned with the private sector, where employees now often receive employer retirement contribution matches and funds that vest quickly, the government changed plans to make retirement a blend of funding sources. Under this new plan, it’s estimated that 85% of service members will leave with at least some retirement money. However, it does put the onus on the service member to contribute 4% of their own salary to receive the full benefits of the TSP match.

How Are TSPs Invested?

Money contributed to the TSP is put into a retirement fund automatically, but you should ensure it’s invested optimally for you. This is less of a problem now; previously, TSP contributions were invested by default in the G fund, the most conservative fund. Younger service members who didn’t realize this until later lost out on potential growth. As of January 1, 2018, contributions for new TSP enrollees default to an age-appropriate Lifecycle Fund, which is a mix of assets that rebalance over time based on the person’s age. However, participants can manually invest in specific funds with differing levels of asset allocation and risk.

Can You Retire on Military Pensions Alone?

Those who leave the military at 20 years are unlikely to be able to survive on just a military pension, since depending on whether you’re on the legacy plan or new plan, your payments are only equivalent to 40-50% of your base salary. You’d have to stay in until 40 years on the legacy plan to get your full paycheck, and those on the BRS can never achieve more than 82% given the TSP component.

However, since the average retiring service member is in their 40s, it’s common to pursue another career and earn additional retirement benefits. You can earn a whole additional retirement pension if you work as a federal employee. If you choose to work at a nonprofit, you may have access to a 403(b) or 457. (457 plans are often available to state and local government employees, too.) Or if you go to the private sector, you can sock away money in a 401(k) or Individual Retirement Account (IRA) that you can use to supplement your military pension. Many of these accounts offer a designated Roth option, where you pay taxes on your contributions up front and then make withdrawals tax-free during retirement, you’ve had the account for five years or longer.

The Bottom Line

As alluring as military pensions can be, they can also be confusing once you get into the specifics of how they work. Knowing which type of plan you have and how it works is essential. Understanding these plans as thoroughly as possible is the best way to get the most out of them, both when you’re contributing to them before retirement, and once you’re living off of them.

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