Opting-In to the 2018 Military Blended Retirement System

Finance
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This might be for a niche audience but maybe the community can share their thoughts regardless of military affiliation.

I will be eligible next year to decide whether or not it makes sense to opt-in to the new military retirement system, called the “Blended Retirement System” or BRS. There is a lot of potentially-ignorant negativity out there about this, but I wanted to keep an open mind and objectively see what it looks like.

I am 1000% the opposite of an expert with this stuff and there are a ton of variables unique to everyone’s situation, so I was thinking I would provide an overview as best I understand it from the official training, and then present my own conclusions from clumsily running lots and lots of numbers… which I will update based on the discussion and mistakes pointed out.

I’ll post my situation in the second post. Hopefully there will be some good discussion and others might feel welcome to post their own situations as well.

Overview:
• You are able to Opt-In if as of 31 Dec 2017 if you are 1) AD <12 years from “Pay Date” 2) Reserve w/less than 4,320 retirement points.
• Must decide to opt-in between 1 Jan 2018 to 31 Dec 2018 and you cannot change your decision at a later date. No action keeps you in the legacy system.

Current System: “High-3” Retirement System
• Receive “Full Pension” retired monthly pay if 20 years is reached (but 81% leave before 20 years).
• “Retired Base Pay” is based on the average of your “high-3” or your highest paid 36 months.
• Full Pension Equation: 2.5% x (years served) x (Retired Base Pay). At 20 years service, pension = 50% of high-3 average.

New System: “Blended Retirement System”
• Still receive “Full Pension” retired monthly pay if 20 years is reached at reduced rate.
• Full Pension Equation: 2.0% x (years served) x (Retired Base Pay). At 20 years service, pension = 40% of high-3 average.
• New automatic 1% contribution to TSP plus 4% match. Vested after just 2 years of service (good, not tied to a full enlistment).
• New “Continuation Pay” bonus at 8-12 years of service in exchange for 3 year commitment.
—Amount could vary A LOT by service and career field; 2.5x to 13x monthly basic pay.
—Taxable, but can receive all at once or over 4 installments.
• Offers a Lump Sum buyout option of 25% or 50% of the present value at the date of retirement in exchange for a greatly reduced pension. It looks truly evil. At least the training doesn’t pretend this is a good thing I guess.

Thoughts on the official training CBT and the Official Calculator:
Although it mentions it, the official training unfortunately feels centered on what’s important for actual “old-age” retirement and personal finance vs. being 37-42 years old “working retired” with a pension and the impacts to this by switching. I think this is substantially shifting the focus of the discussion away from where it should be. There needs to be more discussion of the tradeoff between a 5% TSP match and continuation pay at 8-12 yrs vs. the significant loss in monthly pension until IRS retirement age.

Parts of the Training, and especially the given calculator are very misleading. Despite caveats, it uses both your own and the government TSP contributions as a factor in the new system but not in the old system, as if investing in the TSP was a new benefit. Part of the text in the training actually says, “When you enroll in the BRS, you will be able to contribute to a Thrift Savings Plan account.” I think that this is really inappropriate and you get the sense that the training is a subtle, underhanded way to push people to opt in. At the same time, if you’re not distracted, it does give you all the info you need in order to figure out all the variables in your situation.

Official comparison calculator
http://militarypay.defense.gov/Calculators/BRS/

Thoughts on the decision to switch:
Disclaimer: I only researched this from the commissioned officer perspective because that’s what I know.

Overall, it’s easy to just say that the clear winner is staying in the legacy system… as long as there is no way you’re getting out before 20 years. Remember that this decision to opt in is only being offered if you have less than 12 years of service, so your ability to stay in might be hard to certainly predict. However, from a purely financial standpoint, I think there’s a real bogey here with the Continuation Pay. It can be anywhere from 2.5x to 13x your monthly base pay, and the individual services get to tailor it each year for retention purposes by career field. However, it is taxable. It is also not clear when the first rates will be released or if there will be any appetite for offering high amounts. If you are in a position to invest all of this Continuation Pay and you’re already maxxing out your TSP contribution, it might possibly go a good way towards closing the gap if you can put up with a significantly reduced monthly pension as an investment towards “real” retirement. Again, I only researched this from the commissioned officer perspective, I don’t know how different this would be for enlisted servicemembers.

