Military Blended Retirement

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I don’t know if there is even a need to read my whole post…but it’s below regardless.


Recently, I read an article entitled, “New Military Retirement Plan – Military Bloggers Discuss The Pros and Cons”, about the military’s new blended retirement system and decided to test the claims made by their “experts”. More importantly, I’ve seen and heard many similar claims in other articles and by military members with no evidence provided. Let’s explore some of the claims made in the article.

Claim #1

“It shifts much of the responsibility for retirement income from the government to the servicemember and the market” -Spencer

While it is true that the new system puts  more responsibility on the service member,the burden is, in reality, not great. Firstly, it should be said that, regardless of what any employer (military or not) does or does not do for you, everyone is responsible for their own retirement future. Secondly, the government auto-enrolls new service members into the TSP, which reduces much of the burden or responsibility to the individual. The new blended system requirements states, that “all service members joining on or after January 2018 will be automatically enrolled into TSP at 3% of their basic pay…, with automatic 1% DoD contributions starting after 60 days” (Implementation Policy). In theory, when the government match begins, at the start of 3 years of service, service members will get a 3% government match and a 1% DoD contribution to their TSP. THAT IS MORE THAN 100% RETURN ON INVESTMENT RIGHT FROM THE START (If you contributed (pretend this is 3% of base pay) $100 the government will contribute something like $133…for those confused by my excitement. FREE MONEY!)!!! This is an easy thing to yell and get excited about, but let’s look at some actual numbers to clarify how it works. 

Some assumptions we can make:
-When auto-enrolled, all contribution will go into one of the TSP’s L funds (Lifetime funds)
-The L fund will have an average annual return of ~5.5% (a bit of an under estimate based on past TSP fund performance)
-For this example let us assume the individual planning for retirement is a new lieutenant joining in 2018 and serving for 20 years before retiring
-The age of the individual I use to compare the new and old retirement systems is 60 years old.

Lieutenant Example
Click the photo to see the numbers year to year or see the red/green table below for the important numbers.

The spreadsheet (above), and the image (below), make it quite clear that even with a (measly) 3% contribution, a 3% government match, a 1% DoD contribution, and a retirement pensionltautoentryexamplecloseup  the blended plan is the better option compared to the current plan. Additionally, the blended plan actually saves the government money. That being said, it is important to point out that although the blended plan is only better than the current plan by $37.2k, it has significantly less risk because the service member isn’t required to serve 20 years in order to get a portion of their retirement. It is also important to note a serious drawback to the Blended Retirement Plan; TSP contributions cannot be withdrawn (excluding a few exceptions) until the age of 59 1/2.

I would like to add, that I do think that the rest of what Spencer said was quite good and his website has a lot of great information that is certainly worth taking a look at. I recommend you take a visit.

Claim #2

“For service members planning on doing 20+ years, you have to ask yourself, ‘if DoD is doing this to save money, how could it possibly be good for me?'” -Rob Aeschbach

Alright, let’s spend 3 seconds analyzing this question posed by Rob. If we take a glance up at the previous claim’s answer, we can see, through the power of compounding interest, it is very possible for a service member to make money with the new system while serving 20 years, all while saving the government plenty of cash. But, when is it not beneficial?

Let’s go a few steps further and examine a few examples of when the new blended retirement system is better and when it is worse than the system currently in use.

Some assumptions we will make:
-The TSP fund is split between 80% in the C fund and 20% in the S fund, which has an average return of 9.75% (which happens to be my recommended distribution)
-Past savings are excluded from calculations
-The max contribution is $18,000 (set by the IRS)
-The ranks are somewhat arbitrary (plug-in your own projections if you want more accurate projections)

Example #1

First year plugged into the spreadsheet:2017
Age of that year: 30
Years of service at that time: 6
Rank at that time: Captain (O-3)
TSP Savings rate: 32%
How much of that bonus at 12 years will you save: 25%
How much of your pension will you save in retirement: 10%
When are you going to begin withdrawals: 60

In the end the service member gets about $50K more with the current plan over the course of their career, pension, and letting the TSP compound until the age of 60.

Test1.PNG

Example #2

First year plugged into the spreadsheet:2017
Age of that year: 26
Years of service at that time: 3
Rank at that time: 1st Lieutenant (O-2)
TSP Savings rate: 12%
How much of that bonus at 12 years will you save: 10%
How much of your pension will you save in retirement: 0%
When are you going to begin withdrawals: 60

In the end the service member gets about $643K more with the blended plan over the course of their career, pension, and letting the TSP compound until the age of 60.

