Opting-In to the 2018 Military Blended Retirement System

diffeldoof

This might be for a niche audience but maybe the community can share their thoughts regardless of military affiliation.

I will be eligible next year to decide whether or not it makes sense to opt-in to the new military retirement system, called the “Blended Retirement System” or BRS. There is a lot of potentially-ignorant negativity out there about this, but I wanted to keep an open mind and objectively see what it looks like.

I am 1000% the opposite of an expert with this stuff and there are a ton of variables unique to everyone’s situation, so I was thinking I would provide an overview as best I understand it from the official training, and then present my own conclusions from clumsily running lots and lots of numbers… which I will update based on the discussion and mistakes pointed out.

I’ll post my situation in the second post (the nested replies feature here is awesome btw). Hopefully there will be some good discussion and others might feel welcome to post their own situations as well.

Overview:

You are able to Opt-In if as of 31 Dec 2017 if you are 1) AD <12 years from “Pay Date” 2) Reserve w/less than 4,320 retirement points.
Must decide to opt-in between 1 Jan 2018 to 31 Dec 2018 and you cannot change your decision at a later date. No action keeps you in the legacy system.

Current System: “High-3” Retirement System

Receive “Full Pension” retired monthly pay if 20 years is reached (but 81% leave before 20 years).
“Retired Base Pay” is based on the average of your “high-3” or your highest paid 36 months.
Full Pension Equation: 2.5% x (years served) x (Retired Base Pay). At 20 years service, pension = 50% of high-3 average.

New System: “Blended Retirement System”

Still receive “Full Pension” retired monthly pay if 20 years is reached at reduced rate.
Full Pension Equation: 2.0% x (years served) x (Retired Base Pay). At 20 years service, pension = 40% of high-3 average.
New automatic 1% contribution to TSP plus 4% match. Vested after just 2 years of service (good, not tied to a full enlistment).
New “Continuation Pay” bonus at 8-12 years of service in exchange for 3 year commitment.
– Amount could vary A LOT by service and career field; 2.5x to 13x monthly basic pay.
– Taxable, but can receive all at once or over 4 installments.
Offers a Lump Sum buyout option of 25% or 50% of the present value at the date of retirement in exchange for a greatly reduced pension. It looks truly evil. At least the training doesn’t pretend this is a good thing I guess.

Thoughts on the official training CBT and the Official Calculator:
Although it mentions it, the official training unfortunately feels centered on what’s important for actual “old-age” retirement and personal finance vs. being 37-42 years old “working retired” with a pension and the impacts to this by switching. I think this is substantially shifting the focus of the discussion away from where it should be. There needs to be more discussion of the tradeoff between a 5% TSP match and continuation pay at 8-12 yrs vs. the significant loss in monthly pension until IRS retirement age.

Parts of the Training, and especially the given calculator are very misleading. Despite caveats, it uses both your own and the government TSP contributions as a factor in the new system but not in the old system, as if investing in the TSP was a new benefit. Part of the text in the training actually says, “When you enroll in the BRS, you will be able to contribute to a Thrift Savings Plan account.” I think that this is really inappropriate and you get the sense that the training is a subtle, underhanded way to push people to opt in. At the same time, if you’re not distracted, it does give you all the info you need in order to figure out all the variables in your situation.

Official comparison calculator
http://militarypay.defense.gov/Calculators/BRS/

Thoughts on the decision to switch:
DISCLAIMER: I only researched this from the commissioned officer perspective because that’s what I know.

Overall, it’s easy to just say that the clear winner is staying in the legacy system… as long as there is no way you’re getting out before 20 years. Remember that this decision to opt in is only being offered if you have less than 12 years of service, so your ability to stay in might be hard to certainly predict. However, from a purely financial standpoint, I think there’s a real bogey here with the Continuation Pay. It can be anywhere from 2.5x to 13x your monthly base pay, and the individual services get to tailor it each year for retention purposes by career field. However, it is taxable. It is also not clear when the first rates will be released or if there will be any appetite for offering high amounts. If you are in a position to invest all of this Continuation Pay and you’re already maxxing out your TSP contribution–essentially freeing up some cash to invest outside the TSP–it might possibly go a good way towards closing the gap if you can put up with a significantly reduced monthly pension as an investment towards “real” retirement. Again, I only researched this from the commissioned officer perspective, I don’t know how different this would be for enlisted servicemembers.

