Why I Will Be Opting into the Blended Retirement System in 2018.
I typically write about personal finance and stock market investing topics that can apply to just about anyone. This article, however, is specifically targeted to military members.
As you can see in the title, I am going to explain why I will be opting into the new Blended Retirement System, but I also want to provide the facts of the new system and other hypothetical situations that would make me decide against opting in the new system. This post will be long, but I encourage you to read it through and share it with your peers.
What is the Blended Retirement System?
The Blended Retirement System (BRS), as indicated by its name, is the new military retirement system that blends traditional legacy retirement with a new Thrift Savings Plan (TSP) matching component similar to how a company matches contributions to a 401(K) account.
The BRS, has three components: TSP matching, Continued Service Pay, and a Lifetime Annuity Pay.
Like the traditional system, every service member who completes at least 20 years of service will receive the Lifetime Annuity Pay. The new system cuts the multiplier by 0.5 percent. So, instead of a 2.5% multiplier, like in the old system, the BRS will pay the member just 2%.
TRADITIONAL RETIREMENT ANNUITY EXAMPLE
2.5% x Years of Service (at least 20) x Base Pay (average of highest 3 years of base pay) = Monthly Lifetime Annuity Pay
2.5% x 24 x $3,000 = $1,800 per month for life
NEW BRS ANNUITY EXAMPLE
2.0% x Years of Service (at least 20) x Base Pay (average of highest 3 years of base pay) = Monthly Lifetime Annuity Pay
2.0% x 24 x $3,000 = $1,440 per month for life
As you can see in the scenario above, because the Blended Retirement System lowers the multiplier, that member will lose $360 per month for life if they opt into the new system. If this was the only aspect that changed the old system to the new, then everyone who is eligible to switch should easily say no to opting into the new system.
NOTE: I will be using this $360 amount a lot in this post. Be aware that number can fluctuate based on the number of years and actual base pay you may earn.
Fortunately, the cut in the lifetime annuity pay is about the only negative thing I will say about the BRS.
Moving on. The BRS’s other two components are new and are not offered with the traditional military retirement system. First, the Continuation pay, is a new lump sum payment dispersed to the service member at the member’s 12 year in service mark. The catch is that the service member must serve four additional years. Continuation pay is calculated by multiplying 2.5 and the member’s base pay.
The Department of Defense is still writing guidance on how to add incentives to this pay for things like critically manned career fields, but for now, the minimum each person will receive is from that first calculation.
Continuation Pay Example
Member Reaches 12 years of Time in Service and has reenlisted or extended for 4 more years past the 12-year mark will receive continuation pay.
$2,600 x 2.5 = $6,500
$6,500 paid for making it through half your career? I’ll take it, but again, this new incentive is not enough justification to take a $360 buck a month pay cut for the rest of my life. This is where the best part of the new BRS comes into play.
The DoD has recognized that a significant population of service members do not complete 20 years of service. Most get out after their first enlistment.
Let’s think about this for a second. Those people chose to do an honorable thing and fulfill their enlistment promise of 4 or 6 years and have done nothing for their future retirement other than missing out on a company 401(K). That is an economic tragedy given the uncertainty of the Social Security system.
Sure, they could have saved money in their Thrift Savings Plans and rolled that over into their civilian job retirement savings plan, but the fact remains that less than 50% of active duty service members today do not contribute to their TSP.
It is a shame to see members of the military separate and have no concept of retirement or savings.
Those flabbergasting statistics are one of the main reasons why the DoD added the third and most important component to the BRS. That is the automatic enrollment contribution and contribution match to each member’s TSP.
TSP MATCH EXAMPLE
Members who opt-in will receive matching contributions from respective agency of up to 5% of base pay to TSP immediately.
If member contributes 3% of base pay to TSP, then the respective agency will match that 3% and include the automatic enrollment contribution of 1% for a total of 4% agency contributions. The member will have a total of 7% of base pay going into TSP per month.
This solution ensures that everyone will leave their service with at least some money invested in the stock market.
Why I Am Opting into the Blended Retirement System.
There is probably a good amount of you that already understood the facts of the new system. The real test for you is deciding what you are going to do. I don’t blame you if you skipped to this section of the article.
To fully understand why I have made the decision to switch there are two terms I want you all to understand.
First, the idea of Opportunity Cost. Opportunity Cost is defined by Investopedia.com as “a benefit that a person could have received, but gave up, to take another course of action”.
You could have run a mile this morning, and the opportunity cost of not doing that is suffering on your PT test next month. That suffering is the opportunity cost and the chance to run this morning was the opportunity.
Me deciding to opt into the new system is all about the opportunity cost of not maxing out my TSP and missing the 5% government contributions a month. I will never get that return on my money. It is an opportunity lost.
The key concept of opportunity cost is understanding the difference between now and later. This is simple. Things that happen now will always be more significant than things that happen later. No matter how much you try to convince yourself that the future is more important to you, the fact remains that the things that happen today are more important and impact you more.
With that said, losing $360 per month in annuity payments 15 years from now isn’t the same as losing out on 5% of free money today.
This leads me into my next financial proverb, the power of compounding interest. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it”. Yes, Mr. Relativity himself deemed compounding interest as the most important mathematical equation there is.
This is simple, I want that free 5% to compound RIGHT NOW. I invest today because I know that I will retire early due to the power of compounding interest. I will opt in to the BRS because I know the OPPORTUNITY COST of not taking the free 5% contribution will work against the POWER OF COMPOUNDING INTEREST.
OPPORTUNITY COST + COMPOUNDING INTEREST EXAMPLE
Member who does not opt into BRS. Has $10,000 saved in TSP. Contributes 5% for 15 more years. Earns a modest 7% return per year for the next 30 years. Will have $107,293.34 at the end.
Member who does opt into BRS. Has $10,000 saved in TSP. Contributes 5% for 15 more years plus 5% government match. Earns a modest 7% return per year for next 30 years. Will have $214,586.66
The OPPORTUNITY COST of missing the free 5% is losing out on doubling your TSP account over the next 30 years.
The best part of this scenario is this is an example of someone who is not maxing out their TSP every year. Right now, you can contribute up to $5,550 a year into TSP. For most of you that is between 15%-30% of monthly income. Let’s assume you decide to max out your TSP and used my Ultimate TSP Guide to earn an average of 12% returns per year, then you will have $1,612,847.43 in your TSP 30 years from now. That’s right, before retirement age, you will have over a million dollars saved.
The 5% percent match in TSP, the continuation pay and the reduced lifetime annuity together beat the old system and is reason enough for me to opt into the new BRS.
Reasons Why You Should Not Opt into the Blended Retirement System.
1. You will not max out and optimize your TSP. Since you are choosing not to save or you are choosing not allocate your funds correctly, missing out on $360 a month for life will be a greater loss for you.
2. You are over 10 years of service AND plan to get out right at your 20-year mark. You already half way to your retirement and you know that you won’t go past 20 years. The sum of the compounding interest does not equal more than the total sum of the losses you will incur by missing out on that $360 a month over the course of a lifetime. You need at least 11 years or more of matching contributions to make the Power of Compounding equal more than the old system lifetime annuity payments.
3. You are extremely risk averse and do not want to put money into the market. Well, umm, okay. You go ahead and do that.
That’s it. If you fall into one of the two of those categories, then the traditional system is for you. If you are a Smart Military Investor, then you should never be in category one and three.
All of you service members have one year to decide. Read up on the facts. Calculate your returns. Educate your subordinates. Share this post to people you believe need this. It is a free resource.