After many hours of tedious excel work (not to brag or anything), I have a tool for you to use to decide whether or not to opt into the new military blended retirement system. The two following spreadsheets show an O-3 and E-5 (click on links to download spreadsheet) with five years of service and what they can expect to receive from the old and new retirement systems. I have not locked either spreadsheet, so that you can go in and play around with them to suit your needs. The first sheet in each file is a calculation of the benefits you can expect to receive under both systems and the second sheet is a pay chart which calculates what base pay will be each year in the future based on a given average rate of pay raises. I also used the pay chart calculator to accurately reflect what the base pay for each service member would be in each given year of service.
The spreadsheets are fairly interactive, though they are not professional programs by any means. On the first sheet in each file you have the ability to change the Investment Growth Rate, Inflation, and Contribution rate for the top chart; for the bottom chart you have the ability to change the Investment Growth Rate and Years to Grow.
There are few key assumptions in the spreadsheet I made. The first is that our base pay will grow at average annual rate of 2%. The next assumption and likely most important is that when comparing the value of the old pension versus the new pension in conjunction with your TSP there will be no inflation. This is of course an unreasonable assumption, but one I had to make because I could not find or come up with formula that easily accounted for this variable. Thus the numbers for Government Match TSP Value, BSR Pension Value, and Old System Pension Value are back-of-the-napkin math at best. This does not completely discount these numbers, instead please use these values as a basic starting point in making your decision whether or not to opt into the new system.
The gist of the blended retirement systems is that you will receive both a pension and a defined benefit plan. If you opt into the new plan you will receive a multiplier of 2% vice the 2.5% under the old system for every year of service. For instance, at 20 years of service under the new system you would receive a yearly pension equaling 40% of the average of your 36 highest months of pay instead of 50% of the average of your 36 highest months of pay under the old system. The benefit of the new system which is supposed to make up for this difference is that you receive a matching contribution in your TSP from the government as follows:
In addition, the government will also pay you at 12 years of service a bonus of 2.5 months of basic pay for your agreement to serve an additional four years.
This new system has its benefits and disadvantages. The main benefit is that if you do not reach 20 years of service you have some amount of retirement savings to show for your time in the military. The new continuation pay at 12 years of service is also a nice added bonus. In addition whatever you contribute to your TSP will tax-deductible, though I did not factor the tax savings into these calculations, they should also be taken into consideration. The key disadvantage is the 20% pay cut you take in your retirement. The second disadvantage is that any gains in your TSP are at the whim of the free market. This of course could be both good and bad, and if the markets do perform at or above their historical norms (5-7% annual rate of return), there is a good chance the new system may offer more money overall in the long-term.
With all this being said the new system does not make sense for everyone. The government knows this as well and has limited those who can opt into the new plan. For example, military members with more than 12 years of service are not allowed to participate in the new program. Sailors within a few years of the 12-year mark may also not have enough time left to receive enough matching contributions from the government in order to make up the difference if annual rates of return are expected to be near their historical norms.
After crafting the excel spreadsheets, I was actually quite surprised that a service member at 5 years of service would actually be slightly better off under the new system if annual average returns are around 5%. This will become more of the case with service members with less time in service and the opposite for members who are more veteran. My conclusion after conducting this study is that I myself will likely opt into the new system as it offers benefits equal to and possibly greater than the old system. Furthermore, the new system also offers a level of independence because it allows you build retirement savings faster than on your own due the government’s matching contributions, and you can then take those contributions with you when you leave the military before completing 20 years of service. I hope the work I have done here helps in your coming decision this year, because I know it is a hard and stressful one which should be given much thought.
Dough Nordman over at the Military Guide has a good post with an excellent spreadsheet of his own on this topic. additionally he has another great post discussing the value of how much a military retirement is worth. Both these posts are worth your time when considering whether or not to opt into the new blended retirement system. The rest of his blog also offer a variety of great content which is worth a read.
If you have any suggestions on how to improve my spreadsheet or post in anyway please feel free to comment on the blog or message me, as all suggestions are welcomed.
- Be sure to note that the government’s matching contributions can only be deposited into the pre-tax TSP account, not your ROTH TSP. From what I read in the governments guide-book on TSP , the government will match your contributions to your ROTH TSP, but those matching contributions will be deposited into your pre-tax TSP. This is because if the government’s matching contributions were deposited to your ROTH TSP you would never pay taxes on that money.
- A final IMPORTANT note, I completed the official blended retirement system training today (Course J30P-US1332 on Joint Knowledge online) and discovered the DoD has created a calculator, but I cannot find the link anywhere on the blended retirement system website. It does the same my spreadsheet does, but with some nicer graphics, so be on the look out for that and I will be sure to update you when it comes out.