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.
• 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
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.
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.
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.
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.
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?