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[This post is brought to you by Dan, who’s done a lot of data runs with the BRS calculator.  His new website KeepInvestingSimpleStupid.com is freshly launched, so please check on its progress!
If you’re interested in contributing at The-Military-Guide.com, then see our posting guidelines.]

 

 

Welcome to January 2018! The opt-in period to the Blended Retirement System (BRS) is officially upon us and now the only deadline is the last day to opt-in, December 31, 2018. So, if you’re on the fence about your decision to opt-in or stay put, procrastinate no longer!

Image of dollar bills falling into a pink piggy bank for the military's new Blended Retirement System | The-Military-Guide.com

This could be your TSP!

 

IF opting-in to the BRS is the right decision for you, then now is the time to do it. If you’re unsure, then now is the time to get intense about running your numbers on the BRS Calculator, seeking financial advice from the ACS office, or finding a good financial advisor with familiarity with the Thrift Savings Plan (TSP) and the changes that are part of the BRS. Opting-in is pretty easy through your service specific route. MyPay has a new link at the top of the page (once you’ve logged in) that makes you confirm your choice a few different times. Be sure of what you’re doing!

By now you should have been giving plenty of thought and discussion to your decision to opt-in to the BRS or to stay in the current Legacy Retirement (AKA “High Three”) system. There have already been articles and trainings to prep you for this decision, but here’s a brief review of some of those considerations:

  1. If you know for a fact you will separate from the service prior to 20 years, opting in is a smart decision. You’ll be able to leave the service with some retirement savings instead of none. You will be able to keep this money in the TSP or roll it into a different retirement account. At least you’ll have something to show for your service other than back pain!
  2. If you plan on staying in the service for 20 years your choice is more difficult.
    1. How realistic is staying in for 20 years for you? What’s the promotion rate for your MOS/AOC? How have your most recent 3-5 NCOER/OERs looked?
    2. How many years of service do you already have? Remember, the closer you are to the 12 years of service mark the less beneficial opting-in becomes – UNLESS you are confident you’ll be getting out – in that scenario, still opt-in! But, the closer you are to ~8-11.9 years the less likely the lifetime value of the two retirement plans will come out in advantage of the BRS over the Legacy Retirement System. So, run the numbers for yourself and see exactly what your situation leads to. Keep a realistic expectation of investing return (~7%, which is the preset in the calculator).

One quick reminder – if you’re brand new to the military or join the military after January 1, 2018 then you’ll have to wait 2 years to be “vested” to keep the government contributions.

 

Maximize The BRS

Now, back to the original purpose of this article – if you opt-in to the BRS, how do you maximize what you can get out of it? Now it’s time for you to act!

  1. If you are going to opt-in to the BRS, do it ASAP! Every month you wait you lose another free 5% government match!
    1. If you are going to opt-in but haven’t yet, do it now to get the 5% match for February! It takes 2-3 days to be fully verified and remember that your pay in MyPay is set by ~mid-month or shortly after.
  2. Go into MyPay and set your TSP contribution to a minimum of 5%. This is the most important step. If you opt-in to the BRS but don’t save at least 5% of your base pay each month, then opting in won’t be nearly as beneficial as it could be for you. You will essentially be leaving free money (the government match) on the table each month that could have been yours. Would you be ok losing $100 from your wallet? Likewise, don’t be ok losing out on hundreds of dollars today that in the future will be worth thousands of dollars of lost government contributions! Those contributions will grow and accumulate more money, but you’ll never see that money unless you take the step of contributing at least 5% of your base pay! So, this is a must!

 

More Details On Your Savings Rate

About that 5% savings rate… If saving and investing is new to you, 5% may seem like a lot of money that you don’t get deposited in your bank account each month. But, it’s important to know that an even higher savings rate is known to greatly improve your retirement quality of life. You don’t have control of whether the stock market goes up or down (although you do have control over your exposure to the stock market through your asset allocation, which is very important!) BUT you do have control over your savings rate.

