Tricky Details Of The Military Blended Retirement System
I really wanted to use the titles “Hidden Secrets Of The BRS!!” or “Shocking Urban Legends Of The BRS Revealed– #4 Is Jaw-dropping!!”
But this is a serious life-changing decision.
I’ve had a ton of reader BRS questions and feedback. The good news is that a group of us military personal-finance bloggers have tracked down the answers with the Department of Defense.
This post is going to dig into those details. There’s also a little tough love here for those who “have not had the training”.
Hint: go get the training.
Teach yourself about the Blended Retirement System
If you don’t know about the BRS yet, then go find out. Stop waiting on the military to explain it. Don’t depend on your friends or fellow servicemembers who claim “We’ve heard that…”
The opt-in period for the military’s Blended Retirement System begins on 1 January 2018. You’re eligible to opt in if you have less than 12 years of service before then. (Reserves and National Guard members must have less than 4320 points.) You have all of 2018 to opt in, but you should make up your mind now. All of the info you need has been published.
If you opt in during the first half of January and contribute at least 5% of your base pay to your Thrift Savings Plan account, then DoD will also start contributing 5% in January.
The longer you wait to do the math, the more you could lose. There’s enough information now to make the decision on 1 January. Stop putting it off.
If nobody has told you about the BRS yet, then go do your own research. Don’t depend on your chain of command or mandatory training or a financial counseling session. You don’t need a CAC or a special computer or individual counseling. Go to that link up there and start reading. Your leaders are supposed to understand the system (they’ve already been told to do the training) but feel free to ask questions here too.
Note for military spouses: do your own research. It’s your responsibility just as much as your spouse’s. You can gripe about the military all you want– and you have plenty of reasons to gripe– but learning about your retirement planning is all on you. You’re doing most of the financial management in your family, right? Maybe you should know the most about the BRS too.
Don’t wait on your spouse’s command or the base support center or the Family Readiness Group. You have enough information at that link up there to learn about the BRS and make a choice.
You and your spouse have to review the info together, figure out any differences in what you’ve learned, and make a joint commitment. Don’t depend on what your spouse “thinks they heard during the training” or “need to go find out” or “saw on a Facebook group”. The information is at that link up there, and I can help answer your questions. It’s not only your spouse’s job to understand the BRS– it’s yours too.
There’s a lot of misunderstanding (and even misinformation) out there. However, tens of thousands of servicemembers (and their spouses) testified to the Military Compensation and Retirement Modernization Committee that they wanted the BRS.
People are happy to trade part of a defined benefit pension for a defined contribution retirement account because they don’t plan to stick around for 20 years. DoD is also happy to cooperate with this plan because they can stop putting billions of dollars into low-yield Treasuries and put some of that savings in your TSP account.
You probably won’t retire from the military
If you’re active duty then you have a 19% chance of retiring. (That’s 1 chance out of 5.) If you’re in the Reserve/Guard then your odds drop to 14% (1 out of 7!).
Those numbers come from a credible source: the actuaries who have to pay the pensions.
It’s on page 5 of the latest actuarial analysis of the military pension system:
12. Actuarial Assumptions:
3) Percent of a Typical New Entrant Cohort Serving 20 Or More Years (including
the effect of re-entrants):
Full-time (FT) personnel: 19% ||| Part-time (PT) personnel: 14%
The officer retirement data skews those averages, and that means the enlisted odds are even lower. A sentence at the bottom of page 20 states:
Specifically, 49 percent of new officers and 17 percent of new enlistees attain 20 years of active duty service. It should be noted that some military personnel who begin their careers on active duty move to the Reserves and retire from there.
Officers may retire more often, but it’s still a coin flip. “Retirement” is only going to happen for you if you’re in a service and a specialty where you feel challenged and fulfilled. Maybe that happens more often in the Air Force than in Marine infantry, but you can’t count on making it to 20 in either one.
That footnote on page 20 is even more pessimistic. The actuarial data doesn’t count training drops (before the end of the first year) and broken service:
As in past valuation reports, these percentages are stated from the perspective of a new entrant cohort still in active service at its first fiscal-year boundary (i.e., September 30). If losses prior to the first fiscal-year boundary are taken into account, the percentages would be reduced by approximately 15 percent (19 percent would become 16 percent).
