A loyal reader and frequent commenter Dave asks:
Ok, I’ve been following your BRS posts and I’m sort of tracking but still confused on what I should do. I’m a 6 year (as of this month) O3 (as of Jan 15) that contributes 15% to roth TSP with just shy of $40k in. I plan to stay a full 20, heck even longer if I still like the job, but who knows what the future holds. Should I stick with the traditional system or hedge my bet of staying 20 and go BRS?
I reached out to Dave for some details of his expected promotion dates and made this excel spreadsheet using the DFAS Base Pay numbers and his predictions. Since Dave already stocked away $40k into TSP and has made a pledge of about 15% of base pay in his future contributions, I already knew that BRS would be a good consideration for him.
With his contributions at 15% of base the new BRS plan would set him up with a cool $430,868.71 at 20 years assuming a modest 6% return. The match would account for $56,080.87 which is 5.5 years worth of lost pension compared to the old 2.5% a year system. When you subtract the $188,189.14 that you put in over those 20 years of your own TSP contribution, the earnings and match make up for 24 years of lost pension. This is due to the magic power of compounding earnings, which is even more powerful with the matched funds over 14 years.
|Year||AD Years||Rank O-||Total Match||5% a year||TSP Contribution|
Now beyond 20 years is when the match business pays off. If you are 50 or older you can put in an extra $6k on top of your $18k. As an O-6 with 26 years the match is a nice $6,526.62 a year. If Dave was to retire at 26 years the Army would have given him a total of $91,610.71 worth of match which is 5.4 years worth of the loss of $16,969.21 in pension per year.
The other upside is if Dave was to not complete 20 years he would have up to $56,080.87 as a sort of an insurance policy for not hitting 20 years. Now it may suck that you are getting $67,876.85 a year with BSR instead of $84,846.06 with the old system, but you are covered for the separation before hitting the 20.
Certainly not good choice in switching to BRS if you do not want to handle your own retirement investing. There are lots of assumptions here, but best situation is with Dave’s 15% TSP contributions with match of 5%. We also assume a TSP gains of 6%, this would would account for 24 years worth of pension losses, so after 24 years of retirement, he would be losing out. If you go for the BRS, you know you got to baby sit this money well into your retirement in order to make it worth while. You could just be very unlucky and consistently pick the wrong funds and actually loose money. This is quite hard to do in the long run as all the TSP funds have positive growth over 10 years.
On the flip side you do get the money if you decide to leave before the 20 years. The question is, are you willing to babysit this money well into your 80s? The old system would just be a sweet check every month without thinking. The $10,158 loss of pension is not an insignificant amount of money.
My advice for Dave is to think about maxing every year in TSP then it is certainly worthwhile if he switches. If you also ramp up to $24,000 for your catch up at age 50 then your earnings would account for 30 years worth of lost pensions. The data can be found here. Again it’s always the dreadful disclaimer that past performance doesn’t indicate future results.
Risk tolerance: BRS is more risky
Risk is inherent in taking on the TSP, your earnings will depend on how you allocate your funds. You can trade risk for low returns with the G fund, but ultimately the over all risk is very much midigated by the fact it is esssentialy 5 index funds (the life cycle funds just being pre set ratios of GFCSI funds). If you don’t plan on making any contributions into TSP, and you can’t stomach any loss at all (sometimes for several years), then BRS is NOT FOR YOU. Just take that sweet pension check after 20 years, and have a warm glass of milk before your nap at 1300 everyday in your rocking chair.
If you think you can do better, and historically you will do better than 6% when the money is invested in a broad index fund. Then the BRS is a good way to trade the risk of premature separation for the benefit of volatility and the potential YOLO gains of the market. If you some how stayed in more then 20 years (83% get out before 20) then you get the added bonus of that sweet mindless pension check.
You choose your level of involvement in your own personal retirement with BRS. If you don’t switch over and don’t do TSP, you also assume and rely on the pension system being well funded and supported in the future. Keep in mind that this is mostly out of the control of service members and in the hands of the mindless civilians.
Good Luck out there,