Saving is the best buffer for low or poor stock market returns. The more money you save the less spectacular of a return you need; if your return is good, then it’s a bonus! This is a basic rule of thumb: save 10% for a basic retirement (you’ll get this if you contribute 5% + the government’s 5% contribution), 15% for a “nice” retirement with some extra money for trips or additional expenditures, and 20% savings for greatly improving your chances of retiring with $1 million in the bank! So, while a 5% savings is a start, always strive to try to save more. My recommendation is to review your spending for the past 3-6 months and see how much of it was frivolous and how much is a necessity. Look at the difference and see where you can cut back on spending to increase your saving. “Pay yourself first.” Often, we’ll find that after the fact, it’s easier to notice how much money we’ve actually blown. Now, take that amount of money you blow and begin saving it and watch it grow in your TSP account!

 

Asset Allocation

Now, one important consideration is what funds you select to invest your money in the TSP. This is beyond the scope of just this article, but suffice it to say that this is one of the most important decisions you can make. This is what will determine your “investment return” (remember that 7% from the calculator? This is how you get to that!). One recommendation (by Dave Ramsey) for SMs is to do a 60% C-Fund (S&P 500 Index Fund), 20% S-Fund (Small Cap stock fund), and 20% I-Fund (International stock index fund). I started with this same asset allocation back in 2012 and it worked out extremely well for me.

Since then, as I’ve learned more, I’ve adjusted these percentages, but it’s largely still close to this allocation. One adjustment I’ve added is a 5-10% allocation to the F-Fund (a Bond index fund). However, ultimately, this is where you need to determine your risk tolerance and how much you want in stocks and how much you want in bonds. The G-Fund is a low return fund that is not recommended for long term growth. It’s basically a savings account that doesn’t produce much of a return (~1% per year), so you shouldn’t have much, or any, money in the G-Fund unless you’re nearing, or at, retirement age. Remember, as a general rule, the percentage of your money invested in bonds typically goes up as you near retirement age which also decreases the overall yearly return. (FYI – the LifeCycle funds do all of this asset allocation automatically for you. They’re easy to use; just select the LifeCycle fund that most closely matches the year of your retirement (not your military retirement age, but your actual working retirement age, usually around 60-67 years of age).

Now, for the government’s 5% contribution, that will be placed into the LifeCycle 2050 fund. You don’t have control over this to my knowledge, so nothing to worry about here!  Here’s a couple paragraph of references updated with feedback from the comments:

From paragraph 7.b.(11) of the DoD Blended Retirement System implementation policy:
(11) Default Fund. Unless a specific investment election is made by a Service member, a member’s individual contribution and the government’s contributions to TSP will be invested, on behalf of the member, in an age-appropriate, target date asset allocation investment fund, commonly known as a “Lifecycle” fund.

And from the FAQ on the Blended Retirement System website:
Q2.5: “Is there a default TSP fund for opt-in eligible service members and can they change funds?”
A2.5: “Uniformed Service members who opt into the Blended Retirement System will retain the last contribution allocation of file with the TSP. If no contribution allocation is on file, a member who opts-in to the BRS will have their future TSP contributions invested in an age-appropriate lifecycle fund and any past contributions will remain in the G-Fund. Service members can make adjustments to their TSP fund allocation at any time online at TSP.gov.”

[Nords note:  Your TSP contributions can be sent to your traditional TSP account or your Roth TSP account.  Under federal law from that same BRS implementation policy, the DoD BRS matching contributions have to go to your traditional TSP account.  Here’s the reference:

“(12) Default Type of Individual Contribution. An individual’s contributions to TSP, as described in paragraph 7.b.(4) are treated, by default, as “traditional” tax-deferred contributions, not as Roth, after-tax contributions. A member may elect to designate all or part of his or her
individual contributions as Roth. The Service Secretary contributions described in paragraphs 7.b.(5) and 7.b.(6) are always tax-deferred “traditional” contributions.”]

