New Military Retirement System - Higher Pension or 5% 401k Match

[Michael in ABQ]

The military is implementing a new retirement plan (The Blended Retirement System - http://militarypay.defense.gov/BlendedRetirement/ ) starting January 1, 2018. Everyone who joins after that date will be under the new system, all of those with more than 12 years of active duty will stay under the old system, and anyone in between (myself included) can choose to opt in to the new system or remain under the old.

The main change is that instead of your pension being calculated as 2.5% of base pay for every year of service (20 years gets you 50%, 30 years 75%, and so on) it will now drop to 2.0% (20 years gets you 40%). In exchange for this lower pension the military will now provide a match in your Thrift Savings Plan (TSP) which is the federal government's version of a 401k. The match works out to 5% if you put in 5% and in my case will be vested immediately since I've got 14 years of service in the National Guard. There's also a small bonus at 12 years of service but I'm past that point so it doesn't make any difference. The military found that only 20% of people stay in at least 20 years to collect a pension so this provides some retirement benefits to the person who does just four years or even gets out with 15 or 16 years.

The National Guard and Reserves system works a little different from active duty in that you don't start collecting your pension until you turn 60, even if you retire at age 40 with 20 years. You do get the benefit of your retirement pay being calculated from your base pay when you turn age 60, instead of when you retire (so you get to take advantage of typical annual salary increases of 1.5-2.0%). The sum total of your active duty time during training and deployments is added to the time from weekend drills (which count for two days for each actual day) and divided by 365 to get your equivalent active duty years of service. In my case after 14 years of service including one shorter deployment I'm at the equivalent of just under 4 years of active duty. By the time I retire I will probably be somewhere between 5-7 years equivalent and probably an O-4 which has a current base pay of $92,218 at 20 years of time in service.

I am trying to determine if it's better to stay with the old system and collect a higher pension at age 60 or switchover now to take advantage of the 401k match and the growth on that portion that will occur between now and age 60. I am currently 33 years old and gross around $12-15k per year from my service depending on training requirements. So a 5% match would be about $750 extra every year with continued increases due to promotions and annual pay raises. However, I will probably retire in 10-15 years at which point I will no longer be making any contributions. My current TSP account has gone up almost 23% in the last year based on a simple allocation of 60% common stock, 20% small-cap, and 20% international (C, S, and I funds).

Assuming a more reasonable 10% return over the next 15 years at $800 per year and then holding that until age 60 gives me a projected future value of about $75,000. My tentative projection is that by the time I hit age 60 with continued increases in base pay under the current system my pension would equate to around $20,000 per year in future dollars. Dropping from 2.5% to only 2.0% would lower that to around $16,000. At an 8% discount rate that $4,000 in lost pension income has a present value of just $500.


Now that I've written this out and crunched the numbers it appears pretty obvious that the new system will be better for me as the matched funds will grow enough by age 60 to more than offset the lower pension. Plus, I'd rather have a pile of cash in my name then a pension obligation from a government that could very well go broke in the next 30, 40, 50 years requiring renegotiation of pensions; even a scared cow like military pensions.

[4tun81]

I'm not seeing the math on the 5-7 years in service equating to $20k/yr pension (high 3 system).

5-7*0.025*92000= 11.5k-16.1k

Most military I know effectively look at this switch as simply as if you are going for 20, keep the old system. This makes sense as the difference is extra 10% *avg of your 3 highest paying years (in your case Major). The new system cuts this to extra 5% *avg of all years contributed. Just based on that the old system is always better. The other thoughts I've heard are that the military folks are being pushed hard about this new retirement plan with mandatory savings and selling it as a benefit for members. Why? I'm going to guess it's not so overall payments to members will go up.

You are obviously in a special case as you can contribute longer into the TSP and then get some growth on your (matched) contributions. I tend to think 10% is far-fetched, although I'm conservative. That said, I'd add that $4000/yr is actually worth $100,000 based on the 4% rule which is 33% (25k) more than your contributions at 10% growth will get you.

Yes, govt pension may get beaten up. Same with the market. The differences as I see them are relatively small and you are going to need more for retirement depending on your cost of living. Either way with all the thought going into this game you are winning it.

[Nords]

Michael, your logic is sound yet there are a couple of details which need clarifying.  The Reserve/Guard pension system is horrifyingly complicated and urban legends abound.

The National Guard and Reserves system works a little different from active duty in that you don't start collecting your pension until you turn 60, even if you retire at age 40 with 20 years.

