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A lot has been written about how to decide if the new Blended Retirement System (BRS) is better than the US military’s old retirement system. Most calculators, however are overly dependent on the service member forward projecting their:

  • likelihood of achieving 20 years
  • the inflation rate
  • the cost of living increases
  • their future rank
  • their future contributions to the TSP.

Overly cautious or optimistic guesses can have huge consequences.

It is stone cold obvious, to me, that anyone who plans on never staying to 20 years should jump on board the new system. It gives you access to a TSP match, continuation pay, and transferable benefits.

What does a member stand to gain from the BRS, in real terms?

Some assumptions:

  • Assumes all members contribute 5% in order to get the match.
  • Ignores the fact that the match is really 4%, with a 1% involuntary contribution.
  • Ignores all member contributions, and only examines the value of the government match and its return.
  • Assumes the member does NOT invest any of the 12 year continuation bonus. Again, member contributions happen with or without the government match. For those interested, the pay would be $17,217 and $10,665, taxable, respectively.
  • Assumes no COLA adjustments, inflation, or other macro economic factors, such as the “cost of money.”
  • Demonstrates annually compounded rates of return of 4, 5 & 6%.
  • The members in this scenario are an Officer and Enlisted member with 5 years of service. This makes them eligible for the old system. However, they decided to enter into the BRS. Their TSP match is calculated based on 2017’s pay chart.
  • Assume they achieve their terminal rank of O-4 and E-7 after 10 years, promoting regular beforehand.
  • Assumes 35 years of survivability after retirement, had they stayed for 20 years.
  • Ignores the .029% TSP fee.

Doug Nordman gives us two ways to calculate a pension: Lump sum and TIPS

[Nords note from other reader comments:  I realize TIPS and I bonds aren’t exactly equivalent to a lifetime inflation-adjusted annuity, yet they’re close enough for these comparisons.  The following examples used an interest rate of 2.5% when this post was written, but pick your own rate for the date you’re reading this.]

2 ways to calculate

Lump = 3000/m *12*35

TIPS = (3000/m*12 )/ .025

 

2017 O-4  w/20 years pay = $7685 monthly defined benefit = Old $3842     BRS = 3073

2017 E-7 w/ 20 years pay = $4567 monthly defined benefit = Old $2284     BRS = 1827

 

The resulting pension figures are fairly obvious. Using Doug’s calculation methods, we see the following:

Image of the lifetime value of a military pension for both officers and enlisted ranks | The-Military-Guide.com

 

How might our members’ TSP accounts grown, had they chosen the BRS?

Image of a spreadsheet showing the growth of a military Thrift Savings Plan account for officers and enlisted with the new Blended Retirement System | The-Military-Guide.com

 

 

Our colored cells highlight three common exit points in the military.

O-4

  • At five years in, our rising military officer could leave the service as an O-3 with an additional $2,845 in the retirement account.
  • Stay until 10 years, and our young O-4 leaves with an additional $22,500.
  • Stay for 20 years, despite being part of the BRS, and the TSP has an extra $92,000, but this officer sacrifices $345,000 of pension benefits.

 

E-7

  • At five years in, our rising enlisted member might leave the service as an E-5 with an additional $1,600 in the retirement account.
  • Stay until 10 years, and our young E-7 leaves with an additional $12,500.
  • Stay for 20 years, despite being part of the BRS, and the TSP has an extra $52,000, but this member sacrifices $205,000 of pension benefits.

 

What do you think is the risk versus gain of jumping on the BRS? Might you make it to 20 years anyway? Will it add up in the end?

Here is the Google Sheets file so you can fill in your own numbers.
[Nords note:  Spreadsheet wizards should repeat the calculations for your expected years/ranks, and this time include the effect of investing the 12-year continuation bonus.

You can access and edit your own copy of the spreadsheet with its commands “File | Make a copy…” or “File | Download as”.]

 

Bio: I’m an active duty Coast Guard officer, currently stationed in Boston with my wife, dog, and our first child on the way. I’m chronicling our journey out of debt and into financial independence at http://www.militaryfire.com/

 

 

Disclaimer: I am not a licensed financial counselor of any sort. The opinions contained here are my own. Investing has implicit risk, past gains are no guarantee of future returns. You may lose money, including the principal. These opinions are my own, and are not endorsed by any of the armed services or the US Government.

