[Ah, good, the DoD BRS calculator has been officially released.]
A reader asks an outstanding question:
Does it make sense to opt in to the military’s new Blended Retirement System in 2018?
One of our NCOs has a pessimistic view of the BRS, especially since they’re over 12 years of service and don’t see how the BRS will benefit them. In fact, they don’t see how it will benefit any servicemembers. I think the best way to decide whether there’s a benefit or not is to actually show them numbers, via the calculator.
I’m getting a lot of questions on both sides of the BRS debate, and we’re still comparing the answers. Both sides have their points.
Remember that in 2018 you can opt into the BRS if you have less than 12 years of service (joined the military after 2005) or less than 4320 points in the Reserves or National Guard.
Let me make the most important point about the BRS right now:
It’s not about the pension. It’s about having extra money in your Thrift Savings Plan account.
Here’s the only numbers you need to consider: just one out of six servicemembers stays in uniform long enough to earn a pension.
Take a look at a picture of your recruit training class or your officer basic class. Who’s still in uniform today? Do you feel lucky? Do you?
We’ll return to this point after we answer the calculator question.
The DoD Blended Retirement System calculator
First, here’s the link to the Department of Defense’s Blended Retirement System calculator. (When you’re finished checking it out, please remember to come back here and read the rest of this post!) It was released in early May, several months behind schedule. (It was beta-tested by a few of us military bloggers in January.) Unlike the old DoD CSB/REDUX calculator, this one allows you to set more realistic assumptions for your TSP account’s investment returns.
The calculator’s expected to get another revision in June. Here’s the plan from the DoD BRS staff update:
We also have a few more changes planned for the interface, a print report function and accompanying pop-up boxes and hovers that will increase usability. We are concurrently ramping up the server capacity and ensuring platform stability to handle heavy internet traffic, and thus too many users too quickly may cause the BETA calculator to be slow and unresponsive. You may experience sluggish response, but the calculator is working. We would like the opportunity to complete this work before a full push to servicemembers by the DoD.
The calculator’s biggest flaw is that it doesn’t display what you’d contribute to the TSP if you stayed with the existing High Three pension system. For now, you’ll have to calculate your TSP contributions in a spreadsheet or another investment calculator (see below) and then compare them to your TSP balances under the BRS.
DoD’s BRS staff responded to our blogger feedback:
Yes, we have been discussing the topic of comparison frequently and spiritedly. The school of thought is the calculator is a comparison calculator. It compares one system to the other. Under the legacy retirement system, TSP by law is NOT part of a service member’s retirement. A service member’s retirement is only the defined benefit. It’s no different than a private 401K or government savings bonds. However, under the BRS, you are required to contribute to TSP if you want to receive any government match and thus, TSP by law, is an integral part of the member’s retirement. Believe me, it’s a split discussion in the hallways. On the plus side, another calculator is being developed (planning stages now) for after BRS opt-in; it’s more of a retirement calculator and it will include TSP and 401K, among other savings and bonuses that can be entered and calculated.
USAA’s BRS calculator (easy to use)
Second, USAA has a simple BRS calculator. It’s not as detailed but it’s very easy for people to use. (USAA designed it to have a high completion rate.) When you run that calculator, decide how you’ll feel about having matching funds in your Thrift Savings Plan when you’re near the end of your enlistment contract or your service obligation.
Other BRS calculators
Finally, a very creative National Guard servicemember has built a “What if?” spreadsheet that pretends the BRS started 20 years ago. He used the military’s historic pay tables to simulate how someone would have done. At worst, the BRS servicemember breaks even after a long bear market. In most of the scenarios, the 5% matching contributions grow faster than the High Three pension. Daniel Kopp at MilitaryLifePlanning is putting that spreadsheet into a blog post for more people to use, and we’ll let everyone know when it’s published.
The numbers you really care about
Now let’s get back to the basic question: people are looking at the wrong numbers. Stop focusing on the size of the pension and start thinking about the size of the TSP account.
Is the BRS a bad deal?
The logic flaw is the unspoken assumption that servicemembers will make it to retirement. DoD is publicly stating that their records show only 14%-19% of active-duty & Reserve/Guard servicemembers earn a pension.
This means that five out of six people will get no pension at all, no matter whether it’s High Three or BRS. In 2015, that’s the public commentary the Military Compensation and Retirement Modernization Committee got in hundreds of thousands of verbal & written statements from servicemembers and families.
However, if those servicemembers opt-in to BRS then they can earn a 5% match on their TSP contributions and leave the military with more money than they’d have if they left today under High Three. Take a look at those old photos again: how would those vets feel about an extra 5% matching in their TSP?
Is the BRS a good deal?
The logic flaw is assuming that people can do math and will maximize their DoD match. DoD is putting the burden of saving for retirement squarely on the shoulders of the servicemembers and families. New servicemembers in 2018 will encounter mandatory enrollment in the TSP, and mandatory 3% contributions to the L2050 fund, and eventual DoD matching… but you know that some of them will still find a way to not contribute.
If you’re reading this post and you’ll have less than 12 years of service on 1 January 2018, then you have the knowledge and discipline to squeeze DoD for every last penny of your 5% matching. Judging by similar policies in the federal civil service, about 90% of the rest of the military will probably do that too, largely by autopilot– or by good leadership.
A few of the military will somehow never get around to maximizing DoD’s match, for what might seem like very good reasons at the time.
If DoD thinks it’s a good idea, then why should we?
Then there’s the paranoid question: “Why is DoD being so nice to us?!?”
It’s not paranoia if they’re actually exploiting you. However, the BRS lets DoD reduce their contributions to a very conservative pension system. The High Three retirement law makes them set aside far more money for the pension. (It takes a lot of money to compound the pension savings at a very small yield.) The BRS requires DoD to set aside far less money because servicemembers can invest the TSP’s matching contributions in the stock market (with hopefully a higher yield). Some of DoD’s savings is shared with you.
DoD will save a lot of money by dumping matching contributions into your TSP instead of into the current pension accrual system. Instead of setting aside much more money in special-purpose Treasuries paying a ridiculously low (but very safe) yield, DoD will simply put some of it in your TSP account and make it your problem. Servicemembers will have to assume equity risk in the TSP’s C, S, and I funds to grow those contributions as quickly as they’d get from a High Three pension.
DoD is also being “so nice” to a few servicemembers more than to others. If you serve for at least 20 years to earn a BRS pension, then you’ll almost certainly take the continuation pay at 8-12 years of service– in exchange for 3-4 more years of service. (Download the BRS Implementation Guidance PDF and read paragraph 8 of the attachment.) If you’re still not absolutely sure that you’re sticking around for a pension (even in the Reserves/Guard) then you’d pass up that continuation pay and have a smaller total compensation. If DoD has a low demand for your skills then you’d get a much smaller continuation pay amount, too.
You would only take the continuation pay if you’re feeling challenged & fulfilled and you already planned to stay in uniform for four more years. But that money will jumpstart your TSP (and your IRA) and could compound the value of the BRS to more than the High Three pension.
One final caveat: the worst feature of the BRS is the optional lump-sum pension. (This time it’s not DoD’s fault. That lump-sum law was created by the Senate.) Servicemembers give up a gigantic part of their future cash flow in exchange for a 25% or a 50% lump sum. It’ll sucker a lot of people (“the math tax”) just like the Career Status Bonus of the REDUX pension system has suckered retirees for the last 17 years. In effect, Congress just licensed DoD as the nation’s biggest retirement payday lender.
Let’s add those extra variables into the calculators and see how the numbers turn out.
In most cases, people will do better with BRS (even when they don’t earn a pension) because they’ll have more money in their TSP.
In some cases, people will do worse with BRS— mostly due to large doses of bad financial behavior or conservative asset allocations.
We’re both right– but at least five out of six people who opt in to the BRS will leave the military with more money.
That’s better than we have today.
Your Call To Action
If you enjoy working with calculators, please run your scenarios through the different ones and let us know how the numbers turn out!