How to Maximize the BRS If You Decide to Opt-In
[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!
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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!
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:
- 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!
- If you plan on staying in the service for 20 years your choice is more difficult.
- 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?
- 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!
- If you are going to opt-in to the BRS, do it ASAP! Every month you wait you lose another free 5% government match!
- 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.
- 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!
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.”]
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.
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!