The Blended Retirement System – Part 3: Comparing Systems

ON MONDAYS, I DISCUSS FINANCIAL CONSIDERATIONS THAT SPECIFICALLY RELATE TO US SERVICE MEMBERS. IF YOU HAVE ANY QUESTIONS OR TOPICS YOU’D LIKE TO SEE DISCUSSED, PLEASE LEAVE A NOTE IN THE COMMENTS OR EMAIL ME AT MILITARYDOLLAR@MILITARYDOLLAR.COM.

Welcome to part 3 in my series on the new Blended Retirement System (BRS). Part 1 covered the basics of the BRS – what it is, the implementation timeline, and where to go for more information. Part 2 covered who is eligible for the BRS and the details for the Active and Reserve versions. If you haven’t read parts 1 & 2 yet, make sure you check them out so you are familiar with the system.

Part 3 compares the Blend Retirement System to the current High-36 retirement system and runs some sample scenarios to estimate the possible value of the BRS. In part 4 I go over some frequently asked questions, separate some myths vs facts, and offer my opinions on the BRS.

Finally, we get to what so many people want to see. Some cold, hard numbers on the BRS.

***UPDATED 9 October 2017: these calculations now use the full BRS calculator, not the beta version that was used when this post was originally published***

***UPDATED 27 November 2017: I’ve heard from several readers that this post helped them decide whether to stay with the legacy system or switch to BRS based on the amount of money each one returns in the calculation. I want my position to be clear: which retirement system you choose should use the amount of money as a STARTING point for consideration, not the DECISION point. There are many, many factors you should be basing your decision other than the ending number. This post is to dispel the rumor that the legacy system gives retirees more money in the long run – it is not supposed to indicate that one is better than the other!***

I ran a variety of scenarios using the Blended Retirement System calculator on the DOD website. After the scenarios, at the bottom of this page, are my methodology and assumptions. I know some people will want to see them and some won’t, so they are available if you are interested but not in the way of the juicy stuff.

I know a lot of people have complaints about the calculator. Those that I think were valid, I accounted for (no TSP for High-36 and career progression). Those that I think were not valid, I ignored (misunderstandings about the data the calculator was showing). For those who complained the calculator unfairly favors the BRS – well, judge for yourself based on the results below. I haven’t seen a person yet who thought the calculator actually returned incorrect results, and I trust it.

I’m only using the Active Duty version of the High-36 and Blended Retirement System. I’m sorry, but with the bazillions of factors that come into play with Reserve retirements, it’s just too difficult for me to model for a large group. The calculator is good – I recommend putting in your own scenario and seeing what the result is. You can review my methodology for help in using the calculator.

Lessons Learned

Before I get into the minutiae, I figure most people will want to see the BLUF. Here it is.

• 100% of people who don’t make it to retirement will have a better result under the BRS because something > nothing. If you do not think you will stay in until 20, YOU MIGHT WANT TO SWITCH. I am not a personal finance professional and there is no reason for you to listen to me but ***YOU SHOULD REALLY CONSIDER SWITCHING*** to the Blended Retirement System if you aren’t going to stay in for 20+ years. Capiche?
• The later you push out your TSP withdrawals, the better the Blended Retirement System gets in comparison to the High-36. This is because the TSP money has more time to compound, whereas the pension in the High-36 is pretty steady throughout the years.
• Conversely, if you want to retire before your 60s the High-36 has the advantage of having long term, predictable and reliable income.
• If you don’t plan to max out the government matching contributions, the BRS may not be the right choice. You need to contribute at least 3%, ideally 5%, to beat the High-36. Unless of course you aren’t going to make it to 20 years. Then of course the Blended Retirement System is the right choice. But in order to make up for the smaller pension, the BRS relies on those government matching contributions. If you don’t take advantage of this free money, you’re just settling for a smaller pension. That’s not a good game plan.

