9 Things To Consider Before You Choose The Military’s New Blended Retirement System?

Blended Retirement SystemIn January of 2018, the military retirement system as we know it will cease to exist. Instead, service members who joined after 2006 but before January 1, 2018 will have to choose whether to stay with the existing system or opt into the new “Blended Retirement System.”

Recommended: Beware of Huge Flaws In The Military Blended Retirement System

We’ll see dozens of articles and calculators on the new military blended retirement system during 2016-17, but here’s the quick answer for most of today’s servicemembers:

  1. If you think you’re staying on active duty for at least 20 years, then stick with the current High Three retirement.
  2. If you’re pretty sure that you’re leaving active duty before 20 years then take the new Blended Retirement System.

While we’re awaiting the calculators, think about these big-picture issues affecting you and your family. (If you’re building a calculator to help crunch the numbers then I’d love to join your team of beta testers.) Remember that the Department of Defense gets at least as much out of the blended retirement system as you could.

Don’t Join The Military To Get Rich

Don’t take any job for its pension plan. You have far more human capital than that.

Join the military for the irresistible challenge, or to get out of a dead-end situation. Join to become part of something bigger with an incredible team. Join for the responsibility, the training, and the self-discipline. Join to make something better of yourself.

Stay in the military if you’re challenged and fulfilled, but don’t join just to stick it out for a pension. If the pension is your only motivation then you won’t last past the first obligation. When the fun stops then you should leave active duty for the Reserves or National Guard instead of grimly clenching your jaw and gutting it out for 20.

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You Probably Won’t Earn A Pension

83% of veterans have no retirement benefits. Only 17% of the military’s servicemembers stay on active duty or in the Reserves/Guard for long enough to earn a pension. (Retention is about twice as high for Air Force officers and about half as much for enlisted Marines.) That’s only one out of six.

If you’re on your first commitment then you can’t predict how hard you’ll have to work for a pension. When you reach 15 years of service, you’ll find that your billet choices are narrower and the assignment officers want you to make even greater personal sacrifices to “break out of the pack”. By that point in your career, you might be raising a family who’s also getting a little tired of making their own sacrifices.

The best way to earn a military pension is to take your career one obligation at a time. Don’t set a long-term goal that only has a 17% chance. Instead set a series of shorter goals (Three years? Six years?) and keep going only if you’re feeling fulfilled and challenged. If you’re miserable at the end of an obligation then leave active duty. The skills that lead you to success on active duty will also help you succeed in the Reserves/Guard and in your civilian career. A Reserve/Guard pension still has most of the benefits of an active-duty pension, but a Reserve career has a much better quality of life.

Instead of “just” a pension, your goal should be financial independence! When you have a high savings rate then you’ll build up enough assets to have options. Even if you leave active duty at 17 years, you’ll dramatically improve your work/life balance while staying on track for financial independence. You may delay your pension by 25-35 years, but you’ll invest enough replacement income during your bridge career. If you maintain a 40% savings rate for 15 years then you may not even need the bridge career or the military pension.

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We Asked For The Blended Retirement System

You older veterans may remember that the High Three pension system was passed in the 1980s largely at the urging of Congress and the Department of Defense. It was designed to encourage servicemembers to stay longer than 20 years, but by 1999 it was clear that retention was plunging. Today’s High Three and REDUX pensions came as a last-ditch effort to persuade mid-career servicemembers to stay until 20.

In 2012 DoD decided to build consensus for the blended retirement system. The Military Compensation and Retirement Modernization Committee held hearing for nearly 18 months and received feedback from over 100,000 servicemembers, veterans, and families. They heard testimony by veteran’s groups and military family organizations. They added several surveys and Congressional hearings. Publicity (and media analysis) was widespread and intense.

The key to retirement modernization was the “unfairness” of cliff vesting. (An assignment officer would call it a “retention incentive”, but that’s a whole different post.) The MCRMC hearings showed that today’s servicemembers want a more portable pension system with more money under their control. Instead of cliff vesting at 20 years, people want military benefits to resemble the civilian 401(k) and the federal civil-service retirement systems. Servicemembers want to leave active duty with a little more in their retirement accounts. Instead of a defined benefits pension, people favor a defined contribution plan.

