[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.
- 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.
- 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.
- 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!
- 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.
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.
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.
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:
- 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.
- 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?
- 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.
- 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!!!
- 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.]
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