Financial Planning Focus - Making the Most Out of the Military’s New Blended Retirement System
The “Blended Retirement System” (BRS) is a new retirement program that impacts those who serve our country in the armed forces. It started on 1 January 2018 and modifies the retirement system that military members have known for decades. The BRS will shift more of the preparation for retirement onto service members, which introduces some risks. However, it also provides opportunities for those who take the time to create a strategy and follow it with discipline.
Those who join the military after 1 January 2018 are automatically enrolled into the new system. Those presently serving with less than 12 years of service may choose to remain in the defined benefit system or "opt in" to the new system. Those with more than 12 years of service remain under the legacy retirement system.
The BRS modifies the military’s defined benefit system into a reduced annuity, combined with a 401(k) style thrift savings plan. The government will match individual contributions dollar for dollar – 1% for each 1% the service member deposits, up to 5% of pay. So if a service member deposits 5% of her pay, she ends up with a 10% overall deposit, an immediate return of 100%, all tax free.
The Thrift Savings Plan (TSP) offers an array of high quality index mutual funds with ultra-low management costs. Service members have immediate ownership of their contributed funds, and are vested in the government portion after two years. For most of our service members, this is a savings plan you can take with you if you depart service before retirement at 20 years.
The second portion of the BRS is the retirement annuity, which builds at a rate of 2% of basic pay for each year of service. The catch is, you have to serve twenty years to earn this annuity. But, if you make it a career, you can look forward to a transition at about age 40 with an immediate annuity of 40% of basic pay.
If you are new to the military, how should you think about this change? We’d suggest three steps.
First, make the decision now to defer the full 5% of your basic pay so you can earn that immediate 100% pre-tax return, risk free. To do anything less is to “leave money on the table.”
Second, consider investing your TSP contributions into stock based funds. The C, S and I funds invest in U.S. large, U.S. small and international stocks, respectively. Military pay is very stable and predictable – you can build your savings steadily over time. The other half of the BRS – the retirement annuity – is an asset with a predictable value and payments. It is as if the government is building a bond fund on your behalf that will pay dividends at the twenty year mark. That means you end up with a “blend” of “bonds” – your annuity – and stocks in your TSP account. Stocks tend to appreciate faster over time, so this strategy may yield you a more valuable portfolio when you transition.
Third, consider the BRS a foundation, which you supplement with your own savings program. You are able to build a very valuable portfolio with 5% of your pay. Think about what you could do with another 5 – 10% on top of that, invested over time.
Remember we said that those with less than twelve years of service as of 1 January 2018 may opt in to the BRS, but you have to make that decision by the end of this year. If you opt in, the government reduces your retirement annuity from 2.5% to 2% per year of service. However, you receive the TSP contributions outlined above. Members of the Reserve Components with fewer than 4320 reserve points likewise can opt in.
Should you opt in? Briefly stated, you will be better off with an opt-in if you know you will depart the military before the 20-year mark. If you have already decided that a lifetime military career is for you, then you are most likely better under the legacy retirement system with its 2.5% per year annuity. You should carefully consider the decision and one of our relationship managers at West Financial Services can help you make it an informed choice.
Like any other financial decision, change brings risk and opportunity at the same time. As with all of your financial decisions, talk through your options with the professionals at West Financial Services to determine which has the most value. Make the time of service to our country – a choice for which we are most grateful – one of honor and value.
Dr. Mark D. Troutman, CFP® is part of the West Financial Services professional network. He retired following a 28-year Army career and is presently a Visiting Research Fellow at the Institute for National Security Studies. Mark has teamed with W. Kirk Taylor, CFP® to assist in providing financial planning advice to national security professionals, including veterans and active duty military who are in, or are nearing transition to post federal government service.
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