“Should I Opt In To The Military’s Blended Retirement System?”


[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 under construction, so please check on its progress!
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It’s the Final Countdown to the Opt-In period for the Blended Retirement System – Do You Know What You’re Going to Do?

With the opt-in period for the Blended Retirement System (BRS) quickly approaching on January 1, 2018, many Service Members (SM) and their families are still trying to decide what to do. By now, every SM (and hopefully even some dependents!) should have completed the online training. However, as with most online military training, it’s a lot of information that comes at you fast and it’s mixed in with just enough cheesiness that it makes you lose interest. However, something that I’ve noticed through multiple discussions with other SMs and family members is that most remain largely unsure what the BRS is and how it differs from the current retirement system (AKA “Legacy Retirement” or the “High-3”).

So, if you have completed the training and still have questions, you are the person this article is for. My goal is to help you take the questions you still have and guide you towards a practical decision based off your own research and number crunching! I’ll walk you through how to do it. But even then, I still recommend a discussion with a trusted financial advisor and/or the Army Community Service office (or branch specific financial assistance office) and your spouse as to what the best decision is for your family.

Before we get started, many SMs automatically assume the BRS is worse than the Legacy system because they only know that the percentage of base pay drops from roughly 50% per month to 40%. However, running the numbers for yourself will better explain the differences and if they affect whether you should opt-in or not. So, keep an open mind and truly assess your individual situation and be thankful that we now have options; we asked for this!


The Easy Choice…

The first question that easily leads to an obvious answer is this: Are you planning on getting out of the military before 20 years are up? If your answer is “Yes!” then it’s an easy decision!! Opt-in to the BRS! That way if you get out early, you have a retirement plan; if you end up loving it and staying to 20 years, you’ll have a great retirement! The BRS is very similar in structure to the 401k plan on the civilian side. As long as you actually contribute to the TSP and get the match you’ll have a nice start to your retirement fund that you can take with you when you leave the military. There’s no such thing as “free money” but getting a match from the government on up to 5% of your base pay is as close as it gets! Think of it like this, if you got a 5% raise staring 01JAN you’d be thrilled! Another important factor is that the TSP is just about the cheapest retirement plan available right now, which means you’ll keep more of the money you save and not lose it to management fees. Finally, there are great options for keeping your money in the TSP or rolling your money into a different retirement account when you do separate from the military, whether it’s at retirement or earlier. (“Rolling” retirement plans from one financial entity to another sounds difficult, but it’s not! The financial institution will do 95% of the work for you!)


Where It Gets a Little More Difficult…

Now here’s where the discussion becomes more difficult. If your plan is to stay in the military for 20 years and you are eligible to opt-in to the BRS you have a big decision to make with some impacts that won’t be realized for years. You truly must be honest with yourself. Remember, only around 19% of SMs end up retiring at 20 years. Start with these questions and any others specific to your own situation.

  1. Do your evaluations indicate you have a strong potential for being promoted? If you’re unsure where you stand I strongly recommend having an honest, and possibly difficult, conversation with your senior rater about your potential to progress through the ranks. If your rater thinks you may have a tough time promoting, you should seriously consider opting-in to the BRS. However, if your rater does feel that you have shown strong potential to get promoted then your decision-making continues.
  2. Are you willing to accept the risk of not getting promoted and being put out of the military? I’ve known a handful of people who this happened to. Suddenly, their hope of a nice military pension is gone, and they leave the Service with nothing. Worst of all, for many of them this doesn’t happen immediately but more like 8-12 years in.
  3. What do promotions look like for your MOS or branch? Promotions in my branch are currently hovering between 35%-45% for my next promotion. Suddenly, top block and being top 49% isn’t good enough! I need to be enumerated in the 33% to boost my chances of getting promoted! But that’s not all; if I don’t get promoted one more time after that I’ll still be put out of the service before I’m at my 18- or 20-year marks! These are realistic, future risks that both you and I need to consider. Clearly, I’m one of those SMs that needs to have an honest conversation with my senior rater!
  4. Finally, how is your physical health holding up? I work in the medical field and I see a lot of SMs make it to 12-17 years and not be in good health. A high percentage of them end up getting medically discharged from the service, and that’s not nearly as lucrative as most SMs think it is. In fact, it’s a really poor retirement plan. Plus, if you’re truly not in good shape you’re more likely to have poor health, increased health-related expenses, lower work and job potential (and therefore lower income potential), etc. than if you take care of your body and get out while you’re still in good shape. Remember, there’s a lot of expenses that are indirectly related to poor health that the VA won’t be covering for you!

Now, if you’ve made it to this point of the article with a positive feeling you’re probably considering your potential to be promoted to a sufficient rank and reach 20 years of service as realistic. Your next step is to start the comparison process of the Legacy Retirement system versus the BRS.


Utilize the BRS Calculator

The online BRS Retirement Calculator should be your starting point. After a long delay, the calculator is now available and is the optimal tool for comparing your options. The calculator takes your current years of service, rank, age, life expectancy, and some financial variables into account and estimates retirement amounts of both the Legacy and BRS so you can compare them. (Not sure what your life expectancy is? Check out a medical research-based longevity calculator for a humbling experience!) If you plan on meeting with a financial advisor I would run the BRS calculator 4-5 times with slightly different life scenarios each time and take that information with you to the meeting.

Running the numbers for yourself provides some clarity. You’ll see the final dollar amounts for each system. Change some of your variables, such as when you will get promoted and what percentage of your income you will save each month, and see how making those small changes affect your numbers.