The Scenarios

Below you will see seven scenarios representing different people at different points in their career. I cannot possibly run every possible scenario, so I chose a wide variety of ranks, time in service (TIS), and retirement years. Again, the methodology is at the bottom if you want to see exactly which inputs I standardized and which I changed.

The High-36 numbers are the total projected payout of the pension from retirement (varies) until death (I used age 85). The Blended Retirement System numbers are the total projected value of the pension from retirement until death plus the value of the TSP as of Full Retirement Age (I’m using age 67). All numbers are in future dollars. If the row is bolded, it means that BRS scenario won out over the High-36 projection.

The point of this is to model when BRS is a good choice and when High-36 is a good choice for notional members looking only at the end result (no other financial or non-financial factors). If you want to figure out the numbers for yourself, I recommend reviewing my methodology and running a variety of scenarios for yourself, changing up the following:

• Number of years of service at separation/retirement
• Your life expectancy
• Your TSP withdrawal age
• Your individual contribution rate
• Your TSP rate of return

E-2, 18 yoa, 8 months TIS, separates at 4 years as an E-4  *This one is just to show how BRS benefits even those who get out after the initial commitment*

• High-36: $0 (no benefit due to not retiring from the military)
• BRS:
  • 0% individual contributions, 5% rate of return: $11,871
  • 0% individual contributions, 7% rate of return: $32,859
  • 0% individual contributions, 9% rate of return: $88,506
  • 3% individual contributions, 5% rate of return: $47,486
  • 3% individual contributions, 7% rate of return: $131,439
  • 3% individual contributions, 9% rate of return: $354,024
  • 5% individual contributions, 5% rate of return: $59,358
  • 5% individual contributions, 7% rate of return: $164,299
  • 5% individual contributions, 9% rate of return: $442,530

Winner: clearly the BRS. But we already knew that.

PS – do you see how relatively small changes in the rate of return can have huge impacts in the total amount? This is how the Blended Retirement System can end up being worth more money than the High-36. If you invest well (and have a fair amount of luck), you can potentially end up with a much larger government retirement benefit. There is risk involved, though. Keep that in mind.

E-3, 19 yoa, 1 year 8 months TIS, retires at 25 years as an E-9

• High-36: $7,024,742
• BRS:
  • 0% individual contributions, 5% rate of return: $5,750,740
  • 0% individual contributions, 7% rate of return: $5,910,149
  • 0% individual contributions, 9% rate of return: $6,258,259
  • 3% individual contributions, 5% rate of return: $6,143,580
  • 3% individual contributions, 7% rate of return: $6,781,217
  • 3% individual contributions, 9% rate of return: $8,173,656
  • 5% individual contributions, 5% rate of return: $6,274,527
  • 5% individual contributions, 7% rate of return: $7,071,572
  • 5% individual contributions, 9% rate of return: $8,812,122

Winner: High-36, mostly, but Blended Retirement System holds its own if the member contributes enough to get the full match. More than holds it own, really – look at the difference! Given the member’s young age, if it were me I’d switch. This person can’t know at <2 years that they would make E-9/25 years.

E-5, 25 yoa, 7 years 4 months TIS, retires at 30 years as an E-9

• High-36: $7,290,315
• BRS:
  • 0% individual contributions, 5% rate of return: $5,934,269
  • 0% individual contributions, 7% rate of return: $6,044,127
  • 0% individual contributions, 9% rate of return: $6,267,309
  • 3% individual contributions, 5% rate of return: $6,240,323
  • 3% individual contributions, 7% rate of return: $6,679,752
  • 3% individual contributions, 9% rate of return: $7,572,481
  • 5% individual contributions, 5% rate of return: $6,342,341
  • 5% individual contributions, 7% rate of return: $6,891,628
  • 5% individual contributions, 9% rate of return: $8,007,538
    

Winner: High-36, mostly. This scenario really shows how beneficial the High-36 plan is for those staying in the longest. Remember, the Blended Retirement System stops matching contributions at 26 years TIS, while the pension continues to grow.

