Would I Have Switched To BRS If Given The Option? Part 1

For more information you can find all of my Blended Retirement System posts on my BRS page.

We officially have less than 1.5 months left in 2018. I know, I can’t believe it either! But don’t worry, your military bloggers have got you covered. The indomitable Kate Horrell, who is dedicating her life to making military members and families smarter about money, has gathered dozens of military bloggers together to finish the year strong by making sure everybody has thought carefully about the Blended Retirement System (BRS). We’re calling it the BRS Blitz.

Don’t go rushing away! I know, I know, people are tired of talking about BRS. So who wants a BRS Blitz?? But there are still a lot of people who haven’t switched, and there’s still time. Time to act if you haven’t yet decided what to do. Time to talk to your troops about BRS if you haven’t yet…or if they need it again. And time to change your mind if you’ve decided to stick with High-36.

Why do I care? And why do dozens of other bloggers care? Because as of today, only about 1 in 6 eligible military members have switched to BRS. Meanwhile only about 1 in 5 (19%) active duty members will make it to retirement. Are you Guard or Reserve? The likelihood of retiring from the military is even lower for you – 1 in 7 (14%).

So if at the end of September only 16.5% had switched, and only about 14%-19% of those people are making it to retirement…

Yikes.

That means a whole lot of people are going to be separating from the military having turned down free retirement money. If we assume that everybody that already switched is definitely not making it to 20 years (not a good bet IMO) then about 65%-70% are choosing a losing bet. I’m trying to get that number lower.

The thing is we don’t know (can’t know) which 65%-70% it is. So those of you that are eligible need to make some assumptions about your future. And I’m hoping my real life experiences will help frame the discussion for you.

I’ve said before that I don’t think everybody should switch to BRS. It is not the right choice for everybody. But I do think there are a lot of people for whom it is the right choice, and most of them haven’t switched. This concerns me. So I’m not saying everybody should switch! But I’m definitely saying there are a lot of people who need to rethink this.

What Prompted This Post

During the BRS Blitz I’m going to double down on my efforts to convince people that BRS is actually pretty awesome. As part of that, I’m reading the posts put out by the other bloggers. Doug Nordman wrote one on The Military Guide that I think you should read. Go on, I’ll wait.

Doug tried really hard in that post to avoid the dollars aspect of the High-36 vs BRS decision. The reason he did that is because, as I like to say, this is a lifestyle decision masquerading as a financial one. So many people are hyper focused on which choice leaves them with more money in their pocket if they retire from the military. Not enough are paying attention to whether they will retire from the military.

The first post Doug received on this post did exactly that – it focused on the dollars. And while Doug’s response tried very hard to refocus the commenter on the lifestyle decision, I decided to answer him straight on. Why? Because I have created my own spreadsheet tracking exactly the info he wanted.

Today I’m going to share my answer with you. I’ll also expand a little more based on the fact that it’s simply easier to do on my own blog. Tomorrow I’ll answer a couple follow on questions.

The Original Comment

Before I show you my answer, let’s first go over the question so we are all on the same page.

Hank is asking for Doug to “show his math” behind saying that switching to BRS is revenue-neutral. Hank points out that because the pension is 20% smaller under BRS, the other aspects of BRS (government contributions to TSP and continuation pay) aren’t enough to make up the difference.

Hank also says:

• “For an officer, this is about $10k/yr in present dollars”
• • That’s about accurate for someone retiring as an O-5 at 20 years
• “In exchange you get BRS incentives of a 5% match”
• • Very close…1% automatic and up to 4% matching for up to 5% total
• “and 2.5 months continuation pay”
• • That’s the 2018 amount for AD…the lowest possible. It could be up to 13x for AD. For Guard/Reserve in drilling status, the range is 0.5x to 6x
• “your BRS incentives would have to have grown to $250k to even match the lost pension”
• • This is based on the 4% rule – the inverse is a 25x multiplier, so the person needs to have 25x the reduction in the pension ($10k). $10k x 25 = $250k
• • This is what I focused my answer on, not the age 60 number (he guessimated $500k). It’s harder to get to $250k by age 41 than $500k by age 60, so if you can reach $250k by age 41 you’re good. Plus y’all know I like the thought of everybody being financially capable of retiring right out of the military if they want to!
• “Even the DoD’s own calculators and charts couldn’t make that math work.”
• • Untrue: I’ve run the numbers hundreds of times at this point. Sometimes BRS ends up with more, sometimes High-36 ends up with more. Military members under BRS end up with more money in 100% of the cases where they don’t retire from the military.

My Response To Hank

You can read my response on The Military Guide if you prefer, but this is the expanded version…with better formatting and pictures! Bolding is added for emphasis on parts I want you to pay particular attention to.

Part 1: Introduction

Hi Hank. Like Doug, I think people are focused entirely too much on the money and ignoring the two most important aspects of this choice:
1. The career flexibility from not feeling handcuffed to a pension
2. The fact that the overwhelming majority of people will never get the pension

But since people continue to talk about the money, I thought I’d show you how the numbers would’ve worked out for me if I’d been offered BRS at the beginning of my career. Doug already gave you the link to where I ran numbers for a whole slew of fictional people, but this is what it would actually look like for me, a real live person with actual investing history to model off of.