The stated percentages also reflect the effect of re-entrant, i.e., members who appear in the active duty population one year without having been there the year before, who are not new entrants. Without the effect of re-entrant, the proportion of a typical group of new entrants who attain 20 years of active duty service is reduced from 19 percent to 15 percent.
The actuaries just dropped their “1 out of 5” to “1 out of 6”. The odds are clearly stacked against your likelihood of serving to 20.
Statistics might predict the behavior of a large group, but they can’t predict your individual choices. You can’t count on getting an active-duty pension, but you can decide to take it one obligation at a time.
In the Reserves and National Guard, the statistics are even worse. At the top of page 21:
Based on current Reserve decrement rates, 14 percent of a typical group of members entering the Reserves for the first time (including members with prior active or non-drilling reserve time) become eligible for a Reserve nondisability retirement (46% for officers, and 13% for enlisted).
This means that the Reserve/Guard enlisted retirement odds are closer to 1 out of 8.
Those actuarial quotes have been confirmed with the Air Force major who’s the Assistant Director of Military Compensation Policy in the Blended Retirement System/Strategic Communications section of the Office of the Under Secretary of Defense for Personnel and Readiness.
Visual learner? Then watch the video
Frankly, even if (like me) you enjoy nerding out with actuarial documents then you should still watch the videos. (They’re way more entertaining than DuffelBlog.) Let me introduce you to Robyn, the hypercaffeinated DoD spokesperson for the BRS:
Robyn has a whole series of related videos in the right-hand sidebar. C’mon, you can’t break it down more simply than “Love Actually”:
I’m so sorry, Coast Guard.
The Air Force’s 452nd Air Mobility Wing must still be wincing about this one:
Robyn even takes on the National Guard and NOAA. I haven’s seen her do a version for the Marines or the submarine force yet, but please comment below if you find one.
On a more serious note, the “Show More” links under those videos go to other social media resources. You can learn about the BRS in smaller daily doses from Facebook or from Twitter. You can even wait for BRS tips to show up in DoD’s Instagram feed.
Exactly how soon can we sign up?
Some of you have already made up your minds and you’re ready to opt in.
I thought DoD’s webmasters would roll out a gradual ramp up to the opt-in date, with applications taken before 1 January. But nope, despite the threat of tens of thousands of people pinging the servers in the same microsecond, DoD won’t flip the switch until 1 January. Because, you know, Congress passed the law to take effect then and DoD couldn’t possibly take any IT initiatives that might be perceived as subverting the law.
I’ve confirmed with the BRS office that the servers will light up at 0001 EST 1 January 2018. (That’s in MyPay, or Marine OnLine, or Direct Access.) You can stay up a little later on New Year’s Eve and celebrate by being one of the first to opt in to the BRS. That’s only 7 PM Hawaii time, so I’ll still be up and browsing MyPay by the light of the neighborhood fireworks.
There’s a practical side to that snarky advice: the matching Thrift Savings Plan contributions. If you opt in early enough in January (and contribute at least 5% to your TSP account) then you’ll get the full DoD BRS matching contribution in January.
Your TSP matching contributions will also vest immediately. (That link opens a PDF of the DoD BRS implementation memo.) Those matching contributions are yours and they’ll stay in your TSP account even if you leave the military on 1 February. This is only for those who opt in to the BRS– everyone else who joins the military in 2018 has a two-year vesting period on their TSP contributions. Those two situations are covered in paragraph 7.b.(8).(b) of the implementation guidance (at that link in this paragraph) and in federal law Title 5 U.S. Code section 8432(g)(2).
If the DoD BRS servers start crashing on 1 January then it’s going to be a long, frustrating opt-in process. You’ll have to persist, though, because if you wait until February then you’ll lose the DoD match in January. In fact, most of the services process their payrolls during the third week of the month. If you wait past 15 January then you’re jeopardizing your January match.
The BRS calculator
Thanks to Alert Reader Mark for pointing out the issues with the DoD’s Blended Retirement System calculator. If you’re a calculator nerd like me, then take a look at his comments below the post at that link.
If you’re not a calculator nerd, then be aware of how the calculator’s assumptions are determined. For example, it assumes that base pay rises by 3.25%/year, not including promotions and longevity raises. On the other hand, inflation is assumed to be 2.75%/year and the TSP’s returns are assumed to be 7%/year. (You can’t adjust the assumptions for pay or inflation, but you can tweak the TSP’s return.) You can also adjust the assumptions for how quickly you’re promoted and how much you contribute to the TSP.