My Conclusions:

  1. Switch to the new system if you plan to or know you will separate from the service before reaching 20 years. You will get a good chunk (or at least something) towards “real” retirement that will grow a lot, especially if you’re at the beginning of your career. TSP is excellent, portable, and everyone wishes they started their TSP sooner. It is better still if you can get the Continuation Pay between the 8-12 year mark and meet the 3 year commitment… consider though that at that point you’ll be at 11-15 years in.

  2. Consider switching if you’re closer to the beginning of your career or if there’s a decent chance you won’t make it to 20 years. The hardest part of this is considering the things that can happen to you beyond your control that will cause you to separate early and not meet a goal to reach 20. Medical, fitness, ops tempo and family stress, etc.

  3. Consider switching if you are in a position to invest 100% of the Continuation Pay and cash freed up by the 5% government match (i.e. you are already maxxing TSP contributions), and only if your continuation pay will be more than the minimum 2.5x. You will be trading a very significant portion of your monthly pension in exchange for money earlier.

  4. Stay in the legacy system if you are at the point that you know you can reach 20 years and #3 does not apply.

What do you think? Also, is there any chance of making a better calculator somehow?

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My situation:
I am 32 years old, O-4 just pinned on this year 2017, joined in July 2007 so just crossed 10 year point. Intend to stay in for 20 years and zero months… but anything can happen of course so I want to compare full retirement to getting out at 15 years in 2022 just in case. By being DINKs we have no bad debt, are able to max out my TSP and a ROTH IRA every year, and I have a taxable account at Vanguard that I was good at contributing regularly to until this year. All these numbers are future dollars using the BRS Calculator. I also used its suggestion that I will be dead at 85, FWIW.

Amateur alert. I don’t know if I guessed some of these numbers correctly and the BRS calculator is only so helpful.

Staying in the “High-3” System:

  1. Retire: Start at receiving $64,281 per year/$5,356 per month at age 42 onward, hopefully increasing with inflation. Total pension received by age 85: $5,149,450.

  2. Out at 15 years: Dog shit. Maybe some office supplies.

Switching to the new BRS:

  1. Retire: Start at receiving $51,425 per year/$4,285 per month at age 42 onward (or about $800 less per month in today’s $$ for 44 years). Total pension received by age 85: $4,119,556.

• $19,000 Continuation Pay minimum (about $4.7K for 4 yrs, 2019-2022), all invested in the market. At 7% assuming invested in 2022, worth maybe $89K in 2045 at age 60. (**EDIT: Looking back, I did not take tax into account in this amount, so it’ll be less but I think I can absorb $4.7K/yr without a huge impact).

• $47,000 of gov’t TSP match total over 9 years (about $5K per year), equivalent free cash I’d put in the TSP myself now invested in my taxable account. Assuming invested all at once on retirement date vs. yearly (because I don’t know how to accurately figure this out), worth maybe $158K in 2045.

  1. Out at 15 years:
    • I’ll have at least better than dog shit… collected a minimum of $19,000 in Continuation Pay and $19,000 in the gov’t TSP match as of 2022, invested. I calculated this $38K to be worth maybe $180K total in 2045 when I’m 60.

So if I did this right… if I opt in to the BRS and stay in until 20 years anyways, the BRS pension + invested Continuation Pay + invested free cash from TSP match is about $782K less than the Legacy pension by the time I’m dead at 85, or about $163K in today’s dollars. That is a significant number. It would reduce my pension to about $800 less per month in today’s dollars for the following 40+ years, in exchange for about $38K to invest now in case I get out in 5 years before making the next rank. That $38K could be worth maybe $180K by the time I reach age 60.

Like I said earlier, I the big unknown here is the Continuation Pay amount. I included only the minimum possible amount in my calculations. If it doubles to 5%, then it’s another $19K to invest at that point. My career field has a significant shortage of officers at my level and above, so my plan is to wait and see what they release the amount to be. Timing looks good for me, as I’ll be able to make the decision to switch or not based off the actual advertised amount since it is designed to change every year. If this site is still kicking, I’ll post updates here as anything changes.

What are your thoughts? …and what did I mess up with all this?

Edits: Formatting here sure is a chore.