 

Continuation Pay

The general knowledge on this is that between 8-12 years of service, a SM will become eligible to receive a one-time, cash payout (essentially a bonus) of 2.5-13 times (for AD) their base (monthly) salary. For Reservists, the payout will be between 0.5-6 times their base pay. Now, some MOS/AOC will be offered more than 2.5 times base pay, but as of today we don’t know which ones, so I would plan as if it’s 2.5 times. One consideration is that for this payout you can take it in up to 4 allotments. This may make a difference in how much of the payout you’ll lose on taxes or how much you are able to invest in the TSP.

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Click here to start a calculator run.

This brings up an important point. For some, investing the Continuation Pay in the TSP may not be the best option. For example, someone that is currently maxing out the TSP ($18,500 for 2018) you most likely do NOT want to invest the Continuation Pay in the TSP because you would lose multiple months’ worth of government matches!! When you run the numbers through the calculator, contributing both 5% and 25% of your base pay and investing the Continuation pay into the TSP results in the same thing – lower Government TSP Contributions than if you just get the government’s 5% match each month.

So, I recommend this – run 2 separate calculations through the BRS Calculator in which in one scenario you invest the Continuation pay into the TSP and a second scenario in which you don’t. See which scenario with your Continuation pay gives you the most of the 1) Total Retirement package and 2) TSP value for lifetime. Also, consider this. Just because you may not invest the continuation pay in the TSP that doesn’t mean you can’t invest it in an outside investment platform (such as Vanguard, Fidelity, etc.) in funds that are essentially the same as what the TSP offers. This may also be where allotments of the Continuation Pay may be beneficial if they would happen to occur over two years do help you max out two years of TSP contributions if you’re not already doing so.

Now, for those who are not maxing out the TSP each year it does appear to work out best to invest the full Continuation Pay into the TSP. Running the numbers on this, even for an E5 with a 25% savings rate they will come out ahead investing the continuation pay although they do lose $4,000 on the government matching contributions, they’ll have over $100,000 more in their TSP by investing it. But again, run the numbers for your exact situation to determine which route is better.

Finally, what to do with the continuation pay isn’t so much of a decision to make today. The decision today should be to invest it. How? That you can decide in the future. It may also be beneficial to put the money towards your house and save you thousands of dollars in interest or pay off debt, but you’ll need to look into all of that as well!

 

Pension Lump Sum Option

As a general approach, stay away from taking the BRS pension’s lump sum option. The proposed benefit is the ability to pay off debt, buy a house, or start a business but more often in real life, people blow large chunks of money on things that won’t go up in value. Unfortunately, many businesses fail and if we’re honest, not much of our military training preps us to start a business. It’s more of an exception to the norm when a SM gets out and begins an ultra successful business. For those few, this lump sum could be very beneficial. However, for the others, it might be them gambling a large chunk of their retirement package. Paying off a house is very noble, but I highly recommend having a financial advisor and accountant help you make the decision whether it’s worth taking a lump sum to do that because there are multiple levels of impact from taxes, loss of future dollars, etc.

 

This is a good warning from the BRS website:

The amount you receive will be less than you would have gotten if it was spread out over normal monthly payments. Also, there are tax considerations to understand, and the Lump Sum payment may even impact any disability compensation you are entitled to from the Department of Veterans Affairs. You may choose to receive either 50 percent or 25 percent of the discounted present value of your future retirement payments in exchange for reduced monthly retired pay from when you retire until when you reach the Social Security “full retirement age”, which for most people is age 67. At age 67, your retired pay goes back to its full amount.

Finally, even if you opt-in, continue to prioritize your career progression and strive to stay in the service for 20 years to get the pension. When you run the numbers for a 20-year career the biggest portion of your total retirement package is from the pension. While saving is still imperative, getting the pension is a huge benefit. So, take care of your health and your body, strive to excel in all you do to set yourself apart, and don’t burn yourself out!

