Pick your plan

"How many of you are signing up for the military’s new Blended Retirement System?” 

That’s what I asked a group of airmen recently at a financial readiness presentation. 

Crickets. Not one person raised a hand or even gave me a “maybe.” 

I’m thinking the message is not getting out about the Blended Retirement System (BRS), which rolls out Jan. 1, 2018.   

Uh-oh.

Since this is a crucial decision for military families, I think it’s wise to review the situation. More than a million servicemembers will have to make a choice between the BRS and the legacy High-3 system, and it could ultimately be a six-figure decision. 

The good news is that the Defense Department’s comprehensive BRS education plan should be kicking into high gear this month. I hope it’s effective. After my presentation, an airman told me she wouldn’t be choosing the new system because she wasn’t going to serve for 20 years. 

Ouch! She’s part of the majority of those serving – those who won’t complete 20 years of service – who could benefit from signing up for the BRS.

Since we’re in the homestretch before the new plan goes into effect, let’s review six key points servicemembers should understand before
choosing the right retirement path for their family.

• The new system doesn’t affect current retirees. If you’re already retired, or a gray area retiree from service in the Guard or reserves, the new system will not affect your retirement benefits.
• The monthly military retirement check is not going away. A monthly, inflation-adjusted check for life has tremendous value. Just check out DoD’s Statistical Report on the Military Retirement System and you’ll understand what I’m talking about. DoD actuaries calculated the value of military retirement for an O-5 retiring in 2016 after 20 years of service at more than $1.3 million. For an E-7, the number was just shy of $700,000. Even though the new BRS cuts the retirement annuity by 20 percent, it still amounts to a large potential benefit. Retiring under either system – the legacy or the BRS – will continue to offer tremendous benefits.
• Something is much better than nothing. I’ve received a few letters from readers who aren’t fans of the BRS. It may not be perfect, but the new plan offers a much wider group of servicemembers tangible retirement benefits in the form of DoD automatic and matching contributions to their Thrift Savings Plan (TSP) accounts. Remember, they can keep the entire TSP account – both their contributions and those made by Uncle Sam – as long as they serve at least two years and are vested. At that point, they can leave the account in place or transfer it to a new employer’s plan or an IRA and keep it growing for retirement. Less than 20 percent of those who serve qualify for a 20-year retirement, so the new system casts a much wider net; DoD estimates that around 85 percent will benefit from BRS. 
• Do your homework early. Servicemembers have until the end of 2018 to decide, but the longer they wait the more DoD contributions they will miss out on. There are no retroactive contributions. No one should rush to judgment, because the decision is irrevocable. But those who will make a decision should spend 2017 evaluating their options so they can make the choice early, and if they choose the BRS reap nearly a year’s worth of DoD contributions to their TSP. Remember, those who joined or contracted to serve between 2006 and 2017 will have to opt in to the BRS. Taking no action means staying in the legacy plan. 
• Ease into the change. If you learned your income would be cut by 5 percent starting tomorrow, you’d probably have a few choice words. After that, you’d scramble to figure out how to make things work. Someone considering the BRS should know and prepare to make at least a minimum contribution of 5 percent to the TSP to take full advantage of the DoD match. With that in mind, it’s critical to factor that into your budget now. What’s the best way to do that? Consider contributing to the TSP today. With that approach, you won’t feel a serious financial disruption in 2018. You will still be saving for the future and building for retirement. That’s a win-win.
• Numbers can be made to dance. By the time you read this, both DoD and USAA calculators should be available to help servicemembers make a decision. I’d recommend that anyone faced with a choice check them out and run the numbers. Having evaluated both plans, built countless spreadsheets and had numerous conversations about the change, one thing is clear: you can make the numbers support either side of the “Which is best?” argument. There are assumptions about rates of return, discount rates and life expectancy – just to name a few. All these assumptions can have a dramatic effect on the outcome of any calculation. So consider them carefully and with some skepticism.

For those who serve 20 years, the BRS is probably not as lucrative as the legacy system in terms of DoD’s contribution to their retirement. However, when you consider the potential retirement benefits resulting from a military retirement check along with the total package of DoD and servicemember contributions to the TSP, there is certainly upside.

Not to mention, the BRS also serves the greater good, providing retirement benefits for more people. And it’s hopefully going to encourage a larger number of servicemembers to save for their future, perhaps even creating a new generation of savers.

Take advantage and encourage those you know to make the most of DoD’s training. Check out information and tools from other trusted sources, and be prepared to make the decision early in 2018. 

J.J. Montanaro is a certified financial planner with USAA Financial Planning Services, one of the USAA family of companies. USAA is The American Legion’s preferred provider of financial services.