We’ve reached Part 4 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. Part 3 compared the Blended Retirement System to the current High-36 retirement system and ran some sample scenarios to estimate the possible value of the BRS. If you haven’t read parts 1 through 3 yet, make sure you check them out so you are familiar with the system.
Part 4 covers some frequently asked questions, separates some of the myths and facts out there, and wraps up with my opinions on the BRS.
Frequently Asked Questions
Are Reservists eligible for the continuation pay?
They sure are! It’s a different calculation than for Active Component, but Reservists are eligible. Per the Implementation Guidance, Reserve Component gets no less than one-half times and no more than six times the monthly basic pay of a member of the same grade and years of service on active duty. Reservists can also qualify to receive the same amount as the Active Component under specified situations.
I heard the Blended Retirement System pension doesn’t start until age 60. Is that true?
Nope. Well okay, this could be true for some Traditional Reservists and Guardsmen. But I clarified with the person who asked this, and he was talking about the active duty version of the BRS. So just to be clear, for active duty retirements the pension would start virtually immediately after retirement, whatever age you happen to be when that happens.
Myths vs Facts
The Blended Retirement System pension is 10% smaller than the High-36 pension
Myth: The BRS uses a pension multiplier of 2% for every year of qualified service. The High-36 uses a 2.5% multiplier. 2% is 80% of 2.5%, or 20% less than the High-36. That means that all other things being equal, a BRS pension will be 20% smaller than a High-36 pension. The 10% myth came from people calculating the percentage for a 20 year career. 20 years at 2% is 40%, while 20 years at 2.5% is 50%. So it looks like a 10% reduction, right? But it only looks like a 10% reduction for a 20 year career. Bump that up to 21 years, and all of a sudden you are looking at 42% compared to 52.5%. At 25 years, it’s 50% to 62.5%. If you hate working with percentages and are now confused, just trust me – the BRS pension is 20% smaller than the High-36 pension. However…
The Blended Retirement System retirement package is 20% smaller
Myth: Just because the pension is 20% smaller doesn’t mean the overall result is 20% less. The High-36 consists of only the pension, which perhaps explains why people think the BRS is 20% smaller. But the BRS has introduced new components of the retirement plan to offset the 20% reduction in the pensions. Those components are the continuation pay and the TSP match. Together, they have the potential to raise your overall retirement package to the same amount as, or more than, the High-36 plan. There is also the possibility of getting less. It’ll never be a full 20% less, though, because even if you only ever get the 1% automatic TSP match, that’s still more than nothing.
Personal opinion: To complain about the 20% reduction without acknowledging the addition of the continuation pay and TSP match is ignorant at best and dishonest at worst. As shown in Part 3, the two systems often end up with essentially similar retirement packages. In several instances, the Blended Retirement System is the better choice. It is the better choice 100% of the time for people who don’t retire from the military.
The Blended Retirement System is a worse plan for military members
Myth: The BRS will be a worse choice for some members, but it will also be a better choice for some members. And it’s automatically the better plan for everybody who doesn’t retire from the military, since the BRS gives some retirement benefit to those troops while the High-36 gives none. Saying that one plan is better or worse for everybody is just false. You have to run the numbers for your own personal situation to figure out what is right for you.
TSP matching funds go into a fund earning about 1%
Myth: I’m not trying to call out Time (third to last paragraph) but this is just straight incorrect. They don’t specifically reference which fund is earning 1%, but I assume they are talking about the G Fund. I’m betting they are saying this because under the current construct, TSP contributions go into the G Fund until and unless the member makes a change. But that will no longer be true once the BRS comes online. The Implementation Guidance is quite clear. From page 17:
(11) Default Fund. Unless a specific investment election is made by a Service member, a member’s individual contribution and the government’s contributions to TSP will be invested, on behalf of the member, in an age-appropriate, target date asset allocation investment fund, commonly known as a “Lifecycle” fund.”
The L Funds are not currently earning 1%, and while they may earn 1% at some point in the future it will vary every year because the return is based on the stock market and the asset allocation of the particular L Fund. I’m hoping Time updates this information soon and that by the time you read this blog post, you are confused because the Time article is correct. But as of when I’m publishing this post, they are spreading misinformation.
The government only contributes 1%, max, to the member’s TSP under the BRS
Myth: No. Just no. Look at any of the literature and you will see this is untrue. This accounts only for the automatic contributions, not the matching contributions.
You’ll never have as much money with the Blended Retirement System
Myth: Sometimes? Yes. Never? No. Please review my scenarios in Part 3 if you believe this.
The DOD BRS calculator assumes too high a rate of return
Neither Myth nor Fact: First, this element of the calculator is editable. If you don’t like the default rate, just change it. Easy peasy. Second, whether the 7% default is “too high” is really going to depend on your personal risk tolerance, knowledge of investing, and the stock market overall. You can affect two of those three things. As somebody who has been studying personal finance for over a decade, 7% seems very reasonable to me.
