With the taxes done and filed this week, we have naturally been talking about finances and inevitably about retirement and what we should be doing about it. As you know those who joined the military after 2006 need to decide about opting into the new retirement plan with 5% matching TSP along with 20% cut of pension. Those new baby LTs are really confounded on what to do, so like a good junior officer I went to the senior officers and asked what they would do. Keep in mind these old timers have no skin in the game and are on there way to their traditional retirement of 50%+ base pay of their last highest 36 months of base pay. So I asked a retired O6 Captain that did 30 years making 75% of base in pension, and an O5 on active duty who has done 15 years. They both brought a very interesting perspectives that company grade officers never look at.
I am writing this from the perspective of a staff corps officer assuming you come in as a O-3 and promote which is a good possibility as a staff corps officer. I am not a math major or any type of financial planner, but I write these articles to start the conversation among the Staff Corps officers that will have to make these real decisions in 2017 on how they want to retire with the new plan or the old retirement plan. They also need to decide on getting out or retirement after 20 to 30 years. So consider this an addendum to the previous post here and here.
First off I was wrong in previous articles of a 1% plus a 5% to make a total of 6% match. However one article here says 6% and here says 5% max, a lot of the blogs are confused as well like this one here says 5%. I went ahead and recalculated everything in my 30 year Blended vs Trad Spreadsheet this shows 1% match up till year 5 where the 5% kicks in. The advice of the O6 is that my 20 year retirement plan does not take into account about the fact many stay into their 25 year mark, and 30 years for himself. I did not account for the 2.5% bump per year after 20. I also never considered that at 50 years old it may be nice to stay in for the sweet O6 pay which is a very competitive with private practice at this point. Why I never thought of this I do not know, so assuming retirement after 25 years or 30 we are looking at this pay chart:
|Year to retire||
(50% to 75% base)
(40% to 60% base)
Keep in mind the retirement is based on last 36 month base pay and then additionally 2.5% of base for each year served. so 20 years is 50% and 21 years is 52.5% hitting 75% at 30 years!
After a 120 min phone conversation with my O-5 friend who reiterated the possibility of staying past 20 years. This O5 first of no joke, he’s asian and a prior math teacher and math major. So I am sure of the math, and he wanted me to seriously consider that possibility of the 5% match and its earnings over a 20-30 year period. He says my model is unrealistic not considering the rule of 72. Where at 7.2% return (I hear the snickering already) you will double your investment principal every 10 years. Yes we are right to think that a constant 7.2% is no longer easily achievable without being back the 1980s. So I went ahead and recalculated the losses of the new plan divided by simply the match of TSP by year:
|Year Retired||Years till 80||Retirement time loss||Matching TSP||Delta||Loss/Match|
In this chart I considered age till our expected
death end of retirement at 80. When you retire at 50 you have 30 years of retirement thru when you retire at 60 with 20 years of retirement. If the chart is correct you need to make 3.57 times what you got with 5% TSP matching in the new plan to make up for what you lose with the 20% paycut. According to the O5 that is not a problem because you got 3o years to do it, thats 3 doublings at 7.2% return. This would mean your $72,715.10*2*2*2=$581,720.80 this would more than make up for the 20% paycut. He also made the point that this matching amount is in action every year that you are in active duty as well. looking back at the old chart:
|Year Out||New Cumulative TSP match|
|1||$0 (need 2 years to be vested)|
|2||$0 (need 2 years to be vested)|
|3||$1,490.40 (5% match starts now)|
We both agreed that the 7.2% is tough to do just using the 5 funds that TSP provides so lets try with the pretty much promised 2% return in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security. With 2% we stand to double our money every 36 years and in this situation we get less with our TSP match than with the old retirement plan, and of course if the market goes completely upside down you stand to loose all of your match. It’s really on you to invest correctly if you choose the TSP match blended plan. According to our enlisted counterparts this type of return is a lot of work and would require 11% return!
Who are we kidding though, with the new plan you still get your 40% of your base pay at 20 years so back to the conversation with the retired Captain. This is just some sort of mental exercise as in the end you will have a nice retirement after your 20 years of dedicated service. Look at the 30 year situation, you just need to double your money in your 10 years of retirement to break even with the new plan. Lets say there is a good 7.2% return on investment every year we will hope to double money every 10 years, so retirement at 20 years of service would mean 3 cycles of doubling, at 25 years we have 2.5 cycles and at 30 years we have 2 cycles of doubling before your 80th birthday:
|TSP Match at retirement time||Total Cost of 20% cut till age 79||What TSP matching did not make up for||7.2% return every year in some fantasy world||How much more money you would be making with new blended retirement|
So here are your goals, you can be a lazy ass and stick with the old retirement and you can mindlessly make your sweet pension of 50+% of base pay till your dead you don’t even have to put a cent into your TSP. However if you already put a considerable $18,000 into your TSP (which you already should), and believe it is at all possible to make your 7.2% return you are sure to make more money with the new 5% matching TSP blend. What is your level of comfort in managing your money? The O5 pretty much said he wished he had a choice for the new system as the return is more favorable with matching cash in hand. So what would it take to make the new investment worthwhile? We then apply the 72 rule to see what rate of return we need to make up for the losses:
|Retirement Yr||TSP Match||Cost of 20% cut till 79 yo||Cut/TSP||Time to earn till 79||2X cycles needed||Years to double money||Rate needed in %|
According to the O5 and this calculation you just need to have a return of 5.5% to break even at 20 years, 4.3% at 25 years, and 3.5% at 30 years using the 72 rule. Which is doable, but never a given like the old system. The best situation is to marry another Active Duty member, have them do the traditional and you do the new plan. Then compare the results after 30 years of active duty. I whent ahead and did this 8 years ago so I could have the best of both worlds, be sure to check this site in the year 2043 for a comprehensive write up.
If your in the r/investing camp then go with the nice vanilla 50% base old plan, if your part of the r/wallstreetbets crowd want you can take out the entire TSP amount and do you YOLO bets all day long. The one last advantage is you always have the TSP loans to take up to $50,000 from your TSP before you retire.
Ether plan you go just make sure you max out that $18,000 yearly TSP contribution, even as an E1 I would mess hall and green line every day to achieve this! The Roth TSP being the best deal in town with no taxes and very low expense ratio of 0.01% not found in the civilian world (Vanguard Admiral S&P 500 the lowest at 0.05%).
Thoughts? Comment Below.