BRS Part 5: Insurance For Premature Separation

golden-ticket

I got my BRS golden ticket today in my work email. Here is the excerpt that makes me feel special:

Those members with fewer than 12 years of service as of December 31, 2017, have the option of switching to the Blended Retirement System if they so choose.   Our records indicate you will have the opportunity to make this choice because you will have fewer than 12 years of service as of December 31, 2017

For those that did not get the email, then too bad your stuck with the old retirement system. You have no choice but to take the Clift Vested 2.5% for each year served in the military, starting at 20 years of service:

You may be aware that on January 1, 2018, the Department of Defense will introduce a new military retirement system known as the “Blended Retirement System.” Anyone who joins the military from that date onward will be covered by the new retirement system, while anyone serving prior to that date, including you, will be grandfathered under their current retirement plan.

Now the scary part:

The first opportunity to elect to enroll in the Blended Retirement System will be on January 1, 2018. You will have the entirety of 2018 to make your election.  However, once you enroll in the Blended Retirement System, that election is irrevocable.

However there is a clause for the very lazy that simply don’t give a crap about getting old:

While you will have a choice to make, it is important to note that you will remain covered under your current retirement plan unless you choose to switch. You will not be automatically moved to the Blended Retirement System.

This mass email has prompted many questions from the fellow chosen sailors that are in the magic “less than 12 year mark on 31 Dec 2017”. I decided to look at the data in a different way. I recompiled the data to see each exit year separately as a function of years served and compensation. I took two individuals to compare them. We have a O-4  who is newly promoted and will hit his 6 year mark on 1 Jan 2018 and we compare it to an O-4 that will hit their 10 year mark on 1 Jan 2018. According to this Navy website the TSP match will immediately go to 5% for those members opting in with over 2 years of service in 2018.

The data can be found Here. It is the same nominal promotion scale related to the 2016 Pay Charts from DFAS.

The O-4 with 10 years on 1 Jan 2018:

Years @ RAD TSP Match Totals New Pension Old Pension Difference Years of loss in TSP
10 $4,266.18 $0.00 $0.00 $0.00 N/A
15 $26,576.28 $0.00 $0.00 $0.00 N/A
20 $54,004.50 $46,541.28 $58,176.60 $11,635.32 4.6
25 $84,484.26 $59,222.59 $74,028.24 $14,805.65 5.7
30 $91,010.88 $76,212.70 $95,265.87 $19,053.17 4.8

In this situation the O-4 with 10 years is covered for losses up to their 19.999th year of up to $54,004.50 in cumulative TSP matches. Even if the member decides to leave at the 10 or 15 year mark they will have $4,266.18 and $26,576.28 in matches respectively. This is because the program started on their 10 year mark and the $4,266.18 accounts for just one year of 5% match. Whereas the service member would of had nothing with the old system, they will have something for retirement if they don’t hit 20 years.

However, there is quite a cost for this insurance if the service member makes it to 20 years and beyond. At 20 years of service they will get only $46,541.28 a year in pension (only 2% per year) where if they had stuck out with the old pension they would have gotten $58,176.60 (2.5% per year), a yearly loss of $11,635.32. However the matching TSP contributions of the new system would have topped $54,004.50. This is the equivalent of 4.6 years of loss pension. A better way to look at it is, you let Uncle Sam pay you 4.6 years of retirement pension losses in advance. This is also more than a single years worth of the new pension, slightly less than the old pension. Also don’t forget you get 40% of your base pay every month on top of that, hence the name: Blended Retirement System.

The O-4 with 6 years on 1 Jan 2018:

Years @ RAD TSP Match Totals New Pension Old Pension Difference Years of loss in TSP
10 $19,003.14  $0  $0  $0 N/A
15 $41,304.24  $0  $0  $0 N/A
20 $68,741.46 $46,541.28 $58,176.60 $11,635.32 5.9
25 $99,221.22 $59,222.59 $74,028.24 $14,805.65 6.7
30 $105,747.84 $76,212.70 $95,265.87 $19,053.17 5.6

What is even nicer is switching to the BRS with even less time in the Navy on 1 Jan 2018. This means you have more time receiving the matching funds. Keep in mind the match cuts out after 26 years of service. In this case the junior O-4 in question will have 4 more years of match due to less service time in 2018, He gets 4 years of the 5% match. This still accounts for 6 years worth of perceived losses with the new pension.

BSR Match Still Not for Everyone:

The new BRS is still not for everyone, you must participate in TSP for the match, you must contribute your own money into TSP for the military to match it. Since only 41.5% of you guys participate in TSP, this whole thing would be pointless to switch to. If you want a mindless check in the mail at 20 years, then stick with the old system and get the full 2.5% per year served for base pay.

Now we are looking at contributions alone, along your own contributions of $18,000 and a catch up of $6,000 at age 50 we can put over $24,000 as a very senior O-6 you can make a lot more money with compounding earnings. That would all be up to you. No answer on if the matching 5% would be designated as Roth or Traditional TSP.

Now even if you kept all the money in G Fund you would get a nice insurance from “Premature Separation” from the Navy. Either medically separated, being a dirt bag, or even death before 20 years, you and your estate would have a modest pile of money. If you make it to 20, the cost is a some what significant cut of 20%, However you have around 5 years of TSP contributions worth of losses. The real question is if you want the money now or the money over time. Do you have the financial discipline to not blow a giant pile of money you spent the last 30 years saving up for? The classic lottery winner lump sum vs. annuity dilemma. Don’t worry you have more than a year to decide on this, but I hope people consider this as a gift of choice rather then being burdened with making the wrong choice.

-Derp

3 thoughts on “BRS Part 5: Insurance For Premature Separation

  1. joe says:

    quick question i cant find the answer to: Does the 5% only apply to traditional IRA? thats what i assume. Not that big of a deal but still not ideal for me, as I am an O-2 as well and still deciding.

    • uiucderp2011 says:

      no official news on how the match will be designated. Hopefully part 2 will go into detail of how the match will be designated.

  2. Paul says:

    I’m looking forward to the release of some official calculators. I also made an excel sheet to run some numbers and when I accounted for the investing of the 5% match at a 6% return, I actually came out with more money under the BRS. Of course I’ll be double and triple checking my math as the decision gets closer but as of now, I’ll be making the switch. Cheers.

Leave a Reply

Your email address will not be published. Required fields are marked *