Three Fictional SMs and Their BRS Calculations

To help you see the key numbers to compare, I’ve run 3 different SMs through the BRS calculator with the following variables remaining the same for the sake of comparison: 5% contribution from base pay to receive the 5% government match, 7% rate of return (a conservative, but realistic future rate of return on stocks), life expectancy of 89 years, did not take the lump sum option, and used the calculator automated rank promotions. For all 3 of these examples, the numbers circled in red are the key ones to look at. Note that these examples are shown in “future” dollars to include the impact of inflation in these SM’s retirement ages.

Here’s SM #1: 23 years old, has been in the military for 2 years, currently an E2 planning on retiring at 20 years as an E7.


Image of the output of the military's Blended Retirement System calculator run for a 23-year-old E-2 with two years of service showing that the BRS produces a higher lifetime benefit. | The-Military-Guide.com



First, let’s look inside the red circle under the Legacy Retirement (High-3) system, to get the total value of the current retirement system’s lifetime value (remember, all 3 SMs will live to 89). We see that if SM #1 stays in the current system he will receive a total lifetime retirement compensation of $4,010,833. Sounds like a lot, but look to the right under the BRS. Here we see that if SM #1 contributes 5% of his base pay and gets the 5% government match he’ll end up with a total of $4,026,502 (the .40% base pay per month plus the 5% government match), which outperforms the Legacy system by $15,669! However, looking at the total retirement package we get a much larger number, $4,844,337!!! The total value of his BRS plus his own 5% contribution is worth $833,504 more than the Legacy Retirement lifetime value!

SM #1 has a bright future – as long as he makes the right decision. Here, the choice is somewhat obvious – the BRS does two key things for him: 1) it pays him more money in retirement and 2) it gives him the freedom to get out of the military if he decides it’s not for him. So, for this example opting into the BRS seems like a win-win. SM #1 doesn’t have to worry about hitting 20 years to have a strong start to his retirement, and on the other hand, if he does, he still ends up ahead of the Legacy system! The key point being that he has to actually save at least 5% of his salary!

Here’s a few quick lessons. SM #1 is very young and has a long investing horizon. Time in the market refers to how many years a person is investing, the more the better. Numerous studies have shown that you can be a mediocre investor with mediocre returns as long as you invest for a long period of time. This is good, because most of us are not named Warren Buffet but we can still invest successfully if we start early in life! If we can have time on our side to cover for our imperfections as an investor we should aggressively start saving and taking advantage of that time in the market! Another consideration related to this is that a 7% rate of return is conservative as compared to historical returns of the S&P 500 that are closer to 10%, so with some basic financial education and training on diversification and asset allocation, SM #1 could likely optimize his investing to do better than 7% returns.

Another point to consider is this: no matter how young you are or how small your paycheck currently is, you can’t afford to wait to begin investing! You must be disciplined with your finances regardless of the size of the paycheck. If you do well, over time your paychecks will get bigger. A relatively small amount of money saved for a long period of time and SM #1 ends up a multimillionaire! How many E2s think they have that potential?


Alright, next let’s look at SM #2. She is an E4, currently 26 years old and has been in the military for 7 years. She thinks that she’ll retire at 20 years and will have been an E7 for a few years.


Image of the output of the military's Blended Retirement System calculator run for a 26-year-old E-4 with seven years of service showing that the BRS produces a higher lifetime benefit. | The-Military-Guide.com


First, a quick observation – SM #1 has much higher values in all values in the red circle. Why is this? If you learn nothing else from this post, time in the market is the most important variable! Start investing early, invest often, and learn as you go!

Back to SM #2. We now see an opposite scenario compared to SM #1. Here, SM #2 has more money in her Legacy Retirement as compared to the BRS. This is because since she has already been in the military for 7 years she has missed out on 5 years of the government’s 5% matches compared to SM #1 (remember, you’re “vested” to participate in the BRS after 2 years of service which gives you a max total of 18 years of matches). So, SM #2 will receive less total money from government matches although she also contributes 5% into the TSP.

So, for SM #2, assuming she retires at 20 years, the Legacy Retirement system has the advantage by a $183,622 difference over the BRS. Now, notice in the total retirement numbers under the BRS that if she were to elect switch to the BRS and contribute 5% she would come out ahead against the Legacy. But, here’s a catch that’s important to look at for yourself. Note that in that total retirement package that $377,321 is her own 5% that she has contributed. If you can save 5% to get a 5% match, why can’t you just save 5% for the sake of saving? If SM #2 opts to stay in the military until retirement and determines NOT to opt-in to the BRS, she’ll receive the $2,804,717 from the Legacy System and she’ll still have her own 5% savings of $377,321 (but not the government’s 5% match). This would make her 5% savings plus her Legacy package a total amount of $3,182,038!! This beats the BRS even with the government’s 5% match. The point here is that saving for ourselves is very important, regardless of whether we expect to get the retirement pension or not.

So, some key take-aways from SM #2. She is a little bit older than SM #1 and has been in the military for five more years. Due to losing out on those key 5 years of government matches on her 5% savings she will not make up the difference to give the BRS an edge over the Legacy system. Again, time in the market rules; and unfortunately, for SM #2 it’s too late and she doesn’t have as many years as SM #1.