We did it to ourselves. We asked for exactly the type of compensation that 83% of us will qualify for.

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Why Are They Being So Nice To You?

Blended Retirement System

DoD leaped on the MCRMC bandwagon because a defined contribution plan saves the federal government billions of dollars. For over 30 years, DoD has been required by law to fund military pensions in advance (accrual basis) instead of when they’re actually paid (cash basis). Even “worse”, from DoD’s perspective, the money set aside for pensions is invested in non-negotiable government securities paying a pitifully small (but very secure) interest rate.

The blended retirement system will cost DoD a lot less. It pays a 40% High Three pension instead of the current 50%, and that means DoD immediately saves 20% (10 percentage points) on its lifetime pension expenses. DoD can invest a smaller amount every year in the special-purpose low-yield Treasuries that fund the military pension account. DoD still has to set aside some payroll money every year to match the servicemember Thrift Savings Plan contributions, but those are one-time expenses instead of lifetime annuity obligations. (Click the link on the graphic for the details.) The total of the smaller pension and those matching funds is still less than they’d have to contribute to the current pension fund.

DoD’s cost of matching the TSP contributions for all servicemembers is a complicated calculation. TSP contributions will (usually) earn higher returns than special-purpose Treasuries, so they’ll grow faster and can be funded with less money. The sad fact is that not every servicemember will contribute enough to the TSP to earn a full DoD match, so DoD will “save” even more at the servicemember’s expense. I’m sure that an entire battalion of eagle-eyed DoD CPAs has already determined that paying a TSP match is a bargain when they’re saving 20% on pensions. DoD is thrilled to pay a match for each year of a military career (if the servicemember actually contributes their share) instead of having to pay pensions for decades.

DoD saves so much money on the blended retirement system that they’re even willing to pay a retention bonus. The continuation pay (after 12 years of service) is a one-time expense (with a four-year obligation!) instead of a pay raise that they’d have to pay out for a lifetime pension. Think of it as a lump-sum advance payment on your pension, very much like the REDUX Career Status Bonus. You’re paying for it with four more years of service, yet this advance payment only augments your financial independence when you invest it.

“But wait, there’s more!” Matching TSP funds can be a tremendously cost-efficient precision retention tool. Instead of paying huge bonuses, DoD can simply contribute a little extra money to a servicemember’s TSP account. (Existing legislation already allows the military and the TSP to do this, but the services haven’t implemented this option– yet.) Now instead of paying a bonus to everyone in an understaffed skill, DoD can quietly boost the TSP match of precisely those servicemembers who they want to retain.

DoD can save a lot of money because servicemembers take on the burden of saving for the match. The challenge is that we have to be responsible enough to handle the burden. Most American pensions have shifted to a defined contribution plan, but few of today’s workers contribute enough to the plan. Most employees are investing their assets too conservatively or (even worse) they’re cashing out their 401(k)s for other reasons.

DoD doesn’t have to care about underfunded TSP accounts because they’re saving billions of dollars. It’s the servicemember’s responsibility to exert the discipline and motivation to do a better job of investing for financial independence.

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Mandatory Thrift Savings Plan enrollment

The best feature of the new blended retirement system is mandatory enrollment. Fewer than half of today’s servicemembers are even contributing to a TSP account! The federal civil service’s mandatory TSP enrollment has created an 88% contribution rate, and among new employees it’s over 95%. Ideally, the military’s mandatory enrollment would include default contributions to the L2050 fund. It would be even better if the default contributions are set high enough to at least maximize the DoD match, but again sadly the proposed default contribution is a paltry 3%.

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Maximize Your Contributions And Invest Aggressively

The flaw in the blended retirement system is that it shifts the burden to the servicemember. The summary sheet (see that image linked above) certainly sends the wrong signal. The graphic for the 12-year continuation pay shows the money going to a car, a house, and a pickup truck— instead of being deposited in the TSP and an IRA and a taxable account.