And if you’re still on the fence about opting-in or staying put in the Legacy Retirement System, keep researching and running the numbers until you’re comfortable! Best of luck in 2018!

Dan

 

Related post:

“Should I Opt In To The Military’s 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.

19 Comments
  1. Reply
    Doug Nordman February 27, 2018 at 10:08 AM

    Thanks for the followup, Queue!

    I wish DoD had done a better job with the January opt-in process, and I’m waiting to see how they’re going to address the legal differences between the federal law and the policy implementation.

    And I’m glad you got a copy of the pocket guide! That’s a clear sign that the seminar invested extra effort in getting out the financial-independence word.

  2. Reply
    Doug Nordman February 17, 2018 at 10:39 PM

    I’m starting a new comment here to answer Queue’s and Dan’s 24 January- February comments.

    We’ve heard back from the DoD BRS office and we’re going to hear more outreach in the coming weeks. Hat tip to Airmen MilDollar of the MilitaryDollar site for chasing this down. They wrote most of this post and I’ve added some clarifications/links.

    Just to reiterate what most people already know, the military is paid in arrears. The January mid-month pay deposit is technically an advance on the full pay deposited at the end of January. When that January LES is published, it’s predicting the end of the month. Those who contribute to their TSP accounts (which is less than half of the military) will also see on their January LES that money is being sent to the TSP. The TSP’s “January” contribution leaves your pay account at the end of January and ends up in the TSP in early February. It’s all reported correctly on tax forms at the end of the year.

    For those of you wondering about the January government contributions (1% automatic and up to 4% matching) and why you did/did not receive them:
    The BRS training and implementation documents all say something along the lines of “You will receive the Service Automatic (1%) Contribution, and Service Matching Contribution proportionate to your basic pay contributions, on the first pay period after opting in.”
    http://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/Combined%20BRS%20Policy%20Document.pdf?ver=2018-01-02-105828-370
    Since opt-in was first allowed in January, this would explain why many people didn’t receive January contributions – they should start receiving them in February (with DoD’s BRS matching TSP contributions going into the TSP in early March). However, the NDAA 2016 law actually says:
    “The Secretary concerned shall make a contribution…for any pay period during the period that begins…on or after the date the member makes the election.”

    The NDAA law means that anybody making their opt in election on January 1st (or Feb 1st, Mar 1st, etc) should receive government contributions for that month **because you made the election ON the day the pay period begins.** Anybody opting in later in the month has to wait until the following pay period.

    Hopefully that explains why some people received the January contributions and others didn’t.

    ***********************************************************************

    For those of you that think you should have received January contributions and didn’t:
    If you match ALL of the following criteria and are interested in having your situation looked at, please contact me or Airmen MilDollar privately. We’ll ask the BRS office to dig deeper into your pay record and fix what’s broken. If you don’t meet ALL of the criteria, this does not apply to you.
    1. You think you opted in between 0000 and 2359 EST on January 1st – AND –
    2. You have confirmed you did NOT receive government contributions for January – AND –
    3. You are willing to pass me your full name, branch of service, and (optional) approximately when you opted in (date and time, with the time zone if not already EST).

    Personally, I’m already passing my daughter and son-in-law’s names to DoD’s BRS office.

  3. Reply
    Phil January 25, 2018 at 7:52 AM

    “The general knowledge on this is that between 8-12 years of service, a SM will become eligible to receive a one-time, cash payout (essentially a bonus) of 2.5-13 times (for AD) their base salary.”

    No way is that correct. It should be 2.5 – 13 their base MONTHLY salary.