E-6, 29 yoa, 11 years 0 months TIS, retires at 20 years as an E-8

• High-36: $3,350,577
• BRS:
  • 0% individual contributions, 5% rate of return: $2,719,528
  • 0% individual contributions, 7% rate of return: $2,764,787
  • 0% individual contributions, 9% rate of return: $2,858,731
  • 3% individual contributions, 5% rate of return: $2,836,727
  • 3% individual contributions, 7% rate of return: $3,017,766
  • 3% individual contributions, 9% rate of return: $3,393,542
  • 5% individual contributions, 5% rate of return: $2,875,794
  • 5% individual contributions, 7% rate of return: $3,102,092
  • 5% individual contributions, 9% rate of return: $3,571,812

Winner: High-36, mostly. This is a good example of why those who are closer to the 12-year eligibility cut off might want to keep High-36. They have less years of government contributions to TSP, plus less years of compounding.

O-2, 25 yoa, 3 years 2 months TIS, retires at 20 years as an O-5

• High-36: $6,431,101
• BRS:
  • 0% individual contributions, 5% rate of return: $5,277,456
  • 0% individual contributions, 7% rate of return: $5,430,061
  • 0% individual contributions, 9% rate of return: $5,749,109
  • 3% individual contributions, 5% rate of return: $5,675,181
  • 3% individual contributions, 7% rate of return: $6,285,603
  • 3% individual contributions, 9% rate of return: $7,561,793
  • 5% individual contributions, 5% rate of return: $5,807,756
  • 5% individual contributions, 7% rate of return: $6,570,784
  • 5% individual contributions, 9% rate of return: $8,166,021

Winner: I’m going to call it a virtual tie. The “BRS, 3% contribution, 7% return” numbers are awfully close to the High-36 numbers. One or two years of higher returns would push this into Blended Retirement System as the winner. And the 9% return numbers blow the High-36 pension out of the water.

O-3, 29 yoa, 7 years 9 months TIS, retires at 25 years as on O-6

• High-36: $8,168,211
• BRS:
  • 0% individual contributions, 5% rate of return: $6,664,526
  • 0% individual contributions, 7% rate of return: $6,790,148
  • 0% individual contributions, 9% rate of return: $7,030,772
  • 3% individual contributions, 5% rate of return: $7,054,398
  • 3% individual contributions, 7% rate of return: $7,556,887
  • 3% individual contributions, 9% rate of return: $8,519,381
  • 5% individual contributions, 5% rate of return: $7,184,355
  • 5% individual contributions, 7% rate of return: $7,812,466
  • 5% individual contributions, 9% rate of return: $9,015,585

Winner: High-36. This one surprised me. Not that High-36 won, but that none of the numbers were really that close. Either High-36 crushed BRS, or the other way around.

O-4, 33 yoa, 11 years 6 months TIS, retires at 20 years as an O-5

• High-36: $4,926,323
• BRS:
  • 0% individual contributions, 5% rate of return: $3,995,644
  • 0% individual contributions, 7% rate of return: $4,050,008
  • 0% individual contributions, 9% rate of return: $4,154,295
  • 3% individual contributions, 5% rate of return: $4,159,400
  • 3% individual contributions, 7% rate of return: $4,376,858
  • 3% individual contributions, 9% rate of return: $4,794,004
  • 5% individual contributions, 5% rate of return: $4,213,985
  • 5% individual contributions, 7% rate of return: $4,485,808
  • 5% individual contributions, 9% rate of return: $5,007,240

Winner: High-36. Again, you see the need to achieve higher-than-average returns to make up for the shorter investing timeline if you are already close to 12 years of service.