Image of the new version of the blended military retirement graphic color v2.0 showing piggy bank | The-Military-Guide.com

V2.0: New title and a piggy bank

[Nords note:  Someone on SECDEF staff must be reading this site:  version 2.0 of the above graphic was spotted on 29 December 2015. This time it adds a piggy bank to the continuation pay graphic and retitles the page “The U.S. Uniformed Services Blended Retirement System”.  (Now NOAA and the U.S. Public Health Service are in the club.)  These changes improve the graphic, but it shows that DoD is still implementing the legislation.  We’ll be watching these tweaks for at least the next 18 months.]

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You Can Do Better

The blended retirement system is only a good deal if you’re already maximizing your TSP and IRA contributions as well as saving more money in taxable accounts. It’s only a good deal if you’re aggressively investing in an asset allocation that’s high in stocks (instead of bonds or the G fund). It’s only a good deal if you’re already saving most of your pay raises, bonuses, and promotion pay. In other words, it’s only a good deal if you have the motivation and discipline to pursue your financial independence.

The blended retirement system is a great deal for the 83% who won’t retire from the military– those who just want to serve an obligation or two and pile up a higher balance in the TSP.

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But What About The Lump-Sum Pension Option?

One of the features of the new blended retirement system is the option to exchange your full pension for a lump sum with a smaller pension. DoD already does this with the REDUX pension, and I think we’ve all learned over the last decade that REDUX has saved more money for the federal government than it’s put into servicemember’s bank accounts.

I agree that there are military retirees who are capable of investing a lump sum and earning more (after-tax) returns than the full pension would offer. However, I’m highly skeptical that there are so many potential Warren Buffetts in the ranks. Behavioral psychology studies have shown many times that way too many retirees will use the lump sum for expenses which fail to create more value than the pension.

If you think you can handle a lump sum pension option, then do the math. You’ll probably decide that it’s better to invest your other savings more aggressively because your asset allocation will include the federal government’s inflation-adjusted annuity. You may also decide that it’s better to keep the full pension and save up the money for your lump-sum expense.

If you think that you’re one of the special snowflakes who’s starting a billion-dollar business by taking the lump-sum option, then forget about the lump sum and keep your pension. Instead, find other eager investors who are willing to fund your entrepreneurial startup’s aspirations. Please contact me with your pitch and your term sheet.

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So, Nords, what would you do?!?

Here’s the advice that I gave my active-duty daughter last week. The blended retirement system is only a good deal as long as she:

  • maximizes her TSP and IRA contributions,
  • saves even more in taxable accounts,
  • invests the 12-year continuation pay, and
  • invests most of her pay raises and promotions.

The reason it’s a good deal is not because of the pension.  It’s a good deal because she’ll reach financial independence on her own high savings rate and she won’t be bribed tempted to stay until 20 years of service. If she chooses to stay on active duty, it’ll be for the challenge of a fulfilling career instead of two decades of cliff vesting. If she moves to the Reserves or Guard then she’ll have solid investments for starting her bridge career and reaching financial independence.

When you reach financial independence, you have choices and you can retire on your terms. The blended retirement system can get you there a little faster, even if you never actually stay long enough for the pension. Remember that more of the responsibility has been put on you, and don’t expect the government or DoD to take care of your benefits for you.

You don’t have to wait until 2018 either. Start maximizing your contributions now, and invest in a more aggressive asset allocation.

Every good blog post is supposed to end with a call to action.  Here’s yours:

  • If you haven’t signed up for the TSP yet, then go sign up now.  (Use myPay or this link to the TSP form.)
  • If you haven’t maximized your TSP contribution this year, then boost it by one percent.  (Login here.)


Related articles:
Military Blended Retirement System Spreadsheet
Retiring Without A Military Pension
Retiring From The Reserves And National Guard
How Many Years Does It Take To Reach Financial Independence?
Saving Base Pay And Promotion Raises
Over a decade later, REDUX still sucks
Don’t Gut It Out To 20: Leave Active Duty For The Reserves Or National Guard

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.

