In this week’s edition of Finance Friday, Jennifer breaks down Blended Retirement System Options for military members.
Blended Retirement System Options
by Jennifer Wake
Choices are all around us. Our day generally starts out with choices about food. Will I eat a muffin or eggs? A cup of tea or coffee? And let’s not talk about the myriad of choices at Starbucks. Maybe you want to work out to start your day. Just to be honest, that is rarely my choice. I like food first thing in the morning, along with a good cup of coffee.
Every day we will naturally make a number of choices.
Unfortunately, many people avoid making important choices about their retirement.
There are different reasons people don’t want to make decisions about retirement. I am here to help you review your retirement and consider the options because God calls us to leave an inheritance.
“A good man leaves an inheritance to his children’s children,
but the sinner’s wealth is laid up for the righteous.”
God wants the foundation of our inheritance to be our faith in Him.
Planning ahead for retirement allows us to prepare for the future. He may call us to retire and then continue to work by serving our community either here at home or overseas. Saving for retirement allows us to be open to what God has planned.
There are so many options for retirement, but putting off making a determined decision will hurt you financially.
People who contribute $5,000 each year in their twenties are more likely to retire early than people who contribute $5,000 each year in their thirties and forties. This isn’t a “get quick rich” scheme, it is the result of compounding interest.
If you are serving in either the active duty or reserve, you have probably heard about the “new” Blended Retirement System (BRS).
On January 1, 2018, BRS took over from the standard pension system used by the military for decades. Anyone who joined the military after January 1, 2018 was automatically enrolled in BRS. The last group who have a choice to opt into BRS are current seniors at the academies who graduate this May. They have until July 1, 2021 to opt out of BRS or move to the Legacy (traditional pension) system.
The Blended Retirement System is actually a great name for the new retirement plan. It mixes the old pension with the government equivalent of a 401k. A 401k plan allows employees to contribute up to $19,500 per year into a retirement fund and the employer can contribute up to $38,500 per year. Most employers give a matching percentage. If you contribute 5%, they will match your 5%; in effect you are doubling your money.
To achieve this hybrid, the BRS uses the Thrift Saving Plan (TSP) as the 401k.
The BRS takes money out of each pay period and adds it to the servicemember’s TSP account. Just like any other 401k, the TSP is a group of funds that have low fees and are well managed. It includes Five Base Funds and Lifecycle funds. Lifecycle funds are a blend of the base funds and are NOT intended to be mixed with any other funds. New servicemembers will have their money added to a Lifecycle fund automatically.
There are five Base Funds (G-Fund, F-fund, I-Fund, C-Fund, S-Fund).
G-funds stand for Government securities (treasury notes), F- Fund stands for Fixed income (bonds). These two funds are very conservative. The C-fund stands for common stock (like the S&P 500), S-Fund stands for small to mid-size companies, and I-Fund is for International stocks. All of these are funds which trade stocks. You should talk to a financial counselor or a financial advisor to determine which mix of funds will best meet your needs.
Let me give you an example of the Blended Retirement System options.
Cadet Amanda Ineedmoney has to make a choice between the Legacy system or the BRS. Choosing the Legacy system (pension alone) means that if she leaves the service before she serves 20 years she will not receive a pension. If she moves to the reserves, she will still be required to earn enough participation points to retire but will not receive any pension until age 60.
If she chooses the BRS, the government will automatically put 1% of her base pay into the TSP (Thrift Savings Plan).
After 60 days, unless she changes it, the pay system will deduct 3% of her base pay for the TSP and the government will match her investment, up to 5%. If she serves for two years in the military she will be designated as “vested” meaning she has met the requirement of time to keep her investment and all matching funds.
If she resigns before two years then all matching funds return to the government but she keeps her contributions.
She will always have the option to raise her contributions. After two years she will retain both contributions and matching funds. However, if she chooses to leave before 20 years of service, she retains the TSP as her retirement account. If she stays in for 20 years, she will receive a pension immediately. It is a lower amount than the Legacy system, but still at least 40% of her last 36 months of service pay, AND on top of that she has her TSP fund.
Amanda decides the BRS is the way to go because she is not sure how long she will serve and if she will be able to serve in the reserves long enough to earn retirement. She heads off to her first duty station then her second and suddenly she is five years into the BRS system. She chooses to raise her contribution to 6%. The government matches 5%, so she is now contributing 6% of her base pay but has 11% added to her TSP.
She looks at her choices of funds and decides to wait on making any more decisions. Another two years pass and she reviews her TSP. After listening to a Planting Roots podcast on BRS, she learns how to move her money out of the Lifecycle fund and into the C, I, and S funds. She is in control of her money and her retirement. With each paycheck she adds more money towards her retirement and it is growing. Finally, when she is at seven years, she is done with the commitment from the academy so she can choose to walk away from the service with her TSP or keep going.
Yet another choice for another day….
For more on retirement planning check out these articles: