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?
- 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:
How might our members’ TSP accounts grown, had they chosen the BRS?
Our colored cells highlight three common exit points in the military.
- 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.
- 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: You can access and edit your own copy of the spreadsheet with its commands “File | Make a copy…” or “File | Download as”.
Spreadsheet wizards should repeat the calculations for your expected years/ranks, and this time include the effect of investing the 12-year continuation bonus.]
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.