Note that you can contribute the Continuation Pay (described below) to your TSP account. If you invest all of the CP (in your TSP or IRAs or taxable accounts) then you’ll have that much more compounding with the BRS retirement system to beat the High Three pension.
Because you’re dealing with a broad range of assumptions, your values for the <High Three pension> compared to the <BRS pension + TSP> might vary as much as $100K. Play around with the numbers to see how sensitive they are to your changing assumptions.
Even if the difference is a total of $100K, ask yourself these questions: Is it a lifetime of value? Look back at the probabilities section of this post and wonder: “Do you feel lucky?” Well, do you?
Is it worth locking yourself into a 20-year commitment to earn a High Three pension for “only” an extra $100K over the rest of your life? Or would you rather have the BRS flexibility while knowing that you have plenty of ways to earn $100K after the military?
Nobody can predict your longevity, let alone how your life is going to turn out in 10 years. It’s unreasonable to ask anyone with less than 12 years of service to confidently predict that they’re going to serve for 20.
I know a servicemember who reached financial independence and left active duty for the Reserves when they were just short of 18 years. It was absolutely the right choice for their situation. If you opt in to the BRS and have more money in your TSP account then you can have that flexibility too.
I’ll leave the calculator discussion with one more anecdote. One servicemember has done the math for his career as if the BRS existed in 1997. He’s tracked the 20 years from then through 2017 for his pay tables, promotions, and TSP contributions. Admittedly it’s just one data point, but his BRS resulted in a higher final value than the High Three. He had a smaller pension yet a higher net worth which more than made up for the smaller pension, and it was growing faster than the pension COLA.
What about the Continuation Pay?
The Continuation Pay programs are up to the individual services. (They have to publish their own programs and notifications.) The law provides for the pay to be awarded sometime during 8-12 years of service and requires at least a three-year obligation. The good news is that the minimum bonus is 2.5 months of base pay for active-duty servicemembers and at least 0.5 months of base pay for Reserve/National Guard members. The obligation can be served concurrently with other obligations and bonus programs (as long as the other program allows concurrent obligations). That’s all in paragraph 8 of that link on page 17.
The service memos and messages are starting to come out. So far all of the services require signing up before 12 years of service for an obligation of four years. The continuation pay amounts are the minimums required by federal law. The Navy, Marine, and Coast Guard instructions are linked from that page. The Army memo is out but not yet linked there (you’ll have to track it down at HRC). The programs for
the Air Force, NOAA , and USPHS are still missing, but we’ll update this post when they’re published. (Thanks for the AF update, Military Dollar!)
One more note about the CP timing, because this is different from the BRS. If you’re eligible to opt in to the BRS on 31 December 2017 then you have all of 2018 to opt in. However, you have to sign up for Continuation Pay before you reach 12 years of service. If you’re at 11 years and 11 months of service on 31 December then you’re eligible for the BRS, but you’d only have one month to sign up for CP. See the fine-print FAQs at the bottom of that link.
Note that you can deposit the Continuation Pay bonus in your TSP (because it’s a type of pay). You could deposit all of it into the traditional TSP and defer the taxes for decades, or you could deposit it in your Roth TSP (after paying taxes) and enjoy all of the gains tax-free. However, (and this is important!) you have to make sure that you still have room to contribute at least 5% of your base pay to the TSP every month of the rest of the year. If you hit the TSP contribution limit too soon ($18,500 in 2018) then your DoD match will stop for the rest of the year.
If you’re deploying to a combat zone then your traditional TSP limits are much higher. If you’re contemplating signing a continuation pay contract from a combat zone then contact me to discuss the tax tactics. Continuation pay is a terrible reason to deploy to a combat zone, but if you’re going to be there anyway (and if you want to serve an additional four years) then you can save a lot on taxes.
One last note about Continuation Pay: the contracts could change as the services tailor the payments for various communities and specialties. CP will be used as a retention incentive. If you think your community will offer more money then keep in touch with your assignment branch and watch for changes.
Now that you know more about Continuation Pay, enter it into the BRS calculator and see how that changes the math. It’s possible that your TSP could grow fast enough with the BRS’ CP boost to reach a higher balance than the amount of the High Three pension you gave up for the BRS pension.
There has to be a catch.
This is too good to be true.
What else is DoD not telling me?!?
Yeah, you know there’s a few more unwritten details. Let’s write them here.
