Hello readers! I’m continuing my Blended Retirement System series with two new posts. In today’s post, I’m going to address several things I’ve seen people talk about over the last few months. Later this month, I’ll be posting a Q&A I conducted with a BRS expert to answer some of your burning questions.
As I’ve stated before, I think this is the most important financial decision most eligible servicemembers will make next year, with the possible exception of whether to get married or divorced. It will have serious impacts on many people’s financial future, especially those who don’t retire from the military.
Why am I continuing to harp on this? Because we are less than one month out from the beginning of the BRS opt-in period, and there is still a lot of confusion out in the field. I’m not here to lay blame. I think everybody – the DOD, individual servicemembers, and supervisors/commanders/leaders – shares in the responsibility. Pointing fingers doesn’t move the ball forward. Educating people does…so that’s what I’m trying to do.
That being said – leaders, if your people are still struggling to understand this topic (and trust me, they are) then share this post with them. Share this post with them. Share this page with them. Perhaps most importantly, talk to your people not only about the money parts of this choice, but the lifestyle and career parts too.
Despite the fact that less than 20% of people will qualify for a military pension, the word on the street is that a large majority are planning to stick with the legacy system. That’s not smart numbers-wise. Today we are going to talk beyond the numbers.
There are a lot of things to talk about today, so instead of this being a cohesive, continuous piece it will be more of a stroll through several BRS-related topics. Let’s do this.
Updates On My Original Blended Retirement System Series
I updated part 3 of my original Blended Retirement System series because I was getting feedback that my use of the terms “winner” and “wins” was leading people to choose one of the systems over the other. To be clear: that term was ONLY used to talk purely about the calculated dollar amounts. It should be used as a starting point for consideration, not the deciding factor!
I considered updating part 4 of that series, as it sounds pretty exasperated when I read back through it now. I’m leaving it, though. I am quite frustrated at the amount of misinformation out there about the BRS. There are some real concerns about it from a financial perspective, but those are not the things being discussed. Instead, the common criticisms seem to be focused on a mistrust of the military and the government to be doing anything that is actually in the interest of the servicemember.
It’s true that not all servicemembers will have better results under the BRS as opposed to the legacy system. However, it is undeniable that most servicemembers will benefit more from BRS than from the legacy system. Receiving some sort of retirement benefit is automatically better for the servicemember than receiving no retirement benefit. I remain frustrated at the implication that BRS is bad for servicemembers, so I’m leaving part 4 exactly as is.
(on a funny note, I was recently called a shill for the DOD and Blended Retirement System. If saying loudly and frequently that most servicemembers would do better by receiving some sort of retirement benefit rather than no retirement benefit makes me a shill, then yes. I am a shill)
The Blended Retirement System Calculator On The DOD Website
For everybody who hates that the DOD BRS calculator doesn’t allow you to include TSP contributions under the legacy portion:
I get it. That would be better. But we can’t change the calculator, so we have to work around that to make an apples-to-apples comparison. Luckily, the calculators already does exactly that.
If you want to take the servicemember’s TSP contribution out of the equation, just look at this part – the Government Retirement Benefit. It excludes the Service Member TSP portion. It’s not a perfect system, but it is right there.
The other option is to add the servicemember’s TSP contribution to the legacy retirement total. To do that, simply take the amount in the yellow-ish block below ($920,966) and add it to the legacy retirement total from above ($6,049,311). The total is then $6,970,277 for the legacy program.
Either one of these methods allows you to compare the systems equally. It’s just that easy.
How much is mental flexibility worth to you?
The thing about the Blended Retirement System is that it offers something you simply cannot get under the legacy system – flexibility. Under the legacy program, you must stay in until retirement to qualify for any type of government-provided retirement benefit. At 20 years, you qualify for a sweet pension – that’s true. But at 19 years and 364 days, you don’t.
(Ignore sanctuary for now. Or if you won’t, pretend I said “17 years.” Whatever)
The legacy system employs something called cliff vesting. With some retirement pension plans, you vest in (qualify to keep) the pension gradually over time. For instance, you may qualify to keep 20% of the full pension for each decade you work for a company. The US military instead uses a cliff vesting structure, which means you qualify all at once – in most cases, that’s at 20 years.
In contrast, your contributions to the Thrift Savings Plan are always yours. What’s more, under BRS you start earning the 1% automatic contribution quickly (after 60 days of service) and you vest after only two years. You also start earning matching contributions (up to 4%) after two years. That means that under BRS, you can start earning – and keeping – government-provided retirement benefits after only 2 years instead of 20.
I was recently discussing the BRS vs legacy choice with a military member. This is what I wrote about mental flexibility:
“I guess the best way to describe it is “mental flexibility”. It comes in the form of having a retirement benefit that is portable and that you can take with you if you do leave the military for any reason.