Now note, despite the 20-year retirement edge going to the Legacy system, if SM #2 decides not to opt-in (remember, if you do nothing in 2018 you will automatically be grandfathered into the Legacy System) but 3 years later has a change of life situation, health condition, job burnout, or anything else random comes up that makes her leave the service, she will get out with nothing. No retirement benefits. So, the risk for SM #2 is that by chasing the higher retirement package she may put herself at risk of getting nothing. For her and everyone in her situation, the risk is significant. What is better – a sure thing (getting at least some BRS match if you get out before 20 years) or getting a bigger return (the Legacy lifetime value)? It depends. It’s a gamble to stay in the Legacy, but it’s also more money. Now, I don’t want to make it seem as if SM #2 opts into the BRS and still retires at 20 years that she’s made a mistake, because she hasn’t. Although she’ll have a little less from the pure BRS system, by opting into the BRS her total retirement benefit will be higher, and she won’t have the stress of being stuck in the “20 years or nothing” retirement option that staying in the Legacy system puts her in. SM #2 really needs to do some serious life planning and evaluating. This is a big decision. There’s risks and benefits on both sides of her decision.

How well do you know your own risk-taking tolerance? Running these numbers in the BRS calculator for yourself will help!


Finally, let’s look at our third SM, a CPT at 10 years of service hoping to get promoted next year, who is thinking about opting in JAN18 in case his military career doesn’t pan out the way he hopes.


Image of the output of the military's Blended Retirement System calculator run for a 31-year-old O-3 with ten years of service showing that the BRS produces a higher lifetime benefit. | The-Military-Guide.com


For this example, it is pretty obvious that SM #3 will be better off staying in the Legacy system rather than opting into the BRS – but only if he’s confident he’ll get promoted to MAJ and LTC to be able to retire at 20 years! There’s a significant amount of risk being at the mid-way of your career with promotions becoming more selective. For SM #3, the decision may be less about the dollars and more about the probability of getting promoted. If there’s much doubt at all I’d highly recommend considering opting into the BRS so that he has something of a retirement benefit when he leaves the service. Although mathematically the Legacy would be more money it would only be so by about 10% of the total retirement package. Is there really a difference between having $5.6 million or $5.2 million? I don’t think so, no one should have a hard time living off of that.

Here’s an observation about this scenario. As an O3, SM #3 has a much higher base pay than our first two SMs. But, notice the comparison between SM #3 and SM #1 in the BRS under the “Total” section. With his higher base pay, SM #3 will have more money in retirement coming from his pension than SM #1 ($4.5 million vs. $3.2 million) but he’ll have significantly less ($333,776 less) than SM #1 for the 5% contribution and 5% government match. Again, SM #1 saving 5% so early in life (even of a smaller salary!) and taking advantage of more years of 5% monthly matches is a huge advantage for all young SMs. There is some good research that supports the premise that saving and becoming wealthy is independent of your salary. SM #1 is a good example of this; while he’ll end up with a good salary mid-career and at the end of his career, starting the habit of saving young and getting those matches are what set him up for success!


Some Final Thoughts

In conclusion, all three SMs will do well if they hit the 20-year mark regardless of which retirement plan they’re in. All three will also do well if they opt-in to the BRS and get out before 20-years. However, the question revolves around the “what if?” regarding trying to plan for the future with all its unknowns today.

The risk of opting-in to the BRS is that if you end up with a 20-year career and receive the coveted retirement pension you could possibly end up with less money in total retirement benefits. However, as these examples show, even if you opt-in and come out behind compared to the Legacy system the difference is relatively small, only around ~10% of the total retirement package.

The risk on the other side is that if you elect not to opt-in to the BRS and plan on retiring at 20 years and it doesn’t happen you end up with nothing in retirement benefits. Opting in gives you the freedom to leave the military before 20 years with something saved for retirement whereas not opting in means it’s 20 years or nothing.

Here are some general observations to consider:

  1. No matter which retirement plan mathematically came out ahead, both are very good options. The BRS addresses some big concerns SMs have had for years and opens retirement benefits to around 80% of SMs.
  2. Everyone in the military will assume one of these two risks: 1) Staying in the Legacy and getting out of the military before 20 years and ending up with nothing for retirement or 2) Opting into the BRS and you end up staying in for 20 years and ending up with a slightly smaller BRS retirement package than the legacy. Which risk would you rather live with?
  3. You’ve likely noticed a trend: the more years of service you’ll have as of 01JAN2018 the less beneficial switching to the BRS becomes. Remember, the longer you’ve been in the fewer years of government matches you’ll get. You’re also older and therefore have fewer years to invest until you need to start withdrawing that money and living off it.
  4. Save regardless of whether you opt-in to the BRS or not. The importance of time in the market is obvious. Start saving as young as possible with as much as possible! The habit of saving is more important than your salary. If you’re a saver, as your salary goes up so will your savings. Most retirees that are currently getting their Legacy retirement pay still have to work. You can truly retire if you do your own saving AND hit the 20-year retirement! Save, save, save!!!
  5. If you are going to opt-in to the BRS, you only have the 2018 calendar year to do it and it’s best to opt in on 01JAN2018 and get the matches immediately; waiting to opt-in will cost you money!

Finally, like any good disclaimer, it’s important to remind you that ultimately you are responsible for your and your family’s financial well-being. You work hard; preserve some of your money for use in the future so that later you don’t have to work so hard. The best retirement package is to do 20 years; regardless of which retirement system you’re in the 20-year career is what leads to the big numbers. So, do a good job, get good evals, be an outstanding leader, don’t buy cars you can’t afford or do other dumb things! There’s your financial safety brief!

