We are just shy of a month since the launch of the DoD’s new Blended Retirement System (BRS). Now, it’s time for Active Component Service members with fewer than 12 years since their Pay Entry Base Date, and Reserve Component Service members who have accrued fewer than 4,320 retirement points as of December 31, 2017 to make the decision to opt-in to the BRS or do nothing and remain in the legacy retirement system. In my previous blog post, The Blended Retirement System – The Good, The Bad, The Ugly and Why You Should Care, I dissected the details of the program itself. If you need a refresher, read that post and/or visit the DoD’s website on the topic. Today’s post is all about the opt-in decision and whether or not the BRS is the right choice for you! Below are four points you should consider before making your opt-in decision.
Life Happens. If you already know that you don’t intend to serve 20 years in the military, then you should probably opt-in to the BRS and maximize the defined contribution (aka matching) to the fullest throughout your years of service. Too easy, just log in to myPay and opt-in!
If you’re uncertain of your military plans or even if you’re planning on “doing your 20” you should consider that life is going to happen while you continue your service and sh!t happens sometimes that’s out of our control. Currently only 49% of officers and 17% of enlisted servicemembers make it to retirement…everyone else walks away with nothing more than a handshake and a thank you. Though you may intend to make it a career, changes in family situations, medical conditions or injuries, and inability to make the next rank can result in your separation earlier than planned. The BRS assures that you leave your service with something in your TSP that Uncle Sam contributed for you that you can rollover into an IRA or other retirement account after you separate (as long as you complete two years of service).
Can you save!? In order to maximize the BRS, you’re going to need to be able to deposit 5% of your base pay into your TSP consistently throughout your years of service. If you’re not good about saving or your budget doesn’t currently allow for you to put away money every month then you’re going to get only the 1% automatic gov’t contribution and nothing more. While 1% of your base pay is better than nothing, you truly need to be ready to save 5% of your base pay every month (as often as possible) so that you’re not leaving free money on the table…you literally get a instant 100% rate of return on your TSP contributions up to 5%…where I’m from that’s a good deal! For those who opt-in, it is imperative that you make saving part of your monthly budget to maximize the defined contribution portion of the BRS. NOTE: If you’re struggling with you budget, consider some ideas for trimming your monthly expenses and/or utilizing a budget spreadsheet to help analyze your monthly spending habits.
What’s your timeline? Every person with the opt-in decision is currently sitting on 0-12 years of service. Where you’re at on that timeline will determine the maximum amount that you’ll be able to get out of the BRS. Luckily, there’s a BRS calculator that helps you project the amount of money you could expect to squeeze out of the BRS. When selecting a projected rate of return, keep in mind that the average return of the stock market is roughly 7% per year, historically. If you’re very conservative in your investment choices within your TSP…like you’re putting all of your money in the G-Fund, which I would NOT recommend for anyone young…then you should probably use a more conservative rate of return in your calculations (perhaps 3-4%). Bottom line, I don’t know where you’re at on the opt-in timeline but the BRS calculator can help you estimate your benefits under the BRS. Run several projections with different rates of return to give yourself best and worse case ballpark numbers.
Example #1: An E-3 with 0.5 YOS, who saves 5% of Base Pay and place 50% of their continuation pay into their TSP at 12 YOS. Rate of return is 7%. Individual has an 85 yr life expectancy with TSP deductions starting at 61 yrs old.
This is a bit of an eye chart, but here are the takeaways: government contributions are roughly $35K greater under the legacy retirement…not really that much of a difference when you’re talking about over $3.5M! Total retirement package is almost $4.5M under BRS but keep in mind that nearly $800K of that was contributed by the member while the legacy system requires $0 member contribution. All things considered, the minor difference between the gov’t retirement benefits gives little incentive to a brand new servicemember to stay in the legacy system and risk not making it to 20 yrs active duty and ending up with $0 retirement benefits. Assuming this individual can stay the course and contribute 5% of their base pay throughout their career and average a 7% rate of return in their TSP, their safe bet would be to opt-in to the BRS. This way, if life happens, they at least walk away with something.
Example #2: An E-6 with 8 YOS. All other factors are the same per example #1.
For an E-6 with 8 YOS, the decision is a bit trickier. The spread between the legacy and BRS is over $200K in favor of the legacy retirement. If this member is 100% positive that they intend to finish their 20 YOS and retire then they have to make the decision to roll the dice and hope life situations don’t force them out of the military. If there is any uncertainty at all, the difference between the legacy and BRS likely may not warrant staying under the legacy system.
Example #3: An O-3 with 5 YOS. All other factors are the same per example #1.
Similar to example #2, the spread between the legacy and BRS is not huge but also not insignificant. My thoughts are the same as example #2 for this example. If this member is going to stay with the legacy system they’d better be very sure and willing to roll the dice for an approximate 5% difference over the BRS.
Bottom line is that every member’s situation is different and the variables that they put into the BRS calculator will be different based on their life situation, saving tendencies and risk tolerance. That is why it’s best to seek…
Professional consultation. The decision to opt-in to the BRS will have lifelong impact all servicemembers and it’s important that you seek professional help if you’re uncertain at all regarding your decision or simply want a second opinion. The Airman and Family Readiness Center on your base (or your military branch/base equivalent) has resources that can assist you in making an informed decision. If your already work with a Financial Representative or Advisor (here’s a trusted Advisor if you need one), that person will be able to assist in your decision making process as well. Let me know if you’re having trouble finding resources and I’ll get you pointed in the right direction.
If you have made the decision to opt-in, you must initiate the opt-in on myPay and the BRS opt-in will literally be the option at the top (where you usually click to access your LES). BEWARE: Opting-in is irreversible! Once you decide to opt-in, there’s no taking it back. That’s why considering all aspects and options of the BRS is so critical and I encourage you to make an informed decision if you have any uncertainty at all about whether or not the BRS is right for you and your life/career goals.
Sine we’re on the topic, whether you opt-in or not, it’s a great time of year to review your fund allocation within your Thrift Savings Plan (TSP). You should peruse the fund information worksheet and compare with your current portfolio to see if the current fund(s) you’re in are right for your financial goals. I won’t go into great detail here, because that’s not why we’re here today, but you should consult a financial professional if you have questions/concerns regarding your portfolio allocation. Just my $0.02…unless you’re retiring today, you should go with a L Fund with a 20-30 time horizon (L 2040 or L 2050)…this will be a balanced portfolio in which you should expect to earn a “market” rate of return over that time span.
I hope this article has answered most of the questions you have regarding the BRS and your opt-in decision and that it gave you valuable resources to assist you in making your decision. Remember, once you opt-in you cannot change your mind…it’s a done deal and you’re in the BRS for good! Let me know if you have questions regarding the BRS that you can’t answer and I’ll help you to find those resources!