The High-36 is the safer choice
Myth: Safer in what way? Yes, it is safer to have a higher pension than to have a lower pension. However, I wouldn’t say it is safe to stake your financial future on something only 19% of active duty and 14% of Reservists achieve (a military retirement). You are taking a pretty big risk if you assume you will make it to retirement. But if you make it to retirement, then sure, a larger government-backed pension is safer than a smaller government-backed pension plus investments.
Myth vs Fact Wrap-Up
As you can see, there is a lot of misinformation out there about the Blended Retirement System. That’s why it’s important that people like you share the correct information. Ideally everybody would be using primary source information straight from the DOD, but we all know the average person is NOT going to read the 31-page Implementation Guidance. Heck, most of them wouldn’t even take the online CBTs if it weren’t a requirement. So please, share this blog post. Share posts from other military personal finance bloggers. Talk to your friends and coworkers and troops. Invite your base financial counselor in for a unit brief. Make sure people are basing their retirement system decisions on correct information, not the whiny-pants rants of people who don’t actually know what the BRS entails.
Lump sum payment of the retirement annuity
It is rarely a good idea to take the lump sum instead of the full annuity. The lump sum payments are going to be calculated using what is called a “discount rate.” This means you aren’t really going to get 25% or 50% of the value of your pension in a lump sum at retirement. Instead, you will get a reduced amount of 25% or 50% of the pension. AKA – less money overall. Unless you plan to then invest that money and somehow know that you will earn more via investments than you get with the full pension, it’s probably not a good idea.
However, if you are going to take the lump sum payment to fund something that will likely increase your overall net worth or income potential, taking the lump sum might, possibly, occasionally be a good idea. Maybe. Examples would be if you are opening your own business or you’ve passed your GI Bill on to a dependent and now want to earn another degree. But in general, taking the lump sum isn’t a good financial choice.
Receiving the continuation pay will be a great thing for many people, no doubt about it. I would just remind you to use this money wisely. For some people, this will end up being a pretty massive chunk of change (possibly more than a year’s worth of basic pay!). Using the money to pay off debt, invest, and/or buy a house are all worth looking into. Remember also that this money comes with a service commitment, so carefully assess your plans before signing the paperwork
When to switch if you are going to switch
January 1st, 2018. No doubt about it. If you are going to switch into BRS, you want to receive the automatic and matching contributions for as long as possible. Waiting to make the switch is just giving up that money. Of course, you shouldn’t make the switch until you are sure of your choice. That’s why the DOD has implemented a year-long education period in 2017. Get smart now so you are ready to go in January 2018. And make sure your friends and coworkers are retirement-system smart as well.
A lot of people have made the point that giving retirement benefits before 20 years time in service will hurt retention, because the member can leave at any time and take a benefit with them. The 20 year cliff vesting of the High-36 was a big carrot to keep people in! But I think the Blended Retirement System still has some considerable retention potential. First of all, there is still a pension component that requires a 20-year career. This carrot might be 20% smaller than the High-36 carrot, but it’s still there.
Secondly, there is now an additional benefit for people who know they aren’t going to stay in for 20 years but maybe don’t want to leave after their first commitment. Under High-36, there is no retirement benefit at all for most people. Under BRS, you add TSP matching funds to the list of other benefits of military service. Remember that the government TSP contributions equate to essentially up to a 5% raise in your basic pay. That’s a pretty significant benefit. If somebody is considering getting out, they should run a cost-benefit analysis of doing so. That analysis needs to include all of the benefits a military member receives, including the TSP contributions.
No surprise here – I’m a fan of the Blended Retirement System. I’m also a fan of the High-36, but I think it was time for the DOD to update the retirement system. And while a lot of people don’t seem to remember or realize this, we asked for these changes. It’s easy to say the BRS is a bad thing for retirees, but that ignores the overwhelming majority of military members who don’t retire from the service. The BRS is an undeniably good thing for many people. For those who do plan to retire from the military, it’s important to take the time – and not just a token amount – to analyze each system and see which one best fits your situation. And military leaders, supervisors, and commanders should be helping their people do the same. The decision of whether or not to switch to BRS is going to be the biggest financial decision for many service members in 2018 – bigger than maybe anything but whether to get married or divorced.
So please, share this post (and the whole series). Print out the infographics on the DOD BRS website and leave them in the breakroom. Send out the link to the Implementation Guidance and hope somebody will take the time to read it (it’s the #1 best source of information on the BRS). Now that you are well informed about the BRS, get out there and talk about it! Make sure people are making their choice using facts, not the myths I’ve highlighted above and the hundreds of others I’m sure are also out there. There are good things about both the Blended Retirement System and the High-36 programs, so make sure people have the information they need to make an informed choice.