Now, run 4-5 different possible life and career scenarios through the BRS calculator to help you get a good idea of the possible ranges of outcomes for your retirement. Keep educating yourself on finances. Lots of quality information is either cheap or free. There’s some good blogs and great books that are less than $10 that have made me way more than I spent on them. Whichever way you decide to go, good luck!


[Nords note:  still not sure?  Run the BRS calculator again, only this time give yourself the Continuation Pay retention bonus (2.5 months of base pay) at 12 years– and invest that in the TSP, your IRA, or a taxable account.]



Related articles:
32 Other Links And Posts On The Blended Retirement System From Kate Horrell
Tricky Details Of The Military Blended Retirement System
Nine Things To Consider Before You Choose The Military’s New Blended Retirement System
The Military Blended Retirement System: “Dude, Where’s My Calculator?”
USAA’s Military Retirement Comparison Tool And The Blended Retirement System
Military Blended Retirement System Spreadsheet

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. Reply
    peter gregory December 26, 2017 at 8:27 AM

    10 years into a bridge career with a 403b plan. Which is what most in the civilian health care sector get. I would say the amount and volume of info and tools produced by the DOD on the BRS opt in/out matter is far superior in volume and depth than you ever get in the civilian sector. As I have a stated a number of times on this subject, I retired legacy in 2008 with 23 years, 0-5. I have run the numbers assuming the BRS existed in my active time, 85-08, assuming the match and returns on the SP 500 during those years, even counting 2 major bear markets I am about $200 difference per month in retirement yield turning 60 this year, legacy to BRS. Now it was those 10 or so years before 60 that I had to manage.

    But here is the difference and key legacy vs. BRS. I did not have an option to take 25 or 50% of the future value of my pension in a lump sum settlement. And thank God for that. I suspect many, many, many current and future BRS participants will, given how behavioral tendencies to value immediate gratification vs. delayed tend to work in real life, and I think many current and future military folks will end up with far less in their more grey years of 60s 70s and 80+. Than those under legacy. At some point in the future the social contracts of medicaid, medicare and social security boomers vs. Millennials/Gen X and Z will be hashed out and the future may be bit more austere than now for the younger sets. As my father said, save your money and plan for the future.

    • Reply
      warner25 December 26, 2017 at 10:32 AM

      S&P 500 returns since 1985 have been outstanding (although I also know that you didn’t even get TSP access until late in your career). I can only hope that my generation will enjoy the same, but I don’t think it’s prudent to plan for that nor the 100% allocation to US stocks needed to actually get that return.

      Your point about the lump sum pitfall is a good one. I usually try not to speculate about about what folks will or won’t do, but I suspect you’re right. I also suspect that many folks (including those who opt into BRS, but especially new recruits who won’t get a choice) will just happily continue contributing $0 to the TSP. We know that most contribute nothing already, and I’m not convinced that offering a 4% match will dramatically transform the behavior of young service members. This is where the DoD might reap the biggest savings. Add to that behavioral errors by those few who do contribute, compounded by taking the lump sum, and some folks will certainly end up with very little to show for their time in service.

      • Reply
        Doug Nordman December 28, 2017 at 12:50 AM

        Peter, Warner, the good news is that we have at least eight more years to educate BRS servicemembers that the lump-sum pension is the Senate’s version of a payday loan. Even DoD’s board of actuaries wrote a letter to Congress asking for its removal.

        The other good news is that new BRS servicemembers not only default to the 3% TSP contribution to the L2050 fund, but attempts to disenroll from the TSP will be met with automatic re-enrollment the following year. That’s in the implementation policy paragraph 7.b.(4).(d) on page 14:

        • peter gregory December 28, 2017 at 10:31 AM

          Good comments. Indeed I do think in the next or so years the BRS will go through some tweaking. A rethink of the lump-sum process, maybe a re-work of the 12 year mark bonus. But going back to the Civil War military “retirement” has had very little to do with a reward for a job well done for a period of time, as it always has been a force shaping and force management tool. Meaning manning, retention rates, needs of the services will dictate and drive any future changed to BRS. If in the next 10 to 15 years, Military or Navy Times carries stories of ex service members flat broke, bankrupt, or living in cars due to the abuse of the Lump Sum option or poor investment decisions, then yes the DOD will respond in some way. REDUX died a quiet death simply because service members figured out the 30K retention payment was not such a good deal for a reduced retirement. They will figure out the BRS soon enough and retention, recruiting will reflect that in the next decade or so. Good or bad.

          But if you go back to the original RAND studies in 2009-11 and the Congressional commission testimony, military retirement was not the emergent issue in terms of people costs. It is Health Care, Tricare/VA in its various incantations that is eating the DODs lunch in terms of people costs. And at some point that too will be in focus once again.

  2. Reply
    warner25 December 24, 2017 at 9:04 AM

    Dan, it looks like we can’t nest comments more than three-deep, so I’ll put my reply here:

    I’m satisfied that I’ve expressed my concerns well enough to inform any future reader who finds this.