  1. Doug,

    I am prior enlisted Navy who received a commission with the NOAA Commissioned Corps with no break in service. (Via Conditional Release) I served 7 years 10 months enlisted with 0 contribution to TSP. I am still in the “Opt-in” window for the BRS and cannot see the benefit of BRS other than taking it with me if NOAA Corps doesn’t work out and I leave before 20. I would really appreciate any guidance on contribution specifics to possibly outweigh the benefits of the legacy high-3 at this point in my career.

    Very respectfully,

    ENS Daniel Jessurun

    • Daniel,

      One benefit of the BRS is exactly as you’ve said: taking more money with you (in your TSP account) if NOAA Corps doesn’t work out. You have no control over medical or physical problems, downsizing, lack of promotions, or other issues affecting your ability to get to 20. You might even choose to leave before 20 because of family issues or changing career priorities. If you make that choice under High Three (or if you’re forced out) then you get nothing.

      The overall retirement rate of the uniformed services is around 15%: 1 out of 6. I get e-mails every week from readers who were forced out (or who had to make the difficult decision to leave), and they wish they’d been able to take more money with them. They never vested in any pension benefits and they didn’t have TSP matching. Look around NOAA at the other officers and decide who’s the special snowflake among them who will make it to the pension. Is it you? How do you know?

      The best time to contribute to the TSP was when you joined the uniformed services. The second-best time to contribute to the TSP (and other retirement accounts) is today. When you opt in to the BRS and contribute at least 5% to the TSP, DoD’s matching BRS contributions to your TSP account will compound along with your contributions. If you invest aggressively (the L2050 fund or the C, S, & I funds) then your TSP account balance can grow to replace the difference between the High Three pension and the BRS pension. Run the BRS calculator for your situation and analyze your results. This post (with multiple calculator runs) can help you put that into perspective:

      Between 8-12 years of service you may also be eligible for a Continuation Pay contract. It runs concurrently with any other service obligations you may have (if permitted by the other obligation contract). When you invest your CP bonus in the TSP, it can also compound to an amount which would give you more in your TSP than the pension difference between High Three and BRS.

      For most servicemembers, the BRS decision results in more money because they’re not going to retire from the uniformed services. Even for most retirees, the BRS matching TSP contributions are better than the difference in pension. This post gives you a bunch of additional reasons why you’d rather have more in your TSP account than to have the federal government doling it out to you a month at a time.

  2. I haven’t found anything yet that will take into account the Surviving Benefit Plan – if 55% of gross retirement paid to spouse is chosen, how much does that cost? And is the cost different for Legacy and BRS? It seems with the BRS, the beneficiary would get all of the remaining balance in the TSP. Has anybody seen a calculator that takes this into account?

    • Good points, Kristen, and I’m not aware of any calculators which account for this. (It’s one of the reasons I wrote the post.) The SBP premium will be the same under both pension systems (6.5% of the pension) and the payout will be the same (55% of High Three or BRS). Of course the amount of the BRS survivor annuity will be 20% less than the High Three survivor annuity, just as the years-of-service multiplier for BRS (2%) is 20% less than the YOS multiplier for High Three (2.5%).

      And yes, the BRS’ matching contributions to a servicemember’s TSP means that can be passed on to the survivors.

  3. As someone entering the military as a commissioned officer I was told by my recruiter about this new retirement system which brought me here. I am entering the military through AMEDD and I was told that if I am accepted by the selection board I will be a E4 and after BOLC I’ll be a O2 so my understanding is that after 20 years of service I should get 50% of my last pay. Now my question is that if I decide to choose the new blended retirement system and continue to contribute 5% of my pay every month I’ll eventually get everything back as the normal high 36 retirement system? Or I’ll loose 10% of my retirement if I choose the new retirement system? Do I still pay taxes on my pay and if yes how to maximize my retirement? I know it’s too early to think about retirement but I want to know what I am entering into.

    Any help is appreciated

    • Good questions, Voz!

      Under the current High Three retirement, your pension will be 50% of the average of your highest 36 months of pay. Under the Blended Retirement System, your pension will be 40% of the average of your highest 36 months of pay.

      If you contribute at least 5% of your base pay to your Thrift Savings Plan, then DoD will match up to 5% of your base pay. Since you’re entering the military in 2017, if you opt in to the BRS (as early as 1 January 2018) then your 5% DoD match will begin immediately after you convert.