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I recommend building out a spreadsheet and analyzing each of the possible scenarios. For example:

  1. If you leave at 1 to 20 years, each year makes a difference
  2. What your current base pay is and how you expect it to change over time
  3. Calculate Net Present Value (NPV) of each of the different future outcomes

Then you’ll have a nice set of numbers to look at and see numerically what the NPV of each option is at each year of service you retire. The unknown becomes what year you retire. The NPVs of each option are fixed (based on estimates of TSP returns and wage growth).

Make a nice graph and look at the differences. Then you can multiple each by the probability of you staying to that point in time. For example:

NPV of Standard Option is:
$500k at 20 years
$450k at 19 years
$425k at 18 years
etc…

You’ll be able to look at the answer numerically based on your probabilities of when you think you’ll retire.

I am intentionally vague with some of the details because it would be time consuming for me to build the spreadsheet for you and I think it would be an interesting financial exercise for you so that you actually understand how you built the model and why you picked what you picked. As opposed to me building it for you and telling you the best outcome and you relying on it by blind faith.

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The other issue with the military is that it’s not like civil service, it’s up or out. So you can’t easily hold a position by doing minimally competent level work like you could as a civilian.

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Apparently I am late to the party on this… I just found a lot on a reddit forum for military members that I did not know existed. https://www.reddit.com/r/MilitaryFinance/

Here’s a calculator someone put together that i just found. You have to know a little about this to modify it for your needs, but it is much much better than the official calculator.
Note: This calculator does not take Continuation Pay into account, which I think is a significant limitation if you’re in the position to invest it smartly. https://www.reddit.com/r/AirForce/comments/5u21d6/yet_another_brs_calculator/

Something I think I missed on my OP is with respect to your projected income level after military retirement and the tax impact to your pension. More to think about and will update.

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Reddit says the Coast Guard announced what looks like an across the board 2.5x Continuation Pay in exchange for 4 years of service. Potentially indicative of the other services too. Source: https://www.reddit.com/r/MilitaryFinance/comments/71lywz/official_brs_continuation_pay_multiple_announced/

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It looks like your pension assumption with the BRS is a little high? You say $50k per year, which is almost the same as the legacy.

I am similar to you, but not quite an O-4 yet (probably some time in 2018). I used the reddit calculator many months ago to determine that I am better off sticking with he legacy system. Of course, I am committed out to 16 years or so, so I would be foolish not to stay to 20.

It seems like the BRS is not as bad of a deal as I originally feared. If you are young, early in your career, and committed to getting the full match, you will likely come out ahead. I tested a few different ranks, but focused mostly on the O-grades so that I could help mentor the junior officers.

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Gah! I have no idea where those numbers came from… they’re nowhere on my spreadsheet. I fixed both the annual and monthly amounts for both pensions. Thanks for reading so closely.

Good points. Personally I have no commitment other than PCS at this point, which will bring me right to 15 years assuming one more assignment after this one. Everyone’s situation has so many variables it’s nuts.

I agree with your thoughts about being early in your career… it gets to be a lot more complicated of a decision than I thought if you’re on the cusp.

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Will you be an O-6 with 3 years time in grade by the time you hit 20? What branch of service are you?

The reason I ask is that in the Army, we are lucky to be an O-5 with 2 years service when we hit 20. So then another year to max the high 3, and the following year we get looked at for O-6.

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I wish this was available when I joined in 97. As it is I am happy we finally got access to the TSP and have been depositing since it became available. Sort of had an atypical career spending 5 years enlisted, 11 warrant and will retire as an O3 in the next 2 years.

The idea of early career switching to BRS is the right idea (my opinion). The closer you get to 12 the less sense it makes to switch unless you know you might leave earlier (doctors, pilots, lawyers, etc).

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Sorry for the late reply, I don’t know how I missed your post. I am Air Force… I want to say 16 years TIS is typical for pin-on to O-5 for us “in the zone,” and I won’t be an early guy (we have 2 years and 1 year early). I also expect to not make O-6 in my career field… and honestly I don’t want to. Good point about having to extend your timeline for the the high-3 max though… to me that just wouldn’t be a concern. I don’t think that kind of timing would affect me. I think O-6 is at 22 years but I am not sure. I plan to retire at the earliest opportunity.

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All the services have announced their Continuation Pay bonus amounts, and they are all the minimum for the first year. That makes me a sad panda.