DoD can tell you all about the BRS, but they’re not going to do your financial planning for you. (They’re not even going to recommend which retirement plan you should choose.) This is a highly individual decision, and everyone has different life goals.
The biggest advantage of the BRS is its flexibility of getting money in your TSP even if you don’t serve to 20 years. You’ll be that much closer to financial independence.
However, there are a few other financial advantages to having more money in your TSP.
First, you’ll have more money to pass on to your heirs. Your pension will stop with you (both under BRS and High Three) but your heirs can inherit your assets– including whatever you had in your TSP account.
You’ll still want to consider the Survivor Benefit Plan (for your pension to convert to a survivor’s inflation-adjusted annuity) and life insurance (for a lump sum). However, now you have a bigger estate to leave behind, so you might not need as much SBP or insurance.
Which brings me to the second point: SBP premiums. If you fully “insure” your pension then you’ll pay 6.5% of your pension for at least 30 years of premiums. (When you make your 360th payment, you’ll also have to be at least 70 years old.) Those premiums are a substantial sum of money, and they rise every year with your pension COLA.
However, under the BRS, your pay base multiplier is 2.0% for your years of service, not 2.5%. Not only is your BRS pension 20% smaller than the High Three (starting 10 percentage points lower, at 40% of your pay base instead of 50%), but your SBP premiums will be 20% smaller too. You’ll still have to pay 30 years of premiums and be at least 70 years old before it’s paid up, but in the meantime, you have 20% more SBP premium in your pocket or in your investments. Your survivor still gets an inflation-adjusted life annuity, but they’ll also inherit whatever you’ve piled up in your TSP and your other accounts.
Third, there are taxes. Your military pension is subject to federal tax (every year) and it might be subject to state/local taxes (every year). When military retirees start bridge careers along with their pensions, they’re shocked by how much more they’re paying in taxes. They’re frequently in the 15% personal income-tax bracket and rise rapidly into the 25% bracket. These are good #FirstWorldProblems to have, but they’re still taxed.
The smaller BRS pension will reduce your taxes. Meanwhile, the BRS DoD matching contributions in your TSP may never be taxed.
Instead of getting a High Three pension that’s taxed every year, you’ll have the DoD matching contributions in your traditional TSP account. You may have to pay taxes on them someday, but you’ll only pay tax on them once. (You might even be able to avoid those taxes by a Roth IRA conversion ladder.) Instead of being taxed on your High Three pension every year, you’ll be taxed on a smaller BRS pension and you’ll have more options for withdrawals from your traditional TSP account. You’ll control your income (and your taxes) with more precision.
Let’s dig into the Roth IRA conversion ladder that I mentioned in that last paragraph.
When you leave the military, you can roll your Roth TSP account over into a Roth IRA. This means that (under current law) it’s free of taxes for the rest of your life and you don’t have to take Required Minimum Distributions.
When you leave the military, you can also roll your traditional TSP account into a traditional IRA. While you’re enjoying your post-military life, you can gradually convert your traditional IRA into a Roth IRA (a little every year), paying less taxes when it makes sense. Eventually, you’ll convert all of your traditional IRA (with its higher personal-income tax rates and its RMDs) into a Roth IRA (no more taxes, no RMDs). This tactic has saved hundreds of thousands of dollars for financially-independent people with large balances in their tax-deferred accounts. Roth IRA conversions have personally saved tens of thousands of dollars for my spouse and me, and we’ve been converting our traditional IRAs for nearly 15 years. We’re almost finished and we may never need to tap our Roth IRAs.
“Easy for you to say, Nords, you’re already retired!”
Yeah, but I regret it. I should’ve left active duty for the Reserves at the 12-year point (when we started a family and my career priorities changed). The money would’ve worked out about the same, and we would’ve reached FI within a year or two of when we did, but our quality of life would’ve been way better. I should not have grimly clenched my jaw and gutted it out to 20.
This opt-in decision is personal in my family. I’m being held just as accountable for my advice as you are for your opt-in choice. By 2018, both my daughter and my son-in-law will have three years and seven months of active duty. They’re financially literate and they can do math. They also understand the probabilities and statistics of the retirement systems. They might even be smarter than me.
They’re opting in to the BRS on 1 January 2018. They’ll also be celebrating New Year’s Eve with us in the islands, so maybe we should do the opt-in on Facebook Live.
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