Conclusions

So there it is. High-36 wins in most, though not all, situations (in end result numbers only, not other factors). Bet you thought I was going to say Blended Retirement System was the winner in all, right? Nope. I’m still a big fan of the High-36. It’s the program I fall under, after all (I’m not eligible to switch). But what this post doesn’t show is the 81% of active duty and 86% or Reserves that don’t make it to retirement and therefore would benefit from the Blended Retirement System. I’m still a HUGE BRS fan.

So what all this means is that if you are really confident you will make it to 20 years, High-36 might be the best choice. But if there is doubt, at least you know that switching to the Blended Retirement System isn’t going to leave you high and dry. You can still achieve government retirement benefits that are similar to, if not higher than, the High-36 plan. And you can do it knowing that if for some reason you don’t make it to 20, you still walk away with something. So yes, as always, I still think the Blended Retirement System will be the right choice for many/most people.

Methodology

To keep this even the tiniest bit manageable, I had to standardize some elements. However, I also had to change some up to get a wide variety of scenarios. Here is what I kept the same vs what I changed.

What I changed in each scenario:

• Age (I assumed all enlisted entered the month they turned 18 and all officers entered the month they turned 22. I know there is no standard but I had to choose something)
• Time in Service (Pay Entry Base Date)
• Rank
• Expected separation/retirement
• TSP contribution rate
• TSP rate of return
• Career progression timeline as needed (see below)

What I kept the same for each scenario:

• Opt-in date. See below for why.
• Life expectancy (85, which is in the middle of the Social Security Administration’s expectations for American men and women)
• TSP withdrawal age (67, currently considered Full Retirement Age for people born after the year 1960)

I updated the Career Progression based on the DOD average timeline for promotion as found here. It is entirely possible you disagree with these timelines. I understand. However, I needed a more realistic promotion schedule and this is what I found. For each rank, I rounded up or down to the closest year.

Why did I update the Career Progression Page? Because it’s not accurate! Make sure you are updating it to match a realistic timeline. If you don’t know what is realistic, at least use the averages in that link for your military branch. Your results will be wrong if you don’t accomplish this step. It sometimes resets if you change the options, so check it every time.

I compared three potential rates of return, all of which I consider realistic along a spectrum of conservative-to-aggressive investors. The calculator defaults to 7%. In my opinion this is very fair given the recommended asset allocation for the age of the people eligible to opt-in to the Blended Retirement System. I used 5% to represent a conservative investor and 9% to represent an aggressive investor.

I show the total notional benefit earned, comprised of the pension and government TSP elements. Remember this is all notional. Real life investments don’t neatly return the exact same amount every year. Your real life experiences will differ from these scenarios.

What I Ignored

In order to make these comparisons as apples-to-apples as possible, I am ignoring the “Service Member TSP” portion of the results page. I am only counting what the government gives you. This is because you always have the option to contribute to TSP under the High-36, so it isn’t fair to count Service Member Contributions for the Blended Retirement System and not for High-36. It’s also why the DOD has handily split them out for you visually and by the numbers on the results page.

I am also ignoring the continuation pay since the member can do whatever they want with it. My method of “ignoring” it is to say that 0% goes into the TSP. However, if you are switching to Blended Retirement System, you should strongly consider using the continuation pay to strengthen your financial position (invest more, down payment on a house, pay off debt) rather than spending it on a boat. Just a thought.

Finally, I ignored the lump sum payment option as that doesn’t affect how much the government is willing to give you, it affects how much you take from the government.

Assumptions

• TSP contributions are constant throughout the career. While it’s best to increase your TSP contributions as you receive raises, the calculator doesn’t account for that so I didn’t either. but if you can – start with 5% and increase by 1% every year. You will have buckets of money by the time you retire if you do that and invest wisely.
• All Blended Retirement System opt-ins will happen in January 2018. Because, and I cannot stress this enough, if you are going to opt-in you need to do so as soon as possible. The longer you wait, the more government contributions you are missing out on.

Have you run the numbers on the BRS yet? Are you planning to stay with High-36 or switch to BRS?