      Your BRS pension will be 10 percentage points lower (a 20% cut from High Three) but you’ll have the additional DoD funds in your TSP. Your TSP is your money whether or not you stay in the military, and you can take it with you when you leave the military. You can leave the money in your TSP account or roll it over to your IRA.

      I realize that you’ll have a service obligation after AMEDD, but 85% of all servicemembers leave the military before earning a pension. You may decide that you’d rather pursue your medical career as a civilian as soon as you’ve served your military obligation. The BRS gives you more money in your TSP than if you’d clenched your jaw and gutted it out to 20. More importantly, even if you do serve until retirement, it’s possible that the DoD matching contributions in your TSP will grow faster (and be worth more) than if you stayed with the High Three pension.

      Because you have only 1 out of 6 odds of staying in the military until retirement, I strongly recommend you opt in to the BRS– and take your military career just one obligation at a time.

  4. Hey Doug, very great information here! Do you plan on doing a separate write-up/explanation for members of the Reserves/Guard?


  5. I would disagree that Reserve/National Guard have a higher quality of life. If you are not very careful/lucky as a Reservist, you will lose your civilian career with one long Reserve/Guard callup, and then you will be essentially a temp worker for DoD because you will have only a part-time career (in the Reserve/Guard) and NO FULL-TIME JOB OR CAREER.
    The grass is certainly not greener on the other side.

    • C, I think that active duty and a Reserve/Guard career each have their quality-of-life challenges. Neither one is a rose garden.

      However I still hear from many readers (and my personal experiences) that the Reserve/Guard gives you much more control over your life than active duty. It’s more of the things we enjoy about the military with fewer of its hassles.

      I’ll go even further on the civilian employer: if they don’t support your Reserve/Guard career then it’s worth finding an employer who does. Better yet, save as much as you can for financial independence. You’ll gain more flexibility of choice among corporate employers, part-time work, or your own entrepreneurial projects.

  6. Ok, so my EOE is in July. I intended on serving at least 20 years, and I’ll be at 10 in July. An awesome opportunity came up, and I’m considering taking it. Am I screwed? I can’t opt-in prior to 2018, right?

    • That’s right, Nick, DoD currently plans to open opt-in signup for the Blended Retirement System on 1 January 2018. It’s remotely possible that this could be moved to December 2017, but I’m not holding my breath.

      DoD expects that people who wish to immediately opt in will be able to do so early enough in January to get the full match directed to their TSP accounts at the end of January for that month’s pay.

  7. BTW love the advice to save pay raises, one of my navigation teachers when I was midshipman told the same, and I have been using advice to great success so far. Have been invest and save a ton of dough since commissioning and don’t know if I would have thought that way if there weren’t leaders like him and you out there, so thank you very much! Was searching on google for a calculator on what system to choose, the old or the new, and I found this site (http://www.spendthriftsailor.com/) one of the better I have found.

    • Thanks, Alex!

      We’re going to have some time with that spreadsheet, because the DoD’s BRS calculator is still in beta and reportedly delayed until March…

      And I’ll say it again, the BRS is best for people who are not staying until retirement. They’ll be able to leave with more money (assuming they invest in the TSP for the match) to compound for retirement on their own instead of trying to cliff vest at 20 years.

  8. Excellent review and analysis. As one who has taken a rather cynical view if the DODs process and motivations to run out the new hybrid system, yes, the onus of responsibility is indeed shifted to the service-member’s court. And so it will be post 2018. Much like other aspects of modern financial planning, the risk-reward aspects of money management has shifted from the Government’s balance sheet to the individual’s. For better for some, worse for others. My only suggestion is that before the pre-2018 vets make an irrevocable choice with life long implications, seek the counsel of licensed professional, CFP, CFA certified to get an more balanced view that what may be offered in house DOD. There is a fine line between information and marketing. Nobel prizes in economics have been given in the area of behavioral economics and how delayed gratification vs. reward works in how we come to financial decisions.