 

Related articles:

The present value estimate of a military pension

The new military Blended Retirement System



WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

10 Comments
  1. Reply
    peter gregory February 4, 2017 at 10:23 AM

    Deserat:

    Thank you for the comments. In the general discussion about the BRS we need to remember that the BRS was only about 30% of the what the 2014-15 Reform Commission spent its time on. The majority of the time in the congressional hearings and testimony was on matters of heath care spending, especially as applied to pre-Medicare age military retired. The BRS is the bright shinny object everybody is looking at, but the Commissions final recommendation to in essence scrap the Tricare system and replacing it with essentially either a cash voucher for the Federal HSP, or some other income support plan in the open markets is still out there. When compared to whatever money may or or may not be saved to the government by the BRS, health care is where the real dollars are for capturing any cost controls by the DOD. The final report from the Commission said Tricare in its current forms is unsustainable, and all recommendations call for greater cost share to pre-65 military retired. Any concept of financial independence, be it entrepreneurship to real estate to investments, that does not factor health care costs is not a plan for financial independence.

    • Reply
      Deserat February 4, 2017 at 11:35 PM

      Peter,

      How timely! I am in the middle of a graduate level Health Economics course and we are looking at how healthcare insurance/lack thereof works in many forms and fashions.

      You are absolutely correct about TRICARE-actually, as a Reservist, I don’t get access to that until age 60, although right now am covered under it with my husband’s TRICARE (active duty retiree). I have priced TRICARE Reserve Retired (Gray area coverage) and it would be $450/mo plus either a $1.5K or $5K deductible (just for me) – that is almost 10 times more expensive than what we pay now under regular retired TRICARE. And yet, it would still be affordable if I had to do it compared to some of the other choices through exchanges.

      Health care is that ticking time bomb for all of our society, not just DoD….and has been. I really don’t know the best answer and am awaiting other options to be presented. One thing I’ve found is the federal government is not the most efficient provider of anything. I used to work for Kaiser and their idea of healthcare provision is a lot like what one sees in other countries with a public insurance mandate and public provider and yet Kaiser is a private entity which changes some of the dynamic. It’s also similar to the healthcare we receive in the military, so it was familiar in many aspects.

      As for FIRE, yes, of course healthcare costs are part of the plan, but there are lower cost options. If you are familiar with the Kaderlis, they have managed to provide for all of their needs as well as have a fairly interesting life on much less than most – they do it by getting their healthcare taken care of in foreign countries. I think the Terhorsts are similar.

      In any case, times are going to get very interesting indeed.

      Doug – perhaps a series on healthcare options might be an interesting set of posts…..not that you want to do anymore WORK!!! 😉

      • Reply
        Doug Nordman February 5, 2017 at 11:11 AM

        Thanks, Deserat, I’m working on a Tricare chapter these days, and it’s a slog!

        I agree with the comments that Tricare Prime has been deemed financially unsurvivable (after 30 years of experience). The military has to decide whether it’s a retention incentive or an unprofitable drag on funding & readiness. Yet many initiatives over the last decade (Tricare Young Adult, Tricare Reserve Select, Tricare Reserve Retired) are still cheaper than their equivalent programs through health insurance exchanges.

        I’m not sure that Medicare is much better, but recent ACA initiatives affecting Medicare reimbursements have had a significant incentive on hospitals and other care providers. I think the question for Tricare Prime will eventually devolve into a debate over what percentage the annual fee will have to rise to make the program lose less money, or else put everyone back on Tricare Standard.

        You’re right about the Kaderlis, and we’ve emulated their practice every time we’ve traveled to a low-cost country. Paul Terhorst once commented that he was avoiding America as much as possible due to a fear of becoming ill or injured before he was eligible for Medicare.

        And as Peter says, a plan for financial independence has to include healthcare expenses. That plan might turn out to be a high-deductible catastrophic coverage policy that costs twice as much as Tricare Prime. It’d still be less than our household cable TV/Internet bill.

  2. Reply
    Deserat January 31, 2017 at 1:41 PM

    @Peter Gregory- you make great points- I am awaiting receipt of my Reserve pension and I went through all of that as well as the ‘blood bath’ years in the USAF(R). I was born in 1964 – considered a boomer and yet have been affected and think like a boomer and Gen X. The days of defined benefit pensions are quickly eroding. As for being in the military, you are correct, technology is changing a lot – so what the future holds is indeed different.

    I was very happy when they allowed the TSP for military personnel and jumped on it. As for social security, I will be eligible for it at 67 and yet, I believe based on our current economic issues in the USA, I will not see much of it as there will be even more means testing and/or determinations made with regard to how much one should receive in compensation from the US govt….and yes, I poured a lot of $$$ into SSN (I’m self-employed now, so pay the full ride on that one). For my financial calculators, I don’t count it or only count a small amount.