My Conclusions:

Switch to the new system if you plan to or know you will separate from the service before reaching 20 years. You will get a good chunk (or at least something) towards “real” retirement that will grow a lot, especially if you’re at the beginning of your career. TSP is excellent, portable, and everyone wishes they started their TSP sooner. It is better still if you can get the Continuation Pay between the 8-12 year mark and meet the 3 year commitment… consider though that at that point you’ll be at 11-15 years in.
Consider switching if you’re closer to the beginning of your career or if there’s a decent chance you won’t make it to 20 years. The hardest part of this is considering the things that can happen to you beyond your control that will cause you to separate early and not meet a goal to reach 20. Medical, fitness, ops tempo and family stress, etc.
Consider switching if you are in a position to invest 100% of the Continuation Pay and cash freed up by the 5% government match (i.e. you are already maxxing TSP contributions), and only if your continuation pay will be more than the minimum 2.5x. You will be trading a very significant portion of your monthly pension in exchange for money earlier.
Stay in the legacy system if you are at the point that you know you can reach 20 years and #3 does not apply.

FWF… er, PhWF, what do you think? Also, is there any chance of making a better calculator somehow?

diffeldoof

My situation:
I am 32 years old, O-4 just pinned on this year 2017, joined in July 2007 so just crossed 10 year point. Intend to stay in for 20 years and zero months… but anything can happen of course so I want to compare full retirement to getting out at 15 years in 2022 just in case. By being DINKs we have no bad debt, are able to max out my TSP and a ROTH IRA every year, and I have a taxable account at Vanguard that I was good at contributing regularly to until this year. All these numbers are future dollars using the BRS Calculator. I also used its suggestion that I will be dead at 85, FWIW.

Amateur alert. I don’t know if I guessed some of these numbers correctly and the BRS calculator is only so helpful.

Staying in the “High-3” System:

Retire: Start at receiving $64,281 per year/$5,356 per month at age 42 onward, hopefully increasing with inflation. Total pension received by age 85: $5,149,450.
Out at 15 years: Dog shit. Maybe some office supplies.

Switching to the new BRS:

Retire: Start at receiving $51,425 per year/$4,285 per month at age 42 onward (or about $800 less per month in today’s $$ for 44 years). Total pension received by age 85: $4,119,556.

$19,000 Continuation Pay minimum (about $4.7K for 4 yrs, 2019-2022), all invested in the market. At 7% assuming invested in 2022, worth maybe $89K in 2045 at age 60. (**EDIT: Looking back, I did not take tax into account in this amount, so it’ll be less but I think I can absorb $4.7K without a huge reduction).
$47,000 of gov’t TSP match total over 9 years (about $5K per year), equivalent free cash I’d put in the TSP myself now invested in my taxable account. Assuming invested all at once on retirement date vs. yearly (because I don’t know how to accurately figure this out), worth maybe $158K in 2045.

Out at 15 years:

I’ll have at least better than dog shit… collected a minimum of $19,000 in Continuation Pay and $19,000 in the gov’t TSP match as of 2022, invested. I calculated this $38K to be worth maybe $180K total in 2045 when I’m 60.

So if I did this right… if I opt in to the BRS and stay in until 20 years anyways, the BRS pension + invested Continuation Pay + invested free cash from TSP match is about $782K less than the Legacy pension by the time I’m dead at 85, or about $163K in today’s dollars. That is a significant number. It would reduce my pension to about $800 less per month in today’s dollars for the following 40+ years, in exchange for about $38K to invest now in case I get out in 5 years before making the next rank. That $38K could be worth maybe $180K by the time I reach age 60.

Like I said earlier, I the big unknown here is the Continuation Pay amount. I included only the minimum possible amount in my calculations. If it doubles to 5%, then it’s another $19K to invest at that point. My career field has a significant shortage of officers at my level and above, so my plan is to wait and see what they release the amount to be. Timing looks good for me, as I’ll be able to make the decision to switch or not based off the actual advertised amount since it is designed to change every year. If this site is still kicking, I’ll post updates here as anything changes.

What are your thoughts? …and what did I mess up with all this?

skh12

i left the service at 8 years, i did not think the pension was worthwhile nor sustainable, the VA medical is a toilet that benefits VA executives under the guise of taking care of our vets.
i wanted to get started on my own retirement plan that had fk-all to do with the government, and pulling $175k annual , so anyone in the service should,
gobble up all the free education you can get, make sure you get into a marketable MOS/AFSC ect… and start an IRA/ROTH early, and not the one the hucksters will try to sell G.I.'s, go educate yourself on retirement investing , so basically you don’t feel tied down if an opportunity in the civilian world comes around the lines up with a separation opportunity, marketable skills + money in the bank + retirement savings = you in control