  9. If you are staying for a career remember this, When was the last time congress passed anything that actually benefitted the retiree? This is no different. If you stay 20 under this new system you lose.

    • I agree that Congress and DoD are acting largely out of self-interest, and less out of the benefit to servicemembers. However there’s still a way for military families to win.

      Fewer than half of today’s servicemembers even have a TSP account, let alone contribute to it. The blended retirement system comes with mandatory enrollment in the TSP, along with a default 1% contribution to the L2050 fund. The federal government already has this system in place for its civil-service employees, resulting in over 90% participation rates and nearly 90% of those people contributing every month.

      Military families can win with the BRS by contributing to the TSP up at least to DoD’s match, and can go even further to maximize their annual contributions. When 83% of the servicemembers leave the military before being eligible for a pension, they’ll at least have extra money in the TSP. When the other 17% retire to the new system’s smaller pension, they’ll hopefully have contributed enough to their TSP accounts to allow their growth (and nearly two decades of compounding) to win out over the old pension system.

      But if they don’t contribute to their TSP accounts for at least the DoD match then you’re absolutely right: they’ll lose.

  10. What if you have more time on your contract but you are under 12 years and choose to Opt in. Is your contract canceled so you can get the continuation pay for the additional 4 years?

    • Great question, Mark, and we won’t know the answer until 2018!

      I suspect that you could always take the continuation bonus and tack four more years onto your current obligation. The big question is whether the four-year obligation could be concurrent/overlapping with your existing obligation.

      I suspect that the assignment officers will make that “concurrent” retention decision for each community and specialty. You’ll have all of 2018 to assess the options and make your choice.

      The key is to keep saving & investing as much as you can so that you have the financial flexibility to make the retention choice based on your career goals and quality of life– not based on getting out of debt or living paycheck-to-paycheck.

  11. Thank you for writing this article! It is insightful and helps spark my curiosity. Also thank you Difu Wu for the easy calculator!! I am right in the range to be able to choose either the BRS or remain with the current system. I also have just enough education to know that savings and my future financial stability is critical and to be proactive now.

    I am planning to serve active duty for at least 20 years. So…the current system seems best especially if I can also contribute (5%) to a TSP. My question is, does the DoD use the same matching %’s in the current system as it will in the BRS? If so, I can be hopeful and expect the original 50% annuity (2.5) at 20 years and also whatever the TSP accrues? Right? Seems pretty obvious that the current system plus any added TSP savings will mean greatest future stability upon and assuming I go 20 years.

    Thanks again!
    Semper Paratus

    • You’re welcome, Alexander, I’m glad it’s helping!

      DoD is currently authorized by law to match TSP contributions, but none of the services are doing so. The military’s new blended retirement system will be the first time that servicemembers can enjoy matching TSP contributions.

      However you can still maximize your TSP contributions and compound those funds for your financial independence, even if you don’t stay in uniform long enough for a military pension.

      I’d recommend taking active duty one obligation at a time. Keep going as long as it’s challenging & fulfilling. However, when the fun stops then don’t grimly clench your jaw and try to hang on for the 20-year active-duty pension. Instead you could leave active duty for the Reserves or National Guard and still qualify for an inflation-adjusted annuity by age 60. You’ll enjoy all the benefits of the pension (and cheap healthcare) without the physical, mental, and emotional stress of staying on active duty. (Your family will be happier too.) In addition, your Roth TSP (and Roth IRA) contributions (along with savings/investments in taxable accounts) can bridge the gap between leaving active duty and your Reserve/Guard pension

      You’ll have to use calculators & spreadsheets to decide whether the current pension is better than the new blended retirement system. You’ll have all of 2018 to analyze that choice. In the meantime, keep saving as much as you can for financial independence so that you have more options.

  12. I built a calculator here: https://docs.google.com/spreadsheets/d/1cmVZ3Y4ivgyw3vs8na8RMhiLb5fj4ONV4WeBUOyrzn0/edit#gid=1153203771

    Biggest input is the probability of staying at least 20 years to qualify for retirement. It seems that 20% is around the cutoff (below 20% BRS is better and above 80% current system is better). If you are more likely than not to stay for 20 years, current system is likely the better option.