    Also for the sake of those future readers, here is my alternative analysis as a mid-career officer: 31 year-old O-3 with 9 years of service, contributing the maximum to the TSP, expecting a 3% real ROI (a balanced asset allocation informed by global financial history, not just 100% US stocks which is risky and a historical outlier), expecting to retire at 20 years as an O-5, with 100% of 2.5 months BRS continuation pay into the TSP and no lump sum taken. The value of my legacy retirement package plus my personal TSP savings over the next 10 years (in today’s dollars, of course) would be $2,418,960. The value of BRS plus my savings would be $2,000,172. The difference of $418,788 is enough to buy our dream house in retirement or send all my kids to college. If I choose the legacy system and get forced out of service before 20 years at this point, I’d be missing out on ~$10,000 in BRS matching funds, but that would be little consolation after losing a multi-million dollar retirement package. This isn’t much of a gamble because my chances or retiring are much higher than the oft-cited “less than 20%.” At least on the Army side, we know that officer exit points are extremely bimodal, with about half leaving at the end of their initial 3-5 year obligation (who probably planned to do so from the beginning), and most everyone else leaving at 20+ years as a retiree. I will happily risk ~$10,000 for an ~80% chance of getting ~$400,000.

    If I plug in numbers for a 21 year-old just entering service (officer or enlisted), the disparity is similar, still giving the legacy system a $200,000-$400,000 advantage, but I do agree that they would have a harder time predicting their career path so the portable BRS matching funds would be more enticing. I’m not sure what I’d do in that situation.

    • Reply
      dan December 26, 2017 at 1:29 PM

      Warner25, I said I’d give you the last word and I will! So, this is moving onto a question regarding your expected rate of return as that’s what I think is the key difference between your and my calculations. You said you are “expecting a 3% real ROI” – is that your expected return after inflation, taxes on sales of shares, etc. or your general stock market return? I’m curious what you base that from. I always use the S&P500 average of 10.2% return as a long-term “benchmark” (I’m not 100% just in the S&P500 or C-fund and definitely don’t recommend that, just FYI) but do use it as a benchmark for what’s good, bad, or average. So, curious what you’re looking at for the 3%.

      • Reply
        warner25 December 26, 2017 at 3:34 PM

        Myfavorite source for returns data is the annual Credit Suisse Global Investment Returns Yearbook. Here is a link to the 2017 summary edition: https://publications.credit-suisse.com/tasks/render/file/?fileID=B8FDD84D-A4CD-D983-12840F52F61BA0B4

        I’ll note the following: On pages 13-14, see that of the 21 countries with returns data since 1900, the US enjoyed the 3rd highest real return (and yes, that definition of “real return” is essentially correct) on stocks, 6.4%. The rest of the world returned only 4.3%, producing a global return of 5.1%. But that’s just stocks. See page 47 for global bonds and bills which produced real returns of 1.8% and 0.8%. So just using long term returns data as a guide, planning on 5% means that you’re planning to hold 100% stocks for your entire life, or planning for a best-case scenario in which US markets continue to beat the rest of the world for the next half-century.

        And that’s without even attempting to analyze current conditions. See at http://www.multpl.com that PE10 sits at 32, and both dividend yields and real interest rates are near historic lows. The data is US but the phenomenon is global.

        So for some conventional asset allocation (like that of a TSP Lifecycle fund), I think 3% is a pretty middle-of-the-road planning factor. I think the ball is in your court to explain what will drive a 10% (call it 7% real) return going forward. If you are counting on a number like that, then I say readers beware and best of luck to you.

        • dan December 27, 2017 at 12:59 PM

          Warner25, Thanks for the resource, that is a good one I didn’t have. Upon reading it I think you’re counting inflation twice though to get to your 3% real returns. On page 11 (in para 1.4, the last sentence) it states that the return on equities is 9.5% / year and I believe it’s the very next paragraph where you get your “6.4% [annualized real returns] on equities” while according to the chart 4 shows that inflation for the 1900-2016 was 2.9%, which is just about 9.5%. That’s very close to the historical data of the S&P 500 which was ~10% (minus 3 percent would give you a 7% real return). (see https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp for a similar description) This is also very close to the Vanguard Total Stock Market Index fund (inception date April 1992) which has an annualized return of 9.77% and a 10 year return of 8.42%, which are also pretty similar to what the 116 years of equities return is. I think you are subtracting an extra 3% from the 6.4% when the 6.4% IS THE real return. Let me know if you don’t see that. I think you should expect 6-7% – I could definitely agree with you on that, and from what I’ve read by Warren Buffet and the Vanguard group, 6-7% returns is expected. They don’t think we’ll see some of the same “booms” in the market that we’ve enjoyed in the past with the industrial revolution and the changing face of business. Now, who knows. People who project are wrong more often than right, but I think you’re wise to be cautious about falsely expecting huge returns but I think it’s also not helpful to be too conservative on the other end of it, just so everyone understands that we don’t know what the future holds. We just have to save and invest and do it as smartly as possible.

          That leads me to address your question about getting above “average” or what I’ll call the 7% equity average. So far it’s been easy for the past 8 years because it’s been nothing but uphill the whole way, and even if we just match the market we’re doing well. But, the biggest thing I’ve learned about investing in the past few years is about asset allocation. Nothing makes a difference like that. Sharpe Ratios, the efficient frontier (which basically shows that a 70:30 to 8:20 stock:bond ratio is where you optimize returns while minimizing portfolio volatility – which actually secures gains, which isn’t intuitive until you see the math on it!) are really where you can put together different asset classes/indexes to get those “above average” returns. But honestly, I don’t think there’s anything wrong with “average returns” of 6-7%. If we save and dollar cost average our way into our future, then for you and I, in 30 years we’ll be in a great position. And if we learn a few things along the way and “optimize” our returns by 1% here and there that adds up to a steeper curve up – over time. Here’s some books I highly recommend reading on asset allocation to boost returns:
          1) All About Asset Allocation by Richard A Ferri
          2) The Only Guide To A Winning Investment Strategy You’ll Ever Need by Larry E Swederoe
          3) Rational Expectations – Asset Allocation for Investing Adults by William Bernstein

          Basically, investing can be as simple or difficult as we want to make it. Simple investing is extremely rewarding with “average” or slightly below average returns that, in the end, are enough. The key is saving aggressively, consistently, and for a long period of time. Getting more complicated really only yields smaller benefits, but those do add up. A 1% difference in annualized return over 20-30 years is a huge difference!!!

