Run the numbers on both GI retirement options
Effective Jan. 1, the uniformed services have a new retirement system, the Blended Retirement System. BRS is significantly different than previous retirement systems, as it is a combination of a defined-benefit plan and a defined-contribution plan. Prior to this year, the uniformed services had exclusively used defined-benefit systems (i.e., the member does not contribute cash to his or her retirement). Under BRS, a member’s annuity will be based on a combination of the government’s defined benefit (the formula: 2 percent times years of service times the average of the highest 36 months basic pay) and the amount of funds accumulated in the member’s Thrift Savings Plan account. The TSP portion of the annuity will vary depending on the amount the member invested and the performance of the underlying investments.
Who is eligible to opt in to BRS?
Active-duty members with fewer than 12 years of service as of Dec. 31, 2017, can either remain in the current defined-benefit system (the formula: 2.5 percent times years of service times the average of the highest 36 months basic pay, referred to as High-3) or opt in to BRS. For reservists, members with fewer than 4,320 retirement points as of Dec. 31, 2017, can remain in the current system or opt in to BRS. Years of service for reservists are determined by dividing the amount of accumulated retirement points by 360.
Should I remain in the current system or should I opt in to BRS?
Both retirement systems are excellent, and will provide a solid lifelong financial foundation for you and your family. To assist you, the undersecretary of defense for personnel and readiness, led by Office of the Deputy Assistant Secretary of Defense (Military Personnel Policy), in partnership with the uniformed services, has developed and fielded myriad educational programs. A good starting point is the Blended Retirement Resource Center (https://militarypay.defense.gov/). Of particular note are the extensive training courses that have been fielded the past two years. Working with Joint Knowledge Online, there are numerous courses members can take at their own pace. For example, in June 2016, the leadership course was released, providing essential information to leaders at all levels of command about the basics of BRS. In January 2017, an in-depth course was fielded with explanations on High-3 and BRS options, including several examples of personnel at various stages in their careers. In 2017, the Mandatory Opt-In course was fielded, ensuring members had the requisite knowledge to decide if BRS was right for them.
The website also has a “5-Step BRS Checklist to Success.” Item 3 encourages members to use the online calculator, fielded in June 2017. The calculator (https://militarypay.defense.gov/Calculators/BRS/) enables members to compare their projected retirement annuities under each retirement system. Members should first take the Mandatory Opt-In Course and familiarize themselves with the assumptions. The calculator enables users to run many scenarios, changing variables such as the TSP contribution percentage, TSP return rate, life expectancy, TSP withdrawal age and promotion dates. Each scenario projects the future and present value of each retirement system.
The fourth item in the checklist encourages members to seek financial counseling before making your decision. The Defense Department and the uniformed services have counselors available to assist you in understanding the financial implications of your decision. They can also assist members in developing a financial plan to account for expenses, minimize bad debt and develop a systematic savings and investment program. Members can also seek advice from sources outside the DOD, like your current financial adviser or another financial organization that works with the military community.
The final decision.
Under certain scenarios, the BRS is better financially than High-3. Under other scenarios, the High-3 annuity exceeds BRS. Should I opt in? While every member is different, probably the most important variable is whether you intend to serve 20 or more years in the active or reserve component. If you plan on leaving before 20 years, you should strongly consider opting in. If you opt in, you will receive government TSP matching. (A 1 percent government contribution is automatic, and you can receive up to an additional 4 percent if you contribute at least 5 percent of your basic pay into TSP.) This option allows you to keep some government funds for your civilian retirement one day.
However, if you plan on serving 20 or more years, you should carefully consider remaining in the High-3 system, as the BRS annuity is 20 percent lower than High-3. If you choose to remain in the High-3, you can still invest in TSP without any matching benefit, but after 20 years you will have both a higher annuity plus your TSP contributions when you retire.
Steve Galing is a relationship manager for AAFMAA Wealth Management & Trust LLC. The views expressed are his own. Information provided by AAFMAA Wealth Management & Trust LLC is not intended to be tax or legal advice. Nothing contained in this communication should be interpreted as such.