You're probably aware that after 28 January 2008, every deployment to a combat zone of 90 days (during a fiscal year) means that the pension starts three months earlier.  Tricare is still active at age 60, not earlier, but it's possible to start receiving a pension in your late 50s or even mid-50s.
For those who've never heard of this before, here's a post with the nitty-gritty details:
https://themilitarywallet.com/national-guard-and-reserve-early-retirement-age/

You do get the benefit of your retirement pay being calculated from your base pay when you turn age 60, instead of when you retire (so you get to take advantage of typical annual salary increases of 1.5-2.0%).

In addition to using the pay scales in effect at age 60, when you "retire awaiting pay" then your longevity in your rank accrues during the years up to the pension-- just as if you were on active duty the entire time.

"Retired awaiting pay" also means you could be recalled to duty during a total mobilization (which last occurred during WWII).  That's why gray-area retirees are entitled to the pay tables in effect when their pension starts, and at the higher longevity. 

By the time I retire I will probably be somewhere between 5-7 years equivalent and probably an O-4 which has a current base pay of $92,218 at 20 years of time in service.

And if you've already maxed out the pay at your rank when you file for retired awaiting pay then there's usually no improvement.  But if you make O-5 then there's a little longevity bump at 22 years of service, even if you file for retired awaiting pay at 20 YOS.  If you happen to reach the O-6 rank then there's a very nice bump at >30 YOS.

It's not much help now, but the pay tables could change the longevity pay boosts by the time you reach age 60.

The sum total of your active duty time during training and deployments is added to the time from weekend drills (which count for two days for each actual day) and divided by 365 to get your equivalent active duty years of service.

To be excruciatingly technically correct, the divisor is 360 (not 365).  All military months are only 30 days long.  This is in the procedure for calculating a Reserve pension (in the Financial Management Regulation, DoD 7000.14-R Volume 7B.
http://comptroller.defense.gov/Portals/45/documents/fmr/Volume_07b.pdf

I am trying to determine if it's better to stay with the old system and collect a higher pension at age 60 or switchover now to take advantage of the 401k match and the growth on that portion that will occur between now and age 60. I am currently 33 years old and gross around $12-15k per year from my service depending on training requirements. So a 5% match would be about $750 extra every year with continued increases due to promotions and annual pay raises. However, I will probably retire in 10-15 years at which point I will no longer be making any contributions. My current TSP account has gone up almost 23% in the last year based on a simple allocation of 60% common stock, 20% small-cap, and 20% international (C, S, and I funds).

Assuming a more reasonable 10% return over the next 15 years at $800 per year and then holding that until age 60 gives me a projected future value of about $75,000. My tentative projection is that by the time I hit age 60 with continued increases in base pay under the current system my pension would equate to around $20,000 per year in future dollars. Dropping from 2.5% to only 2.0% would lower that to around $16,000. At an 8% discount rate that $4,000 in lost pension income has a present value of just $500.

Now that I've written this out and crunched the numbers it appears pretty obvious that the new system will be better for me as the matched funds will grow enough by age 60 to more than offset the lower pension. Plus, I'd rather have a pile of cash in my name then a pension obligation from a government that could very well go broke in the next 30, 40, 50 years requiring renegotiation of pensions; even a scared cow like military pensions.

Yep.  In addition, the likelihood of a Reserve or National Guard servicemember staying for 20 good years is even smaller than for active-duty servicemembers. 

This post has quotes on the actual statistics from the DoD actuaries.  The odds of reaching 20 are more like 1 out of 7 or even 1 out of 8.  Your priorities could change a lot in the next decade.
http://the-military-guide.com/tricky-details-military-blended-retirement-system/

[Michael in ABQ]

I'm not seeing the math on the 5-7 years in service equating to $20k/yr pension (high 3 system).

5-7*0.025*92000= 11.5k-16.1k

Most military I know effectively look at this switch as simply as if you are going for 20, keep the old system. This makes sense as the difference is extra 10% *avg of your 3 highest paying years (in your case Major). The new system cuts this to extra 5% *avg of all years contributed. Just based on that the old system is always better. The other thoughts I've heard are that the military folks are being pushed hard about this new retirement plan with mandatory savings and selling it as a benefit for members. Why? I'm going to guess it's not so overall payments to members will go up.

You are obviously in a special case as you can contribute longer into the TSP and then get some growth on your (matched) contributions. I tend to think 10% is far-fetched, although I'm conservative. That said, I'd add that $4000/yr is actually worth $100,000 based on the 4% rule which is 33% (25k) more than your contributions at 10% growth will get you.

Yes, govt pension may get beaten up. Same with the market. The differences as I see them are relatively small and you are going to need more for retirement depending on your cost of living. Either way with all the thought going into this game you are winning it.

