Schwab $300 for $25k, Am I a Sucker?

BLUF: Dave has the right idea for $100 for $1k for a better return at 10% return. There is alot of anxiety to lock up $25k for a year, but 1.2% is still pretty good on $25,000 if you plan on putting it into Schwab’s new super discount funds.

So the deal with Schwab is still on, but after talking to the Customer Service Rep, turns out I need to maintain the balance for a whole year or they will claw back the bonus! The link for the offer is here. The fine print is here:

Offer valid for individuals who do not have a Charles Schwab & Co., Inc. (“Schwab”) account (other than a Stock Plan Services account) and who open and make a qualifying net deposit into an eligible retail brokerage account within 45 days of enrollment in the offer. Net deposits are assets deposited into the enrolled account minus assets withdrawn from the account and transferred out of Schwab. Only outside assets new to Schwab qualify; assets transferred from affiliates other than Schwab Retirement Plan Services are excluded. Net deposits will be calculated as of the 45th day after enrollment, and the cash bonus will be credited to the enrolled account within approximately one week. For taxable accounts, you must maintain the net deposit amount (less any market losses) at Schwab for at least one year or Schwab may charge back the cash bonus.

Schwab reserves the right to change the offer terms or terminate the offer at any time without notice. The offer is limited to one per account, with no more than one account enrolled per client. The offer does not apply to accounts managed by independent investment advisors, the Schwab Global Account™, ERISA-covered retirement plans, certain tax-qualified retirement plans and accounts, or education savings accounts. The cash bonus, when combined with the value received from all other offers in the last 12 months, may not exceed $5,000 per household, as defined in the Charles Schwab Pricing Guide for Individual Investors. The offer is not transferable, saleable, or valid in conjunction with certain other offers and is available to U.S. residents only. Employees, contractors, or persons similarly associated with Schwab or a Schwab affiliate; their spouses; and employees of any securities regulatory organization or exchange are not eligible. Schwab may decline requests to enroll in the offer at its discretion. Other restrictions may apply.

I used these codes: “SchwabWelcome11” for $100 to $500 bonus for $10,000 to $100,000 deposit or roll over made within 45 days and held for ONE YEAR, and then code “REFER” for another $100 for at least $1,000 held for a whole year. Sorry for any confusion!

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Part 2 of the BRS Series: Staying in for 26 years, Maxing Out TSP

chart-bsr

In this scenario I stay in for 26 years and make O-6 at 17 years and continue to work till I am 56. At the age of 57 I retire at 26 years to get a new pension of $5,480.12 a month which is 52% of base pay of my top 36 months averaged out. Now we assume some pretty drastic things here. First being in the Navy for 26 years and hitting every promotion on schedule. We also assume  a healthy consistent but not impossible 4.1% return on TSP every year. We also always put in the max of $18k in TSP every year and matching starts in the year 2018. We also assume I never touch the money for a TSP loan.

Age TSP w/ Match TSP
57 $1,013,035.94 $851,256.97
58 $1,054,570.41 $886,158.50
59 $1,097,807.80 $922,491.00
60 $1,142,817.92 $960,313.13

The first year of retirement looks good. I got $1,013,035.94 in TSP, I am a member of the two comma club and on top of that I get my $5,480.12 a month pension. Lets compare it to how things would of been with my old Cliff Vested plan. I would be taking in a larger pension of $6,850.16 a month (65% of top 36 month base pay), but I would only have a meager $851,256.97 in TSP. Over a year I would have $16,440.37 more pension than the new BRS plan. This is more than handsomely made up for with $145,338.60 more money in TSP due to compounding TSP match with BSR.

Old Pension New Pension Cumulative Yr Loss TSP Difference BRS Bonus Age
$6,850.16 $5,480.12 $16,440.37 $161,778.97 $145,338.60 57
$6,850.16 $5,480.12 $32,880.74 $168,411.91 $135,531.17 58
$6,850.16 $5,480.12 $49,321.12 $175,316.80 $125,995.68 59
$6,850.16 $5,480.12 $65,761.49 $182,504.79 $116,743.30 60

I choose 26 years of AD because that is the limit of the match. The government will not match 5% after your 26th year. You can find all of the data here if you want to play around with it. I am siding with BSR myself because it is the only way to get in on contributing more than $18,000 a year into TSP. This becomes very significant in the last 9 years as a captain:

Years in Base Pay 5% Match Yearly TSP Add Match % for TSP Total TSP
4 $5,287.00 $0.00 $18,000.00 0.00% $18,000.00
5 $5,643.90 $0.00 $18,000.00 0.00% $18,000.00
6 $5,967.00 $3,580.20 $18,000.00 19.89% $21,580.20
7 $5,967.00 $3,580.20 $18,000.00 19.89% $21,580.20
8 $6,313.80 $3,788.28 $18,000.00 21.05% $21,788.28
9 $6,313.80 $3,788.28 $18,000.00 21.05% $21,788.28
10 $7,110.30 $4,266.18 $18,000.00 23.70% $22,266.18
11 $7,110.30 $4,266.18 $18,000.00 23.70% $22,266.18
12 $7,356.00 $4,413.60 $18,000.00 24.52% $22,413.60
13 $7,356.00 $4,413.60 $18,000.00 24.52% $22,413.60
14 $7,673.10 $4,603.86 $18,000.00 25.58% $22,603.86
15 $7,673.10 $4,603.86 $18,000.00 25.58% $22,603.86
16 $8,158.50 $4,895.10 $18,000.00 27.20% $22,895.10
17 $8,937.00 $5,362.20 $18,000.00 29.79% $23,362.20
18 $9,392.70 $5,635.62 $18,000.00 31.31% $23,635.62
19 $9,392.70 $5,635.62 $18,000.00 31.31% $23,635.62
20 $9,847.80 $5,908.68 $18,000.00 32.83% $23,908.68
21 $9,847.80 $5,908.68 $18,000.00 32.83% $23,908.68
22 $10,106.70 $6,064.02 $18,000.00 33.69% $24,064.02
23 $10,106.70 $6,064.02 $18,000.00 33.69% $24,064.02
24 $10,369.20 $6,221.52 $18,000.00 34.56% $24,221.52
25 $10,369.20 $6,221.52 $18,000.00 34.56% $24,221.52
26 $10,877.70 $6,526.62 $18,000.00 36.26% $24,526.62

As you can see the match becomes more than 30% of your TSP contribution. Now if you don’t contribute anything into TSP this may not be the plan for you.

-Derp

BLUF: New Retirement Plan only worth it with 4.355% TSP Returns for newbies, not worth it for 2018 switch!

I had another O5 friend call in from Japan and brought up another interesting situation. I spent too much time mulling over how much is lost over the period of retirement from 60 to 80. I failed to account for the compounding interest of earnings while in service. While I know there must be a mathematical formula to compute this, I went ahead and just made a massive spreadsheet: What About Compounding TSP from day 1?

Also he mentioned that no one gets the match of 5% till 2018 which makes the last 6 years non matching for myself and for many of the people who joined after 2006. You will not have as much time to make the 5% match worth it. Unless of course they have a plan to backdate matching to year one which will never ever happen.

This new calculation accounts for the interest earned from the TSP match from day one compounding with the interest and matching every year for 30 years of service. So on your first day out after 30 years you get a pension of $78,319.44 with the new plan, but you got a sweet nest egg of $174,414.81. This may seem a lot more than the $97,899.30 with the old pension system, but over time the old system of 75% of base pay will pay a lot living till 80 years old. You would have to be making a constant 4.355% in TSP just to keep up. The below chart shows plugging in this magic number:

RETIREMENT Cumultive Loss Delta in TSP Match
61 -$19,579.86 $154,834.95
62 -$39,159.72 $142,850.85
63 -$58,739.58 $131,197.55
64 -$78,319.44 $119,889.45
65 -$97,899.30 $108,941.59
66 -$117,479.16 $98,369.65
67 -$137,059.02 $88,190.01
68 -$156,638.88 $78,419.74
69 -$176,218.74 $69,076.68
70 -$195,798.60 $60,179.44
71 -$215,378.46 $51,747.42
72 -$234,958.32 $43,800.90
73 -$254,538.18 $36,361.00
74 -$274,118.04 $29,449.80
75 -$293,697.90 $23,090.32
76 -$313,277.76 $17,306.59
77 -$332,857.62 $12,123.67
78 -$352,437.48 $7,567.75
79 -$372,017.34 $3,666.12
80 -$391,597.20 $447.27

Using the 2% G Fund rate we start seeing losses at Age 69 making us wish we had stuck with the old plan some 39 years earlier:

Age Cumulative Loss with new plan Offset with TSP
61 -$19,579.86 $131,520.89
62 -$39,159.72 $114,963.05
63 -$58,739.58 $98,465.64
64 -$78,319.44 $82,029.89
65 -$97,899.30 $65,657.02
66 -$117,479.16 $49,348.28
67 -$137,059.02 $33,104.97
68 -$156,638.88 $16,928.39
69 -$176,218.74 $819.88
70 -$195,798.60 -$15,219.21
71 -$215,378.46 -$31,187.48
72 -$234,958.32 -$47,083.52
73 -$254,538.18 -$62,905.89
74 -$274,118.04 -$78,653.10
75 -$293,697.90 -$94,323.66
76 -$313,277.76 -$109,916.04
77 -$332,857.62 -$125,428.66
78 -$352,437.48 -$140,859.95
79 -$372,017.34 -$156,208.25
80 -$391,597.20 -$171,471.93