Test2.PNG

Example #3

First year plugged into the spreadsheet:2017
Age of that year: 36
Years of service at that time: 11
Rank at that time: Major (O-4)
TSP Savings rate: 25%
How much of that bonus at 12 years will you save: 10%
How much of your pension will you save in retirement: 0%
When are you going to begin withdrawals: 60

In the end the service member gets about $155K more with the current plan over the course of their career, pension, and letting the TSP compound until the age of 60.

test3

As you can see from the examples above, based on different career paths, it does matter which system you decide to choose. Now, this isn’t every scenario and it certainly isn’t the most scientific approach, but it shows that different career paths do significantly impact final retirement savings. I highly recommend you take some time to open up the spreadsheet, plug in your current numbers and projected career, and see how the new system might affect you. You can find the GoogleDoc spreadsheet here. If you would like the Excel version instead, you can find that here.

Claim #3

As a financial planner, I’ll advise anyone who has a choice:

  • If you plan to do less than 20 years, and have a plan for when you leave the service… you should take it. Something is better than nothing.
  • If you plan to stay for 20 years… you should seriously consider not taking it. The only reason you might want to take it is if you’re in a highly competitive field and there’s a strong possibility that you’ll be forced to separate. However, your decision should reflect your readiness to make up that difference by engaging in a second career as early as possible.

-Forrest Baumhover

Step 1: don’t make such a big decision based on Mr. Baumhover’s assessment. If you plan to stay for 20, just do the math and make an educated decision. There are so many scenarios where not taking the new system could hurt you financially, and visa versa.

The biggest factor that all these calculations do not take into account is risk. If there is the slightest chance that you will not serve 20 years (and in some cases, even if you do) you should take the new blended retirement system because “something is better than nothing”…which actually means you can still see HUGE benefits with the new system.

Here is the order in which you should ask yourself which retirement system to take:

Question #1: Is there the slightest chance I won’t serve for 20 years?

Answer: If you are going to get out before 20 years of service take the Blended Retirement System, even if there is a slight chance.

Question #2: If I’m going to serve for 20+ years, is the current plan going to earn me more for retirement?

Answer: Do the math. Don’t just assume that the current system is better.

Don’t forget to ask yourself: Am I taking risk into account?

Always take risk into account. After doing the math, if the estimated savings are similar (this will mean different things for different people) I recommend you take the blended plan.  It reduces the risk and guarantees retirement benefits.

Those of you curious about how I allocate my TSP funds, those wondering if they should use a Roth or Traditional TSP, or just curious about what the L, G, F, C, S, I funds are, take a look at my post here where I give a quick explanation of what it all means.

Addendum: Recently I’ve heard people say that the current system is better because it has a larger pension. If you invest a portion of that pension you will see even greater returns, thus, making it that much better than the Blended Retirement System. Though true, the larger pension does not automatically make the current plan a better option. The Blended Retirement System will give you a bonus at 12 years of service, a pension after 20 years of service, and add up to 5% to your TSP for 20+ years, which has the added benefit of compounding during your years of service and into retirement. Also, if you max out your TSP contributions you will have more take home pay because of the government’s 5% match into the TSP. That is an additional 5% of base pay in your pocket each year, giving you extra money to invest outside of the TSP. All that to say, there are serious tradeoffs to each system. Take the time to do the math so you can make the best, most informed, decision.

 

Follow on Twitter @IncMillennial


Resources:

TSP Fund Performance
My Handy Dandy Spreadsheet [GoogleDoc] 
My Handy Dandy Spreadsheet [Excel]
BRS Frequently Asked Questions
Blended Retirement System [Information Website]

3 thoughts on “Military Blended Retirement

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  1. If I do the blended retirement plan, my understanding is that the government match will be towards a traditional TSP while the rest goes towards a Roth TSP (if I choose). Will there be a problem rolling over both types of TSP to my roth IRA later on in the future?

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    1. You are correct, all government contributions will go into your traditional TSP account even if you are contributing to a Roth TSP. Rolling your Roth TSP to a Roth IRA will have no issues or tax implications. Rolling a traditional TSP to a Roth IRA is possible. However, you will have to pay income tax on the amount rolled into the Roth IRA.

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