          So, since you asked, I assume you question if it’s possible. It is, even in the TSP. My 12 month TSP return is, as of 30NOV2017 at 22.81% (S&P 500 = 22.87%) and I’m not 100% equities but a blend of the C-, S-, I-, & F- Funds. For 2016, TSP did 17.5% (S&P 500 = 12.25%); 2015 TSP return = -.2%
          (S&P 500 = 1.19%) (2015 is the year I started changing how I was doing things), 2014 TSP return = 10.5% (S&P 500 = 11.74%). So, as you can see some years better than average, some years worse – but always very close. I’ve also changed my asset allocation the past 2 years which I think has led to better returns this year very close to the S&P 500 without being 100% equities. So, for whomever is reading this, it’s really not too hard. Do your own research and get a feel for your own risk tolerance, but right now with another 30 years of working in me, my risk tolerance is quite high. So I’m at the more aggressive edge of the efficient frontier at 90:10 stocks/bonds with the goal of getting closer to 85:15 to 80:20 over the next couple of years. So, my TSP looks like ~60% C-fund, ~20% S-Fund, ~10% I-Fund, ~10% F-fund and I plan to shift a little more into the F-fund for rebalancing in the future. One last thing, this is why I’m not a fan of life-cycle funds unless that’s the only way someone is comfortable investing because they don’t understand it and don’t want to. The returns on the lifecycle funds are quite a bit worse than doing a little bit of leg work yourself to optimize returns – that makes a huge difference. So, saving is #1 so that’s great, but optimizing returns is #2. The 2050 Life Cycle fund 2016 return was 8.65% vs. the S&P 500 2016 return was 12.25% – so quite a big difference. It’s easier, but lower return. A little bit of work goes a long way – and remember those few percentage points of “better” returns each year also compound. To whoever reads this post, sorry, it turned into a blog post all on its own! Best of luck!

    • Reply
      Doug Nordman December 24, 2017 at 10:07 AM

      Warner, the “oft-cited less than 20%” number comes from the Defense Manpower Data Center and has also been backed up by RAND studies. I’ve pulled those details from the DoD BRS office and from the RAND database. A number of us military personal-finance bloggers have asked for a breakdown by rank, service, & specialties, and we may have to put in Freedom Of Information Act to get it. In the meantime there’s the thrill of wandering around the RAND archives for hours searching for the same info.

      One of those RAND numbers is an estimate that officers have a much higher retirement probability of nearly 49%. That number is spread across all the services, and I suspect it’s lower for infantry than aviation. If you have data showing that Army officer exit points are extremely bimodal then I’d appreciate a link to whatever is publicly available.

      Whether the retirement odds are the roll of a die or a coin flip, there are still risks of not reaching 20 years due to factors outside of our control. I’ve personally experienced it, my spouse personally experienced it in her active-duty career, and I’ve seen similar stories from many readers. This is why so many servicemembers (and their families) requested the BRS.

      You describe the risks in terms of houses and college educations. Others see the risks in terms of life energy, health, and family harmony. All of those perspectives are rooted in behavioral financial psychology (not so much in math or logic), and that complicates apples-to-apples comparisons.

      I’ve moderated a comment which could be interpreted as an ad hominem response. You’re also welcome to send over a guest post presenting your side of the debate. I’m at NordsNords at Gmail.

      • Reply
        warner25 December 24, 2017 at 11:43 AM

        This is what I remember reading, published by the Army War College in 2010, so it’s not current but probably still a good approximation: https://drive.google.com/open?id=0B4s0Qz-qpOSCTmRhLXhkWFVKaU0

        It finds that only 54% of officers remain at 7 years of service (see Appendix A), so that explains most of the 49% figure from RAND. It also notes that “As they approach 10 years of service, the probability that officers will remain on active duty until retirement eligibility climbs to more than 80 percent” (although it’s not obvious where to see the raw data for that claim, it generally follows from the chart in Appendix A and the aforementioned 49% figure).

        Since you mentioned it, I think you’d be surprised by the Army’s retention figures by branch/specialty. I have to keep searching for the paper with the data, but the Infantry branch (with one of the highest rates) actually has a much higher retention rate than Aviation (among the lowest) for its officers. The explanations for that are mostly Army-specific, so this does surprise a lot of outsiders.

        Your point about the risks and the value of the money is well taken. I’ve always said that there are plenty of good reasons to leave active duty before 20 years, but getting farther ahead financially is usually not one of them. I think choosing BRS should be described similarly. It softens the financial impact of leaving before 20 years, so that’s nice to have in your back pocket, but I disagree with the presentation here that someone choosing BRS will often come out ahead of the legacy system after retiring at 20 years.