Still on the fence about this one as I can’t tell if I can make 4.355% on TSP! Is it even a risk worth taking? I went ahead and shifted everything around to compensate for my late arrival into the game in 2018 when I would of lost 6 years of matching at this point, and then I plan on getting out at 25, we assume I can make the 4.355% earnings on TSP:

Age Cumiltive Loss TSP Worth Delta
56 -$16,268.04 $141,946.93 $125,678.89
57 -$32,536.08 $148,128.72 $115,592.64
58 -$48,804.12 $154,310.51 $105,506.39
59 -$65,072.16 $160,492.30 $95,420.14
60 -$81,340.20 $166,674.09 $85,333.89
61 -$97,608.24 $172,855.88 $75,247.64
62 -$113,876.28 $179,037.67 $65,161.39
63 -$130,144.32 $185,219.46 $55,075.14
64 -$146,412.36 $191,401.24 $44,988.88
65 -$162,680.40 $197,583.03 $34,902.63
66 -$178,948.44 $203,764.82 $24,816.38
67 -$195,216.48 $209,946.61 $14,730.13
68 -$211,484.52 $216,128.40 $4,643.88
69 -$227,752.56 $222,310.19 -$5,442.37
70 -$244,020.60 $228,491.98 -$15,528.62
71 -$260,288.64 $234,673.77 -$25,614.87
72 -$276,556.68 $240,855.55 -$35,701.13
73 -$292,824.72 $247,037.34 -$45,787.38
74 -$309,092.76 $253,219.13 -$55,873.63
75 -$325,360.80 $259,400.92 -$65,959.88
76 -$341,628.84 $265,582.71 -$76,046.13
77 -$357,896.88 $271,764.50 -$86,132.38
78 -$374,164.92 $277,946.29 -$96,218.63
79 -$390,432.96 $277,946.29 -$112,486.67
80 -$406,701.00 $277,946.29 -$128,754.71

So things don’t go red until 69 even at 4.355% which kind of sucks because if I’m not dead by then I would of made more money on the old retirement. When making your decision in 2018 make sure you account for how many good years you got to have for matching. In most cases you will not have enough contributions matching at 5% to make up for your 20% pay cut! Now what if you live way past 80? Then you would of been better off with the old system.

Remember they did this to save money so it is hard to think you can make any more money with this new deal.

-Derp

New Retirement Plan From The Senior Officer Prospective

Navy’s birthday cake is cut by the most senior and the most junior sailor at the same time. The tradition is said to represent passing knowledge and experience from one generation to the next

Navy’s birthday cake is cut by the most senior and the most junior sailor at the same time. The tradition is said to represent passing knowledge and experience from one generation to the next

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.

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My 20 Year Plan

This is a follow up data post to my casual analysis of the new retirement plan that service members who joined after 2006 have a chance to switch to in 2018. Those who join the military after 2018 will be forced into this new blended plan with mandatory 3% base pay contributions to their TSP.

I went ahead and did the calculations for some one considering doing 20 years in the service starting at 30 years old entering as an O-3 and assuming you progress to O-6 for 5 years and do a total of 20 years. I obtained the pay information from DFAS and I just made some guesses on what is normally expected time in each rank in my calc tsp vs pay spreadsheet. I also assumed the average life expectancy of 79 for males reported in 2011.

 Plan Pension Monthly Year From 50 to 79
O-6 Pay $9,240.80 $110,889.60 N/A
New blend (40%) $3,696.32 $44,355.84 $1,286,319.36
Old Hi36 (50%) $4,620.40 $55,444.80 $1,607,899.20
Delta $924.08 $11,088.96 $321,579.84

As you can see its about a $321K loss over your retirement with the new plan, this was made to save the government money so this should be of no surprise that the new plan would make less money for you at your full 20. Now on the flip side, for those who know for sure they would never do 20 years, I went ahead and calculated the cumulative expected matching TSP at each exit year:

Matching Cumulative Year you leave
$0 1
$0 2
$1,490.40 3
$2,072.30 4
$6,135.91 5
$10,199.52 6
$14,495.76 7
$18,792.00 8
$23,337.94 9
$28,216.73 10
$33,336.14 11
$38,455.56 12
$43,751.88 13
$49,048.20 14
$54,572.83 15
$60,448.90 16
$66,883.54 17
$73,318.18 18
$80,080.92 19
$86,843.66 20

You must do 2 years to be fully vested to even get the 1% base pay TSP contribution. As you can see this is far better than the $0 the old plan would of given you after 2 years, and also note that if you do less than 4 years the matching 5% does not kick in yet. So for all those that don’t do their 20 full years theres something for you all as well. Its time to start thinking about which one you will do, you got till 01 Jan 2018 to make the choice (I think)!

-Derp

EDIT: Looks like is only up to 5% matching, not 6%, check here with the new calculations.