    All in all, however, what I find important in a lot of these changes as well as this blog/board, is the admonition to live below your means, save and invest what is left over and think about what is important to you with regard to how you spend the time in your life; that it truly is up to you and not some paternal mechanism. The military is one avenue, but there are many others as well. It is amazing what financial independence does for one emotionally and mentally. It allows you to have a very different perspective on your life decision in *every* category. To strive for that and achieve it or close to it can really change one’s life for the good.

    • Reply
      Doug Nordman February 1, 2017 at 5:10 PM

      “… the admonition to live below your means, save and invest what is left over and think about what is important to you with regard to how you spend the time in your life; that it truly is up to you and not some paternal mechanism.”

      Thanks, Deserat, financial independence really does give us choices and lets us avoid making decisions out of fear!

  3. Reply
    peter gregory January 31, 2017 at 1:18 PM

    John: Thank you for the response. The BRS is in many ways based on concepts found in an area of economics called behavioral economics. A key understanding in the field is the concept of future discounting or risk and reward. That the human brain and people more times than not choose immediate rewards or gratification over a potential future gain or reward. Offer a child a cookie now, with the promise if he waits an hour he can get 5, he will choose the now almost every time is an example. As applies to the new BRS two key selling points are the retention bonus at 12 years, and a potential for cash windfall at 20+ if they take the lump sum. But as has been pointed out many times, there is allot of economic assumptions going forward that may or may not pertain at a 12 or 20 service mark. Be it 1945 or 2045, the reason why the military has a retirement policy is driven by issues of retention and needs of the service. Will the BRS in any way incentivize people to say or leave at any point in their military career? My guess is not, people will stay or leave as they always have based on needs of family now, personal life issues now, and other options as they perceive now. And in that mindset, the cookie now looks far, far better than the 5 cookies awaiting in the future.

  4. Reply
    Alex Chmelik January 30, 2017 at 4:50 PM

    Thanks for the spreadsheet! Found another good one at this site (http://www.spendthriftsailor.com/). Really appreciate everyone putting work into this. I know this is hard problem set, especially since it involves so man variables. Having been in the Navy now almost five years it is a tough decision to make and sites like this are making my life easier.

    • Reply
      John February 1, 2017 at 8:57 AM

      You are welcome Peter- I’m disappointed in the disguised use of behavioral economics to save the DoD money. The DoD is making it easier for people to make poor choices. I suppose the other side of the coin is an overly paternal DoD. There is no winning, just making the best of the situation. But thanks for spelling out the science behind the BRS.

      Alex, I checked out http://www.spendthriftsailor.com/ and that guy has some cool excel skills. The main difference between his and my sheet is mine focus’s only on what the “Match” is worth over time, whereas he uses a more comprehensive calculator. I mentioned to him there seems to be a break even point somewhere between year 0 and year 12 for those who plan on staying in for the full 20. I’m not sure where that is yet.

  5. Reply
    John @MilitaryFIRE January 28, 2017 at 8:03 AM

    Interesting analysis Peter. My look at the BRS is that it unfairly disadvantages the enlisted workforce, especially any of the 31 year olds/ 10-15 yos who might still be eligible to transition. Officers who entered the service after accession from a 4 year college/academy will still by ~31 in 2017, but will only be approach 6-10 years of service. Same life-point, but different amount of time to take advantage of any pluses in the BRS. And I think you are right, the BRS might just be the flavor of the month.

  6. Reply
    peter gregory January 27, 2017 at 9:48 AM

    If you approach financial planning and the BRS from Generational studies, it makes a bit more sense. The median age of the “Millennials”, which gets so much press, is 31 in 2017. The vast, vast majority are well into their careers, military and other wise, paying down debt. Buying homes and having kids, though at a far older age than their Boomer parents. This age cohort is close to the end or near it in terms of a military career, approaching 10-15 years in service by 2018-19. I think the vast number will opt to stay in the traditional 20 year cliff vesting. BRS was never really designed for them. What it was designed for is what is called Gen Z, born after 2000, now approaching military recruitment age, who will male up the bulk of the active duty/reserve force in 10 years. And for them, a full working “career” is not 20 years of service, but this generation will accept as normative working careers well into their 70s, as Social Security for this generation will not be a reality until ages 70-75 anyway, considering the fixes required in the system now. In the age of robotics, cyber and alike the actual numbers of those in uniform will be much less than anything approaching post 9-11 force structure end strengths. So the BRS in raw numbers will effect and be marketed to a different age cohort than those currently active in Uniform. And at this point I have yet to see any independent study, numbers, apart from DOD sources, where the BRS turns out to be a better deal than the traditional plan to those with 10 or more years service by 2018. Having lived through High 3, REDUX, TERA, DOPMA in my active service time I know what seems very popular one week, may not be so next. we will see how this rolls out.

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