I'm taking into account inflation in military pay over the next 27 years at an estimated 1.5%/year. That's why I stated that it would be around $20k in future dollars.

[MrStash]

I'm in the same dilemma. 1LT, 5 yr TIS. I took the Blended Ret. System course which is required to switch to the new system just so I have freedom of action. For a while I was certain I would opt in to the new system, but after thinking about it, 1.) they are pushing this way too hard, 2.) By the time I'm 60, I'll have at least 2-3 million (maybe more) in 401ks and other investments directly tied to the market, in other words, way more than I could even need, and running my cash flow risk high in case of a significant, badly timed downturn. An extra, say 75-100k in TSP matching + growth will not make much difference as a % of the total investments. But if I make it to O5/O6, the extra .5 in the multiplier would result in a significantly higher pension which is guaranteed and adjusts for COLA. It would function as a higher safety net so I could keep my other investments in more aggressive investment options which would statistically result in additional returns even during retirement.

So at this point I'm leaning towards staying with the old system.

[Nords]

1.) they are pushing this way too hard, 2.)
So at this point I'm leaning towards staying with the old system.

Humans make decisions from math & logic, but there's also a large component of behavioral financial psychology.  An example is the perpetual debate of paying off the mortgage-- some do the investment math and take the risk while others "feel better" being totally debt-free with less risk.

Skepticism is understandable, especially because DoD is indeed saving their fair share of the money on the new system.  DoD may be a non-profit, but it's not a charity.

Yet it's also possible that their hard push is simply due diligence:  making sure Congress knows that DoD did the best they could to inform everyone of their options.  You know that in 2019 at least one organization is going to file lawsuits accusing the federal govt of not adequately informing servicemembers & families of the reasons to opt in to BRS, and tragically allowing people to miss the deadline.  I have a few readers today who say that they don't invest in the TSP because the military never explained it to them well enough.

2.) By the time I'm 60, I'll have at least 2-3 million (maybe more) in 401ks and other investments directly tied to the market, in other words, way more than I could even need, and running my cash flow risk high in case of a significant, badly timed downturn. An extra, say 75-100k in TSP matching + growth will not make much difference as a % of the total investments.
... the extra .5 in the multiplier would result in a significantly higher pension which is guaranteed and adjusts for COLA. It would function as a higher safety net so I could keep my other investments in more aggressive investment options which would statistically result in additional returns even during retirement.

Math & logic.  Absolutely.  You'll reach financial independence even without the pension, right?

But if I make it to O5/O6,

Here's the potential logic flaw.  Way too many people make the implicit assumption that they'll get to 20.  Yet the data shows how statistically unlikely that is, and people have a hard time believing that they'll be a statistic.

The risk of staying with High Three is cliff-vesting at 20.  Statistically, you'll end up with nothing.  Individually, you risk being forced to gut it out to 20 while risking your health physically, emotionally, and even mentally.  (Again, this is not just my personal experience but also what readers tell me.)  If you're willing to accept that risk-- and especially if you'll reach FI without High Three-- then you're making an informed choice.

Or you could take less risk now and less risk later.  Sort of like paying off the mortgage.

Looking back 20-30 years, I would've gone to the Reserves around my 10-12 year point-- when we started a family and my military staff job was unbelievably sucky.  Life would've worked out about the same, and so would the money.  Ironically today I can see that I would've made *more* money by going to the Reserves and having the time to develop a civilian career, either corporate or freelance.  But instead I gutted it out-- and I saw the health effects.

Yet I don't have to look back 20-30 years, because today there's another Nordman in her 20s who's facing the BRS decision too.  I've advised my daughter (and my son-in-law) to take the BRS for the career flexibility, and also because their high savings rate tells me that they'll achieve FI without any pension at all-- let alone having to take the risk of gutting it out for a High Three pension.

If you're going to stick with High Three-- either logically or emotionally-- then have a plan for the statistical possibility that you won't make it to 20 in the first place.

[One Noisy Cat]

Just to throw my two cents in about not making it to 20, I saw a couple people while I was in the USCG reserve on Long Island, NY not make it. One was an E-8 with 18 in. He got transferred to Governor’s Island in New York City and said “forget it, that place is a hellhole”. He quit, to our amazement. Another was an E-4 I drilled with who had 15 years, just got tired of it. A third who made it, just barely, was “my cousin” (we had the same last name but aren’t related) who with 19 years had his company offer him a job in the State of South Carolina or the State of Unemployment. He took the former and commuted once a month, staying with his daughter who still lived on the island.

   I certainly don’t know which is better but there is a strong case for getting the sure thing.