Continuation pay under the U.S. military’s Blended Retirement System (BRS) is effectively a bucket of cash provided to mid-career servicemembers as an incentive to stay in uniform. However, the number of dollars in that bucket varies widely depending on an individual’s specialty skills or career area as well as external factors such as retention rates across the military services. This article demystifies continuation pay, provides an overview of current pay rates, and offers some suggestions on how to manage your own cash payout to meet your short- and long-term financial goals.
What Is Continuation Pay?
Continuation pay is one of the main pillars of the U.S. military’s Blended Retirement System, which went into effect Jan. 1, 2018, and remains the retirement plan for all new servicemembers. Essentially, continuation pay is a one-time direct cash payout, kind of like a bonus, that is given to mid-career servicemembers as a retention incentive.
In exchange for continuation pay, servicemembers must commit to serving an additional three or four years. Keep in mind that continuation pay can be received in addition to other benefits, such as retention bonuses or other career field-specific incentives.
The amount of continuation pay varies by military service, active duty or reserve status, and year — making it somewhat difficult to plan for and factor into a budget. In general, the size of this payout ranges from:
- Active duty/Active Guard Reserve: 2.5 to 13 times regular monthly basic pay
- Reserve Component Members: 0.5 to 6 times the regular monthly basic pay
The payout rates are established by each Service on an annual basis and take into account overall military retention goals. Payout rates are likely to climb if retention rates dip.
Continuation Pay Eligibility Requirements
Not every servicemember is eligible to receive this payout. In order to qualify for continuation pay, the servicemember must be enrolled in the Blended Retirement System and have completed between eight and 12 years of service. In this case, the “years of service” is calculated from the servicemember’s Pay Entry Base Date, which appears in Block 4 of the Leave and Earnings Statement.
How Is Continuation Pay Calculated?
The amount of continuation pay to be received is based on several factors, including a servicemember’s base monthly pay rate and a pay rate “multiplier” as outlined above. This multiplier is based on service-specific retention needs as well as the need for specialty skills and hard-to-fill positions, so it changes year-over-year as the personnel needs of the services fluctuate.
Requesting Continuation Pay
Once a servicemember has met the eligibility requirements for BRS Continuation Pay, having been enrolled in BRS and between eight and 12 years of service, they may complete the Request for Continuation Pay (CP Contract). This must be completed no later than 30 days prior to hitting the 12-year mark. Here is an example of the form, but check with your branch of service for the most current version.
Servicemembers have the option of receiving the payout in a single lump sum or in a series of equal installments that are allocated over a period of time, but not for longer than four years. This is an important decision to make because continuation pay is treated as earned income and is therefore taxable. Spreading out payments across a number of years could be a good idea for those seeking to pay less in taxes overall.
Forward-thinking servicemembers can also have their continuation pay directly transferred to their Thrift Savings Plan account, which is a wise and savvy way to manage a cash windfall.
2020 Continuation Pay Rates
The BRS continuation pay rates for 2020 are nearly identical across each of the Services. For Active Component servicemembers, the pay rate multiplier is 2.5. For Reserve Component servicemembers in all Services except the U.S. Army, the pay rate multiplier is 0.5; for National Guard and Reservists in the U.S. Army, the 2020 pay rate multiplier is 4.0, indicating that the Army is actively trying to incentivize mid-career servicemembers in the Reserve Component to stay in.
The timing, too, of continuation pay is fairly standard across the services and occurs at the 12-year mark. Two exceptions include the Army’s Reserve Component, which is at the 11-year mark and the U.S. Public Health Service, which is at the 10-year mark. Across all Services, the additional service obligation is four years.
Here is the Continuation Pay Rate Table:
|At 12 YOS (AC)
At 11 YOS (RC)
|Army MEMO 18DEC19
|At 12 YOS
|At 12 YOS
|Navy MEMO 19JUN19
|At 12 YOS
|SECAF MEMO 17NOV2017
|At 12 YOS
|At 12 YOS
|At 10 YOS
For the purposes of this table, AC = Active Component and RC = Reserve Component, which includes the Guard and Reserves.
Can I Contribute My Continuation Pay to the TSP?
Yes, you can. Your continuation pay is similar to all specialty compensation, pay, and bonuses, which can be invested in your TSP, up to the annual TSP contribution limit, which is $19,500 in 2020. However, it’s good to be aware that this will count toward your annual contribution limit. If you max out your limit early, you may miss out on government automatic and matching contributions.
You should run the numbers to determine how much of your continuation pay you should contribute to the TSP. If you strongly desire to invest your continuation pay in the TSP, then another option is spreading your continuation pay out over several years, so you can maximize your TSP contributions over a several-year period.
What Should I Do with My Continuation Pay?
Receiving a lump sum of cash can bring spending temptations out of the woodwork. Spending all or part of your continuation pay windfall may help bolster your financial future, by paying down debt or using it as a down payment for a house. However, it’s wise to consider how saving and investing this bucket of cash could help you and your family down the road.
Here are just a few ideas on how to put your BRS Continuation Pay dollars to work:
- Max Out Your TSP Account: As of 2020, the annual TSP contribution limit is $19,500. Consider contributing all or some of your payout to your TSP account so that your money is working for you over time.
- Establish an Emergency Savings Account: Having cash on hand is crucial in an emergency, which is why it is recommended to have enough funds to cover 3-6 months of expenses in an easily-accessible savings account.
- Pay Down Debt: Aggressively paying down credit card, student loan, or other debts will not only help you sleep better at night, it will also help you pay less in interest over time and could positively impact your credit.
- Spend it wisely: You can do a little of all of the above, or you can spend your money. However, it’s a good idea to do so with a plan. It’s easy to whittle it away until there is nothing left, only to realize you have nothing to show for it.
There is no right or wrong answer to how you use the money. Make a plan, and do what is right for you.