  13. Good points, Gerald!

    If you see new training materials on the blended retirement system, or a calculator to help make the choice, then I’d love to add the links to this post.

  14. Dave and Peter bring up good concerns. I have the perspective of someone who is a financial counselor and educator for the military (contractor) and after serving in the Navy for 20 years. I never saw anyone whose job it was to teach or counsel in this subject area promote REDUX over regular high 3. We provide the information, the advantages and disadvantages, reasons why someone would choose one over the other, and, in my case, which one I chose. We’ll be doing the same for the new plan. Statistically speaking it makes sense for someone early in their active duty military career with the choice and the will power to invest more than the minimum to take the new retirement plan (based on what we know right now). But I (and I hope we), will simply present the information and projected potential outcomes. And if you know anyone is out there teaching that TSP “beats the market” you need to stomp on them.

  15. Thanks, Peter. Good points about behavioral finance.

  16. If the 6% drop in the S/P the first 5 trading days of the year, and 10% from the October highs does not give one pause, it is the over 8,000 DOW points the index has traveled since Jan 2015 in its ups and downs. The point is the biggest factor in one’s return on assets in any investment vehicle subject to market fluctuation is simple human emotion. We tend to treat our personal investments as we tend to treat a loved person in our lives, with the full emotional and at times, imperfect judgement we apply to all other area of our lives.

    And if there is one behavioral factor all 18-30 year olds have (prime military demographic) it is an under-appreciation of risk, risk taking behaviors and allowing emotion to cloud their judgements on money, finance and life. The DOD knows this so it markets, and marketing is the correct term, this “new” retirement package knowing full well the core demographic if given a choice will chose quick cash now, any choose any other choice that carries the greatest risk to the individual and not the government or employer. Good for the DOD, bad for most else.

    And what ever the DOD does offer in terms of ‘counseling’ or financial advice it will be marketing and other means to get the individual to per-select the retirement choice in the DOD’s best interest.

  17. Thanks, Dave, I appreciate your comments!

    I’m looking forward to a comprehensive spreadsheet/calculator tool that everyone can use for weighing their numbers.

  18. I find it funny how the two %’s are compared. As it states: only 17% of the force receives a pension, and in the next breath the assertion that the DoD (likely RAND) received overwhelming support (I would wager 86% of the force) for this program. It’s kinda funny. My main concern is what I pessimistically, but almost certainly expect; the complete lack of MEANINGFUL education on retirement planning. Just like the TSP rollout the 18yr olds will be show the typical C Fund prime operating ratios and cycle where it walloped the market, but fail to show how to accurately and meaningfully plan for actual retirement in terms of lifecycle investments. Hey will be told they can et a 10$ return year after year until they die, and how TSP outperforms the market, and lull them into a false sense of security. A prime example is in their own ridiculous literature. Look at the continuation pay frame…REALLY??! New Sports Car, New Trucks….NUTS! This is how we teach out kids to be stupid with money!

    I sincerely hope they are shown, like you accurately illustrate, that they need to maximize their investments. I am already telling my Amn that if they are not contributing at least 15% of their own money (and spreading it into Traditional and Roth) it will cost them dearly!

    This plan works out OK for those who are smart and plan, however, that is not in the typical 18yr olds mind. By the time the realize it, it will be too late and they will suffer 100s of thousands in retirement shortfalls over their retired lifetime.

    Please show your folks simple math so they can appreciate how much the have to make up. Consider a 24yr MSgt with a base pay of $4,725 Under the current system they would receive $1,380,800. Under blended that total would be $1,088,640. That is almost a $300K shortfall. And you would not even be 90 years old at that point. Obviously this doesn’t factor SBP or COLA etc. But the higher you go, and longer you are in, the more of a deficit this creates. Don’t show them monthly math, that is a system tactic to make change look smaller and confuse younger uneducated troops into feeling that small change it not a bog deal month by month. Make it simple math and long term. You will scare education into an 18 yr old be telling them they are set to “loose” 1/2 million dollars.

    Thanks for putting this article together!