    • Reply
      danhhuffmangmailcom January 26, 2018 at 11:34 AM

      Phil, that’s a good catch on poorly worded phrasing on my part! Yes, that is based off the monthly base pay. I’ll ask Doug to clarify that in the post.
      dan

  4. Reply
    Queue January 24, 2018 at 7:27 AM

    My wife and I opted in on Jan 2. We were on vacation and had no internet access on the 1st, so give us a break 🙂 My question is when will we start to see the match go into our TSP? My guess is this upcoming pay date which looks to be Wednesday, January 31st, 2018. I’ve never had a match before, so unsure how it usually works. I just know that it’s not in there yet, as I’ve checked nearly every day since mid-Jan pay day.

    • Reply
      danhhuffmangmailcom January 24, 2018 at 1:51 PM

      Queue,
      I also opted-in on 02JAN! Congrats on making the decision. From what I know of the TSP, it sounds like we “should” get the match for January, but I haven’t seen my next LES (Army) to know for sure how it shows up on there. So, I don’t have a solid answer for you, Doug might though. But I’m in the same boat as you – I opted in and now waiting for that match! Best of luck!

      • Reply
        Queue January 25, 2018 at 5:58 AM

        Thanks Dan. I’ll keep an eye out and try and remember to report back here once I finally see the match enter our TSP.

        • Queue February 25, 2018 at 8:42 PM

          Just to bring this full circle for my own situation, I just wanted to confirm that I looked at our newest LES and we are now on track to receive our full match moving forward. A shame that I inadvertently missed out in Jan, but glad to move forward with the match. Thanks again for Doug and Dan for responding.

          P.S. I just went to a BRS financial seminar for Military Saves week, and was given a copy of Doug’s booklet entitled, “The Military Financial Independence & Retirement”. Looking forward to reading it!

        • Queue February 17, 2018 at 8:43 AM

          https://www.reddit.com/r/MilitaryFinance/comments/7uzm8e/has_anyone_actually_received_their_brs_matching/

          That’s the reddit thread I was reading the other week. Just a bunch of anecdotal evidence, but with the consistent theme that 1 Jan seems to be the magic date. My next step is to wait until our LES is available for the end of Feb to check and see if we’re getting our match.

        • dan February 12, 2018 at 11:24 AM

          Queue, so I’ve been looking into it and I can’t find anything else out either. My LES also has $0…

        • Doug Nordman February 11, 2018 at 5:13 PM

          Thanks, Queue, I’m sorry to read about that. This does not seem to be a consistent policy, let alone a fair one. Do you have any Reddit links that I can run by the DoD BRS office for a followup?

          The BRS policy document can give that impression too:
          http://militarypay.defense.gov/…/Combined%20BRS%20Policy%20…
          7.b.(6).(c): “Commencing with the pay period that follows a Uniformed Service member’s election to enroll in the BRS, in accordance with procedures in paragraph 9.b., the Secretary
          concerned will contribute an amount that matches the individual Service member’s individual contribution of basic pay and/or inactive duty pay to TSP in accordance with Table 1.”

          If you opt in on 1 January, technically by that document verbiage you’re already in the January pay period and the match will happen in the February pay period, which means the money hits the TSP account in early March. But 1 January is also a federal holiday, and we have seen servicemembers who opted in on 1 January get a DoD match on their LES:
          https://www.bogleheads.org/forum/viewtopic.php?f=1&t=236503&sid=4a9eb1e6c1b9c2b222ad8b709866f4ae#p3747354

          Yet I also remember being told several times during DoD’s BRS blogger conference call (and a couple of e-mails) that servicemembers had to opt in right away to get the January match (in a TSP account in early February).

          I can understand that people make mistakes, and I can see that the contract rules are hypothetically perfectly clear, but DoD’s hair-splitting still leaves a bad taste in military mouths.

        • Queue February 10, 2018 at 5:48 AM

          After reading a few posts of reddit, it appears as though only those who opt’d in on 1 Jan are going to receive the automatic contribution and match for Jan since you have to be enrolled for the entire duration of the pay period. Everyone who signed up 2 Jan or later won’t get anything until Feb. If that’s how it works then there’s probably nothing I can do to receive the match for Jan. I’m a bit miffed that wasn’t made very clear, or else I would have made sure to have internet on 1 Jan.