  3. Reply
    warner25 December 22, 2017 at 9:08 PM

    Aaron, yes, exactly. It seems criminal of the DoD to deliberately exclude equivalent TSP contributions from the legacy side of their official calculator, just inserting some fine print in its place. The illusory advantage of BRS is further magnified by the default option of “future dollars” which can only serve confuse people. This whole BRS education campaign just reeks of deceptive salesmanship. We must not forget that the primary motivation for BRS was to save the DoD money, and those savings can only come at the expense of future retirees.

    The author of this article is funny… On one hand he downplays a $482,840 advantage of the legacy system in case #3 (“Is there really a difference between having $5.6 million or $5.2 million? I don’t think so…”). On the other hand, he excitedly touts the value of the TSP matching even though it amounts to just a few thousand per year for a mid-career officer.

    By the way, in practice I don’t think BRS will make the decision to stay-or-leave active duty much easier for anyone. Even with the multiplier reduced to 2.0x, the pension and retiree healthcare are still, by design, a very strong pair of “golden handcuffs.” $20,000 or so of TSP matching after 10 years of service is peanuts in comparison.

    • Reply
      dan December 22, 2017 at 11:53 PM

      Hi Warner25, as author of this article I can clarify a couple of your points. The reason why the five percent is excluded from the legacy it’s because it is not required, it is not part of the legacy retirement for the servicemember to save. That is why it’s not part of the calculations.

      Obviously in a perfect world the most awesome person ever will still save it and still get the legacy retirement if they get 20 years. Unfortunately most service members do not save and put all their hopes and dreams in the 20 years cliff-vesting High Three retirement. But the numbers show that only about 20 percent of enlisted and up to 49 percent of officers ever make the retirement point. That means everyone else gets out with zero retirement dollars. Thus the BRS make sense for anyone considering getting out.

      To address a couple other points, you can switch between future dollars and current dollars. It is always more accurate to look at future dollars whenever possible, which of the BRS and legacy give you. Going to example 3 now, that is one very similar to my own situation. Yes, the legacy system comes out ahead. The point I was making is that someone who is an officer has a very small chance of making it through the next two promotions which are required to get to the retirement point. So they can gamble to get a few hundred thousand more dollars and getting promoted twice more, or they can be insured of getting some retirement in case they do not get promoted. I know many people that are in that situation.

      I think it really comes down to personal risk and what risk people are willing to accept – the risk of not getting promoted and getting out with something for the risk of getting promoted but having opted into the BRS and getting a little bit less. That’s why I don’t like the difference of the $400,000 between $5.5 and $5.1 million. It’s not that it is a truly small difference, it’s that when you add in risk then the difference may actually disappear for some people.

      This is what service members of been requesting for years to solve this very problem.

      Finally one of the best things that the BRS does it teach service members to save. Having a good money-saving habit is the best thing servicemembers can do regardless of whether they stay in or get out. Those habits are probably going to make them more successful in the long run than anything else.

      I apologize if this article came off being too much pro BRS. I see as I started writing it I just started feeling the numbers drifting that way for myself. Especially if you change some of the rates of return closer to the rates that I typically get investing, there’s really no comparison. It does save the DOD money and it also makes the servicemember money and hold some partly accountable for their own future. I always think it’s a good idea when people take ownership of themselves.

      • Reply
        warner25 December 23, 2017 at 2:51 PM

        Well, saving 5% in the TSP isn’t required under BRS either, so I’m not buying that argument. I come back to the fact that opting into BRS saves DoD money, so they’ve deliberately configured the calculator with default values and a deceptive interface in order to sell it.

        Calculating with future dollars is fairly unusual because it needlessly adds yet another guess/assumption (about inflation) to a fragile model already built on many assumptions, and people don’t have any intuitive sense of what, say, $100,000 is worth in nominal 2055 dollars. Again, by making this the default setting on the calculator, showing inflated personal savings on the BRS side while simultaneously excluding equivalent personal savings on the legacy side, DoD has made BRS look significantly more attractive. I just hope other service members can see through this smoke and mirrors.

        And what the heck does this mean? “…if you change some of the rates of return closer to the rates that I typically get investing…” To be honest, you don’t sound like you’ve been around the personal finance sphere for very long. There is a generally accepted range of returns that one can choose to assume, based on global historic returns data, accompanied by a long list of caveats and cautions. If what “[you] typically get investing” means US stocks since 2009, then I’d say you’re skating on thin ice here.

        • Dan December 24, 2017 at 12:54 AM

          Hey Warner25, I will reply one last time and then give you the last word. I appreciate that as we have gone back-and-forth on this that you kept it respectful. I wish that we could discuss this in person because you are the type of person I enjoy talking to this about. You seem like a little bit of a conspiracy theorist and I understand why! Anytime the government says it’s going to save money and things will get better for us we always question it! And it’s smart to question everything in life cause it helps us find better answers.

          But, there are still some good answers to some of your points. Your first point about the five percent not been required by the BRS is actually correct. You can opt into the BRS and not contribute five percent, but anyone who does that is nuts. That would be a complete waste of getting that match. So this whole article is written from the perspective that if you walked into the BRS you will contribute five percent of your own paycheck in order to get the free five percent government match. That is why the BRS calculator includes the five percent government match on it. If you do not contribute five percent, but let’s say plan on contributing three percent, the calculator will still calculate it for the three percent. So yes, if someone is not going to contribute money the BRS would be a bad option. But if they get out of the military before 20 years that is also a bad option.