  19. You’re absolutely right, Vince, and I hope so too.

    Based on what we’ve learned from our experience with REDUX, I’d say that we have an educational challenge on our hands…

  20. Wow, Doug, Just finished reading this in detail. I had not noticed the “lump sum payout” option in anything I’d read before. That’s definitely a trap right there!! I hope future service members can avoid the “I need a down payment” syndrome when they drop their retirement paperwork…

  21. Thanks for your comment, Peter, it’ll be interesting to see how Tricare reform goes.

  22. The iron rule of governmental benefit changes is to never make it more generous to the employee of that which it replaces. All that is happening is that your retirement moves from the DODs balance sheet to your’s. Plan wisely.

    The real driver of military retiree living costs going forward is not reserve vs. active duty pension systems, but health care and its related costs. The delta between the Tricare reserve select to grey area retirees and that of Standard, Prime, Extra to the active retired competent drives this point home.

    If 2015 was the year of military retirement “reform”, so 2016 will be the year for change to military health care. What I see going forward is for the three tricare platftoms being rolled up into one, “standard” with far higher co-pays than offered now to the sub 65 military retired community and greater cost share with the “for life” offered as a medicare suppliment. Either that or all military retired gets rolled up in the FERS civilian health care matrix with an unknown by-in. Either way the biggest driver of over all military retiree quality of life will be how one obtains health care and under what price.

  23. Great question, Sarah!

    The Reserve/Guard pension starts later in life, so its impact is smaller on the total retirement payout– whether it’s a 50% pay base or a 40% pay base.

    The biggest advantage I can see is the continuation pay and the TSP match. The Reserve continuation pay is a lot smaller than the active duty amount, and as you point out it’d be a challenge to make the DoD match on the TSP with drill pay and AT.

    However all of those funds would be in your TSP account instead of waiting until age 60 for DoD to pay them out as a pension. I suspect that an aggressive asset allocation (L2050 or the S and I funds) would grow the investment in your TSP account faster by age 60 than it would amount to as a pension payment starting at age 60.

    You’re right– there are a lot of factors and it’s a highly individual situation that needs a calculator.

    When you have a choice between a TSP and a civilian 401(k), I’d contribute to the TSP first for the maximum match, then the 401(k) for its maximum match, and then back to the TSP– for its lower expense ratio. And yes, it’s a challenge when you have both accounts. A good problem to have.

  24. Great summary, I look forward to reading more aa the calculators get built. I would be interested in learning more about how the BRS would work for reservists. It’s impossible to max out the TSP on drill pay alone, does that change your recommendation? It’s tricky to get the allocations right between the TSP and civvie job 401K so that I don’t go over.

  25. Thanks, Bridget, you’re absolutely right!

    Joining the Reserves or Guard is not a panacea, but it’s a much better option than burning out on active duty. The top regret of our readers in their 40s or 50s is that they didn’t get enough good years in the Reserve/Guard to earn a pension.

  26. Doug,

    Thank for jumping on this and explaining it – however, I would caution that going into the Reserves/Guard will mean less duty or obligations. In reality, you can be called back to active duty involuntarily and that can wreak major havoc to your civilian career depending on your circumstances. The last 14 years have proved that and I’ve seen many in the Reserves/Guard end up losing or not being able to go as far as they may want in civilian careers. Also, juggling the two careers can mean even less time with your family – a person needs to go into the Reserves/Guard with open eyes and a good understanding of what it entails and proper expectations regarding their rank progression.

    If you are willing to look at the Reserve pension and TSP aspects as one of the streams of income you can have in retirement – early or standard – then you can set goals (mainly point goals in the Reserves) as well as savings goals for income in retirement. In addition, you should at the Reserves with a win-win attitude and acquire and practice skills that can span or assist in your civilian career advancement/goals. I’ve found that the different types of communication skills required of someone in the military spans all careers: oral, writing, extemporaneous and scripted. Moreover, the opportunity of learning to lead anything is usually something reserved for much later in one’s civilian career as compared to their Reserve/Guard career.

    Long story short – you will still be held to the same standards in the Reserves/Guard as the active duty and while it may be part-time, it can still be stressful on the other aspects of your life.


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