(here I showed her a crude, quickly put together version of the graphics you are about to see)
The reason it is mental flexibility is you won’t feel tied to the job just to get the pension. A lot of people feel like they have to stay in the military just to get that pension. It’s called golden handcuffs…
(then I told her some personal stuff about people I know and why they have chosen to either stay in or leave the military)
…So that’s what I mean. You won’t feel like you absolutely have to stay in the military so that it wasn’t all a waste. I have nothing official to base this on, but I think the reason the pension is still so big under BRS is because they knew if they dropped it any lower they’d have tons of people getting out at the 8-12 year points. That’s when families and other opportunities converge to make it really hard to stay in if you don’t absolutely love it.”
When making this decision, think about all the things that might change between now and when you plan to retire from the military. Are you positive you will hit all of your career milestones and keep promoting? Will you get married? Divorced? What if you have children? Will they have special needs that limit your ability to move or be away from home? What if you open a side business and decide that’s what you want to do with your life?
The TSP belongs to you – forever. You get to take it with you no matter when you leave the military. It is an asset you own, which means it can be passed down to your survivors after your death. You don’t have to stay in a job that no longer works for you just to keep your retirement benefits.
The pension does not belong to you, it belongs to the government. When you die, your pension benefits disappear. You can purchase a survivor benefit through the Survivor Benefit Plan, but then you are paying to have that benefit pass on to your beneficiary…and options to pass it on from there are extremely limited. Under BRS, much more of your retirement portfolio will be in the always-yours TSP instead of the most-people-don’t-qualify pension. That’s not a small point to consider.
Pension Mountain, TSP Trail, and BRS Land
I also wanted to find a good way to visualize what I just described. Here’s what I came up with. Imagine the process to get your retirement package is a hike, and the end goal is to be on the mountain top looking over the vista. You following me? I’m not a graphic designer, so bear with the simple visual aid.
Legacy Retirement System, Member Does Not Contribute To TSP
In this scenario, the member receives zero government retirement benefit until they reach 20 years of service. Additionally, they aren’t contributing to TSP so they also aren’t building their own retirement package. The trail they are taking is flat, and once they reach the mountain they take an elevator straight to the terrace corresponding to their years of service.
If this servicemember stops hiking (leaves the military) before 20 years, they have made no progress towards seeing the awesome view. They walk away without a retirement benefit of any kind.
Legacy Retirement System, Member Does Contribute To TSP
Next up is someone who is working towards a pension, but is also setting aside money in their retirement account. As they move towards Pension Mountain, they are also gaining some altitude. They don’t have matching contributions from the government, but they are gaining some altitude. They are definitely making some progress on their retirement goals. If they don’t reach 20+ years, they will still stop with some amount of retirement savings. If they do qualify for the pension, they will have the pension on top of their TSP savings, making the stopping point (retirement package) a little higher than it’d be with the pension alone.
Blended Retirement System, With Government Contributions
Finally we have the person who falls under Blended Retirement System. Because they qualify for both matching and automatic government contributions, their TSP account can grow much faster during their career. Pension Mountain is smaller in BRS land, but it’s sitting on top of a formidable TSP base. Again, the member can stop along TSP Trail at any time and still be able to see a view from altitude. Maybe it won’t be as high as if they made it all the way to Pension Mountain, but it’s still a good view. And if the member gets injured and can’t continue, it sure is nice to be able to get off that trail having enjoyed the sights from up higher rather than trudging through the flatlands all along…no?
I’ll stop there for now. I still have the BRS Q&A for you coming up this month, and I will continue to hassle people to make the decision in 2018. But the point is – make the decision! Don’t let a lack of training or understanding cause you to default into anything. Think about what is really important to you.
In the BRS, the government contribution for the maximum of 5% match is for 26 years of service. So if someone has been active duty for 7-years of already by Dec 31, 2017, does that mean he/she will only get 19-years of matching starting in Jan 1, 2018? The 26-years of service does not start from Jan 1, 2018 but for each individual? Also if someone has a combination of active duty and reserve them, how would years of service be calculated? Thanks
Mark,
Yes, you are correct. The total amount of time each person opting in will be eligible to receive the BRS matching and automatic government contributions will be based individually. Someone with 7 years of service will have a maximum of 19 years of matching, because it will end once they hit 26 years of service.
As for calculating AD and reserve time, I admit I’m not the best person to ask since I’m not a reservist. I *believe* the right answer is to simply take your total points and divide by 360 (360 being the equivalent of a full year of AD time). That assumes that your point total already includes your AD time though, and I don’t know whether that is true.
If it’s not true, then my next guess would be that you take your Reserve point total divided by 360, and add the result to your AD time. For instance, if you have 2000 Reserve points and 3 years AD, it would look like:
(2000 / 360) + 3 = 8.56 years
But again, I’m not the expert. The best way to figure this out is to use the information in this link:
http://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/Verift%20Retirement%20Points%2010.20.2017.pptx?ver=2017-10-23-110135-323