Contributing Author: Dianne Schechter

The year ahead will prompt many of today's 1.3 million active-duty service members to make a big decision about their retirement benefits: whether to preserve their place in the traditional military pension system or opt into a new “blended” benefits package.

In the months to come, the Defense Department will begin an expansive education program to ensure all troops understand the difference between the two benefits and are prepared to make such a critical personal financial decision.  Those who are eligible to make a choice between the two benefits, have a full year before they can opt in to the new plan.  That window will last from January 1, 2018 through December 31, 2018.  Everyone who joins the military on or after January 1, 2018, will be automatically enrolled in the new plan.

The law contains a grandfather clause giving troops entering the service prior to 2018 the option to keep the legacy retirement benefit, which offers a monthly pension check equal to 50 percent of basic pay after 20 years of service.

The new retirement benefits offers a smaller pension check, 40 percent of basic pay after 20 years, yet also includes monthly government contributions to an individual retirement account that service members own outright after completing just 2 years of service.  It will be similar to 401(k) contributions for private sector employees, and marks the first time the military will offer some limited retirement benefits to troops who leave the service before reaching 20 years.  Historically, non-career service members (more than 80 percent of the force) have not received any retirement benefit.

The new system will make individual retirement account contributions equal to at least 1 percent of basic pay.  Additionally, the government will provide matching funds (up to a maximum of 5 percent of compensation) to troops who contribute their own cash. 

Individual contributions are tax-deferred, meaning the tax is payable upon withdrawal.  But money deposited into these retirement accounts, known as a Thrift Savings Plan, is generally not available for withdrawal before the owner reaches the age of 59 ½ .  Early withdrawal comes with significant tax penalties.

The most important factor in the decision will be whether an individual service member plans to stay for a 20-year-military career.  For those who expect to reach the 20-year mark, or who have already reached their 20-year mark and intend to retire from active service in the near future, the traditional pension system is probably a better deal.  However, for young troops who are unsure about their career plans, the new system has the potential to provide a greater retirement benefit than the traditional pension system after 20 years of active service and also promises some retirement benefit for those who might leave long before 20 years of service.