        • Doug Nordman February 5, 2018 at 9:43 AM

          Thanks, Queue, I hope your accounts are updated (or “backdated”) on Monday 5 February!

        • Queue February 3, 2018 at 10:40 PM

          Quick update,
          Just looked at our LES and it read as $0.00 for the automatic contribution and $0.00 for the match. Haven’t seen the contribution is our TSP yet either. Hopefully they’re just working out the kinks!

  5. Reply
    peter gregory January 19, 2018 at 6:49 AM

    Really the best summation of the process I have read to date and I have read allot about BRS. The most precious factor is any successful investment strategy is not so much asset allocation or return on capital, but time, in essence through the magic of compounding, rule of 72 and so on, time is by far the best friend anybody can have in financial independence. The annualized return on the S/P in the time period 1981-2015, the vast bulk of my active investing, averaged about 12-15% per year, once dividends are included. And that included the three bears of 79-80, 2001-2, 2007-9. Both Fidelity and Vanguard call for annualized market returns far more modest in the next 10-15 years, 5-6% on average, the parabolic rise in the market post election and tax cut laws, not withstanding.
    Again, simple time is the key to financial success most often.

    I went from having $450 in the bank to well over 1 mil under active management over that time, and I had no TSP options for the vast majority of my career. Under the current BRS systems could an 18 year old E-1 end up with that and greater in a active working career of 40 years, military and post, yes, and greater even under a 2-5% annualized return for decades, but again, time, the sooner the better and longer the better.

    • Reply
      Doug Nordman January 20, 2018 at 8:55 AM

      Thanks, Peter, that’s a great long-term perspective!

  6. Reply
    TheMilPhys January 18, 2018 at 4:15 PM

    Great article and information for our military members looking for high yield info on the BRS and TSP! Thanks for putting this together.

    One point I wanted to clarify so we can all be on the same page: “Now, for the government’s 5% contribution, that will be placed into the LifeCycle 2050 fund. You don’t have control over this to my knowledge, so nothing to worry about here!”

    I’m not sure this is the case. Yes, it goes in to your Traditional TSP pot of money, but I do not think they directly allocate it. It is still up to the member to allocate how they would like. Some had hoped the government would put at least the automatic 1% for new members in to the 2050 lifecycle (or whatever longest target-date fund is available), but I don’t believe this is the case. ?? Anybody have clarification?

    Thanks again for the great post!

    • Reply
      danhhuffmangmailcom January 19, 2018 at 11:08 AM

      Hi THEMILPHYS,

      So, when I was writing this article, this was the one thing I “knew” I had read, but couldn’t find again to verify! So, today I dug through all the resources I could find and finally found the answer – and you are correct – you DO have a say in where the government contribution/match money goes.

      According to the “DOD FAQs (06/2017) on the BRS website (it’s a PDF file near the bottom of the “resources” section), here’s the question and the answer that I believe clarifies this issue:
      Q: “Is there a default TSP fund for opt-in eligible service members and can they change funds?”
      A: “Uniformed Service members who opt into the Blended Retirement System will retain the last contribution allocation of file with the TSP. If no contribution allocation is on file, a member who opts-in to the BRS will have their future TSP contributions invested in an age-appropriate lifecycle fund and any past contributions will remain in the G-Fund. Service members can make adjustments to their TSP fund allocation at any time online at TSP.gov.”

      I think it must have been the part about the contributions going to directly into the Lifecycle funds if you don’t previously have an asset allocation already set. Thanks for catching this, this has honestly been one of the things I have been trying to figure out for myself and I believe this settles it, thanks!
      dan

      • Reply
        Doug Nordman January 20, 2018 at 8:54 AM

        Good points, everyone, I’ve updated the post and added a note about the DoD’s BRS matching contributions going into the traditional TSP.

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