I am currently in my 14th year of service – I commissioned in 2004. I have a spreadsheet showing what the government contributions to my TSP would’ve grown to if I started BRS as an LT – this spreadsheet only includes the government 5% contributions, it does not take into account my own money.

I then predicted what the numbers would look like when (if!) I reach 20 years TIS.

Part 2: Methodology

To calculate the results, I used my own actual TSP returns for every year I had them. During years I didn’t have TSP, I used the S&P 500 return that year. For future years, I assumed a 7% annual average return. And for future base pay, I assumed an average 1.7% increase each year. All conservative assumptions, I think we can agree. Because I’m not going to dig up the daily returns for 14 years, this is a simple annually compounded estimate. The real numbers would vary a bit.

Now, as you said, in order for BRS to actually be revenue neutral purely by the numbers, you would need the government contributions portion of the TSP to make up for the reduced pension. If starting right at retirement, for an O-5 retiring at 20 years TIS that means we are looking at making up ~$10,000/year. Using the 4% Rule, that means the government contribution of the TSP would need to equal ~$250,000 at the time of my retirement (25x). Let’s see how it works out.

Part 3: What My Government Contributions To TSP Would Look Like If I Opted In As A Brand New O-1

Okay, so we haven’t quite made it. If I retired in 2024 (20 years TIS) using the above assumptions, I’d have a total of $167,220.88

It brings us close. Using the 4% rule, in year 1 it’d replace $6688 of the “missing pension.” That means it’s only a $3312 annual difference, $276/month, if I’d been in BRS. That’s the “cost” of ensuring I’d walk away with something rather than the high likelihood of walking away with nothing. Not really a whole lot, especially when you consider the unique benefits of TSP over the pension (easily passed to heirs, can reduce need for Survivor Benefit Plan (SBP), etc)

Part 4: But Wait! Continuation Pay!

If I added in Continuation Pay under the 2018 rules (which are the worst possible scenario, at the lowest allowable amount AND the latest possible time) suddenly I have a lot more money at 20 years TIS.

If I’d opted into BRS as a brand new O-1, and using the assumptions listed above, I’d have $204,408.77 in the government contributions part of my TSP.

Now we are looking at income of $8176/year using the 4% rule – a difference of a mere $1824 from the estimated $10,000/year. That’s $152/month. And that’s using conservative assumptions! Talk about being essentially revenue neutral. Add in the benefits of lowered SBP and the other TSP benefits and now you are looking at an insurance policy that costs you less than $100/month, under conservative assumptions.

And remember I’m talking about immediately using TSP upon retirement at 20 years, not waiting for age 59.5. Assume I’d be using some of the multiple methods available to take money out early.

Extend out your compounding timeline, have a more generous Continuation Pay year, and/or invest well enough to get higher average returns and you can very easily end up with more money from BRS than legacy, while also ensuring more career and life flexibility.

Part 5: Longer Investing Timeline

Since Hank talked about what the number would be at age 59, I looked at this too. If we continue to assume 7% average annual returns on the $204,408.77, with no further government contributions…

Hank guesstimated that an O-5 retiring at 20 would need the government portion of the TSP to be about $500k by age 59 to make up for the lower pension. Well, I blew past that in this simulation. If the numbers are what concerns you the most, how does a potential extra $145,689.53 sound?

So that’s what Doug meant by revenue neutral.

Given these assumptions, would I have switched?

You betcha.

When I first entered the military, I didn’t know as much about personal finance as I do now but I could’ve calculated these numbers. And even though 21-year-old me thought I’d spend 30 years in the military (oh what an innocent I was) it still would’ve made sense to switch.

Plus at that point, I knew about investing (in theory) but I didn’t know a ton about the pension. Think back to yourself at that age, if it’s been awhile. Which would’ve sounded better – money entering an account you own right now, or the possibility of money 20+ years in the future?

Yeah, I would’ve switched.

One other important thing that you might need to teach your troops about: Always, always contribute enough to catch the full government match unless your finances truly can’t handle it. That’s an automatic 100% return on your money. FREE MONEY.

But it’s not that simple, right?

It’s not. Very, very few people had the opportunity to elect to switch to BRS within their first month in the military. It’s pretty much just those who joined in December 2017 and the Academy/ROTC scholarship cadets who commissioned this year. Most people are making the decision later in their careers.

Tomorrow I’m going to show you what my account would’ve looked like if I’d had the opportunity to opt into BRS at 3, 6, 9, and 11.9 years. I’ll also cover what my career was looking like at those points, and where my mind was. Because again, it’s a lifestyle decision masquerading as a financial one!

And I’ll answer the other follow-up question to my comment on The Military Guide, which goes into my assumptions. It’s important that you know why I’m assuming the things I am.

I’ll also keep you informed about other BRS Blitz posts. Please spread the word to others!

Given what I wrote in this post, would you have switched to BRS in year 1 of your military service?

Visit Part 2 to see what choices I would’ve made at my 3, 6, 9, and 11.9 year points.