The New Military Retired Pay System
On November 25, 2015, a huge if not seismic change occurred to the military retired pay system. For generations the military retired pay was “all or nothing.” A service member had to serve at least twenty years and get a discharge no less favorable then Honorable in order to qualify. Upon retirement they would, on a monthly basis, get a percentage of their base pay. If the service member served only 19 years and 364 days, then he or she got nothing.
All that changed with the passage of the Defense Authorization Bill of 2016, signed into law on November 25, 2015.
The military will now have a hybrid system. For all service members who come on active duty on or after 1 January 2018, the military will place 1% of the annual base pay in the retirement savings plan. The government will match dollar for dollar every amount a service member places into the retirement savings plan up to 5% of the base pay. A frugal service member see could see up to 11 percent of his/her annual pay flow into the retirement savings every year.
This money belongs to the service member after two years regardless of how or when he/she leaves the service. This money can be rolled over to another tax deferred plans without any tax penalties. But, the money could not be drawn without tax penalties money before age 59 and a half, a significant change from the current system that begins payouts immediately upon retirement.
For those service members staying the full twenty, the traditional military retired pay will be reduced from 50% of the base pay to 40%. Further, the service members who stay to twenty, can upon retirement chose a lump sum option. Retirees could receive a one-time check for either 25 percent or 50 percent of their total anticipated retirement payments up until their 60th birthday. The remainder would continue as reduced monthly pension payouts.
This new retirement system would go into effect Jan. 1, 2018. Folks who came in before Jan. 1, 2006, would be grandfathered under the current system and could choose to stay will the old system or move over to the new one.