          Now in regards to future dollars, this is something that is important because business projections are often done in future dollars because it includes the impact of inflation. There’s tons of data on inflation so this really isn’t a complex calculation. It just helps a normal person see what type of money they will have in the future, while the BRS does not show us what your expenses will be in the future which will also go up with inflation. But the way this calculator works both the legacy retirement number and the BRS number are adjusted for future dollars, so regardless of what your opinion is on future dollars the numbers are equally calculated and with a click of the button you can go back and forth between today’s money and future money.

          Finally, to address the last comment about adjusting the rate of return. This is in regards to the automatic assumption of a seven percent return on investment that the calculator uses. I ran all these examples using that seven percent because it is a very good realistic estimate of what future returns may be in stocks. But it is just that, an estimate. Historical returns do not predict or guarantee future returns. So anyone investing invests at their own risk. But there is the risk of investing and also the risk of not investing and not having money in the future. So those are both equal risk. So coming back to my point, the reason why I made that comment is because the S&P 500 has a 90 year history (that includes numerous bear markets and just low return years) that still averages 10.2 percent return per year which is quite a bit higher than the calculator estimate of seven percent return. Plus when you do a little bit of asset allocation and diversify your funds (even within the tsp) you can actually boost your average return above that. So again this comes down to investor choice, anyone who opts in to the BRS and leaves their money in the G or F fund will not have good returns. But anyone who would just dump their money into the C fund and keep contributing and never touch it will likely do better than the seven percent estimate that the BRS Calculator automatically assumes.

          Again, I appreciate your interest in this. Your willingness to read and comment clearly shows that you are passionate about helping yourself and your subordinates do the right thing. The good news is the military is not forcing anyone to opt in. We are able to make our own choice. I’ll take that alone as a win!

  4. Reply
    aaronburch December 21, 2017 at 3:47 PM

    Doug, you kind of alluded to it for SM#2, but in general, for an apples to apples comparison, you should assume in all examples that the service member is saving 5% in their TSP, regardless of participation in the legacy system or BRS, and reflect that in the Total Retirement Package. Since the calculator isn’t doing that itself, you’d have to manually add it, otherwise you’re assuming that SM’s under the BRS are living on 95% of the take-home pay of those under the legacy system, right?

    • Reply
      Dan December 22, 2017 at 2:49 PM

      Hi Aaron, I think I can add something to what Doug said. Let me know if I’m missing the point that you were making. The reason why the five percent included in the legacy retirement calculation would not be apples to apples is because we are purely looking at Legacy retirement benefits versus BRS retirement benefits. For the legacy system there is no required five percent contribution; it is purely the pension at 2 1/2 percent of base pay. So for the comparison, the purest form would be the legacy retirement system versus the blended retirement system plus the governments five percent match. To get that retirement benefit, the servicemember is required to contribute five percent. That’s why there’s no five percent included in the legacy retirement numbers. I think one of the strings the BRS is that it gets service members to actually contribute to that retirement. That five percent that they contribute will make a huge difference over time.

      When I run the numbers for myself I try to save 10 to 15 percent, and that makes a massive difference over time. Obviously it would be best for everyone who is going to stay in the military and not opting in to the BRS to still be saving for themselves. But unfortunately that is not the case. The most recent numbers I’ve seen are the only around 40 percent of servicemembers utilize the TSP. Although we do know that some servicemembers use other investing platform such as Vanguard or Fidelity or financial advisors. I think that answers your question, let me know if it doesn’t. The main difference between the two retirement systems is that the one requires the servicemember to pay five percent in order to maximize it. Best of luck with your numbers!

    • Reply
      Doug Nordman December 22, 2017 at 12:32 PM

      You raise a good point, Aaron, and it’s going to be a perpetual debate through 2018 (until the opt-in period ends).

      Let me make my usual comment about not being distracted by math. The most important point about the pensions is the probabilities: only 15% of servicemembers even qualify for a pension. For 5 out of 6 people reading this post, it makes more sense to choose the BRS and have a little more in your retirement accounts, whether or not you serve the full 20. For those who are sure they’re the 1 out of 6 special snowflake, well, I wish everyone luck with the factors beyond our control of that assumption. It’s far better to have the BRS flexibility (and a little more money in your retirement account) than to force yourself to gut it out to cliff-vest at 20.

      DoD’s BRS office and we military personal-finance bloggers had some intense discussions about the algorithms, and DoD’s decision was to leave all other savings/investments out of the BRS calculator. (Fewer than half of today’s servicemembers even have a TSP account, and fewer than half of the military account owners are still contributing.) To even up the calculations on both pension plans you’d have to either add in the servicemember’s 5% TSP contributions to the High Three or subtract them from the BRS.

      I’ll go a step further: anyone adding 5% to the High Three TSP should also add the Continuation Pay contract (2.5 x monthly base pay) to the BRS.

      In the big picture, it’s doubtful whether that 5% over 40-50 years will make a meaningful difference in the BRS flexibility. That’s especially applicable to those servicemembers in communities struggling with retention and likely to have higher multiples on their Continuation Pay contracts.

      As always, every servicemember who can save at least 40% of their gross income in a high-equity asset allocation (like the TSP’s L2050 fund) will reach financial independence in 15-17 years– even without a pension. It also gives them a lot more flexibility with their retirement accounts (instead of being locked into a High Three pension) and even lowers their income taxes. Those issues are not reflected in the BRS calculator either.

      Bottom line: most servicemembers won’t retire from the military anyway. Understand the math, but give it the proper priority behind the BRS’s career flexibility.

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