Thoughts about the new Blended Retirement System?

[militaryPHYS]

I already took the training and have the certificate. Can I just switch to BRS on the mypay website automatically on jan1st or do i have to submit the training certificate in advance to someone in particular? If so, who do I submit the training certificate to?
thanks!

You can sign on to MyPAY on 01JAN and switch no matter what. The training is tracked by your command, not mypay or TSP.

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[DD214_DOC]

"Purple medical corps"?

 

[pgg]

"Purple medical corps"?

My money is on nothing ever changing in that regard.

We already have Navy IAs that get deployed to Army units, and Air Force residents in some of our Navy GME programs, Army staff at some Navy hospitals, etc, but that's not "purple". That's Blue and Green and Different-Blue commuting to an alternate place of business, but still remaining Blue and Green and Different-Blue.

Sensible, reasonable, efficient, but certainly not one unified/purple medical corps.

 

[Cooperd0g]

My money is on nothing ever changing in that regard.

We already have Navy IAs that get deployed to Army units, and Air Force residents in some of our Navy GME programs, Army staff at some Navy hospitals, etc, but that's not "purple". That's Blue and Green and Different-Blue commuting to an alternate place of business, but still remaining Blue and Green and Different-Blue.

Sensible, reasonable, efficient, but certainly not one unified/purple medical corps.

Agreed. There is so much inertia and bureaucracy that it would take decades.

 

[backrow]

Agreed. There is so much inertia and bureaucracy that it would take decades.

VADM Bono, at a recent meeting, said that she was not a fan of a “purple” medical service, but rather expanding our “jointness.” She elaborated that, for example, NMC San Diego being staffed 99% by Navy she would like the MHS to instead look for the right person across all the services. So although the hospital would be “Navy” it would potentially be staffed by physicians from all the Services.

Now, I’m not sure how that would work in all the details (e.g. fit reps, chain of command, etc) but it wouldn’t surprise me to see more of this in the coming years.


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[militaryPHYS]

VADM Bono, at a recent meeting, said that she was not a fan of a “purple” medical service, but rather expanding our “jointness.” She elaborated that, for example, NMC San Diego being staffed 99% by Navy she would like the MHS to instead look for the right person across all the services. So although the hospital would be “Navy” it would potentially be staffed by physicians from all the Services.

Now, I’m not sure how that would work in all the details (e.g. fit reps, chain of command, etc) but it wouldn’t surprise me to see more of this in the coming years.

Agreed. Seems the direction VADM Bono and the interim updates are heading is "joint staffing" at designated locations (i.e. consolidation of everybody's medical assets). Purple is just old lingo now being translated to "jointness". To what extent, what it means, how long it takes is anybody's guess... the decades thought is probably spot on.

 

[Baron Samedi]

Even if you plan on doing 20 years, some people will likely come out ahead by taking BRS.

Using 2017 dollars, the difference between 40% pension and 50% pension for an O-6 with 20 years of service living 40 years after retirement is approx. $494000.

A 5% match starting at someone with 5 years of service who stays in for another 15 years ends up with $63000 dollars of employer contributions that continue to gain compound interest. Assuming you've maxed TSP and a conservative rate of return of 8%, at age 45 those employee contributions are worth $107,000 and at age 65 when you would withdraw would be worth $499000 and could continue to earn interest even after that age.

The numbers are even more in BRS's favor if you are younger, savvy with investing, beat the historical average of 8%, and continue to contribute to a 401k/IRA after exiting the military.

 

[Baron Samedi]

1. If I switch to BRS on Jan 1, should I switch how I've been doing my TSP (e.g. contributing substantial sums early to max out withing 6-9mo so I have more money at the end of year; contributing %'s from all types of pay, not just base pay)? Will they match if my TSP is coming from pay that is not base pay? Does it matter if I max out in 3-6 months vs take the entire year?

If you max early, you will miss out on some of the match. If you wanted to get the benefit of lump sum investing(i.e. maxing early), you could near-max out early and then save enough of your remaining contribution limit to contribute 5% of your base pay the remaining months. It requires a bit of math but could be done.

 

[pgg]

a conservative rate of return of 8%

That's a bold statement.

 

[Atlas Shrugged]

So a potential increase of a whopping $5000 (with a lot of big ifs) instead of the most safe, stable, and predictable monthly distribution in the world.

If you plan on doing a full career you would be crazy to opt into BRS.

Plus, if you are doing BRS it would be crazy to do a full career. I foresee staffing issues in the future because there will no longer be a carrot on a stick. People will do their 4-7 years and get out, especially the surgical subspecialties.



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[DrDude2004]

So a potential increase of a whopping $5000 (with a lot of big ifs) instead of the most safe, stable, and predictable monthly distribution in the world.

If you plan on doing a full career you would be crazy to opt into BRS.

Plus, if you are doing BRS it would be crazy to do a full career. I foresee staffing issues in the future because there will no longer be a carrot on a stick. People will do their 4-7 years and get out, especially the surgical subspecialties.



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Agree.

The way I view it is trading 10% additional income at retirement for 5% additional income now.

 

[Baron Samedi]

That's a bold statement.

Unless you are 100% invested in the G fund or F fund, no it's not.

Average Market Returns

From 1928 to 2010, the average yearly return in the S&P500 was 11.31% and even from 2001 to 2010(where we sustained both a terrorist attack and a major market crash) the average was 3.54%. The C fund(which mirrors S&P500), since inception in 1988, has performed at 10.16% and that includes the dismal 2001-2010 timeframe.

Barring an apocalyptic end to the US Stock Market, 8% after adjusting for inflation should be easily achievable. If you are concerned about risk, you can always mitigate through further diversification.

 

[Baron Samedi]

Agree.

The way I view it is trading 10% additional income at retirement for 5% additional income now.

That 5% is misleading though, in two major ways:

1. That 5% allows you to invest above the $18500 limit into TSP/401k/403b into a tax-advantaged account.
2. That 5% additional income gets 30+ years of market exposure and growth, making it worth far, far more than it's current value.

 

[Baron Samedi]

So a potential increase of a whopping $5000 (with a lot of big ifs) instead of the most safe, stable, and predictable monthly distribution in the world.

That $499k value is based on a conservative, not-quite-worst-case scenario with market return of 8%. If you follow historical returns of 11%, then the value of that 5% match is over $862k, which blows High-3 out of the water.

The situations that would result in less than 8% return over that time are similar to the situations that would result in loss of your pension(ex. total collapse of the US Economy). The situations where you don't make it to 20 years and end up with zilch are much more likely(injury, family situation, career goals changing).

When you die, your military pension basically stops(the Survivor Benefit plan gives your spouse only 55% of your pension that then stops once they also die AND you have to had paid into it). When you die, your family gets your TSP and any other funds you may have.

 

[DrDude2004]

That 5% is misleading though, in two major ways:

1. That 5% allows you to invest above the $18500 limit into TSP/401k/403b into a tax-advantaged account.
2. That 5% additional income gets 30+ years of market exposure and growth, making it worth far, far more than it's current value.

In response to 1: I still view it as income from my employer. My employer is giving me an additional 5% (yes I agree it is tax advantaged and that is a factor) for 15 years of my lower earning years. The other option is an additional 10% of higher earning for 30-40 years .

In response to 2: I get market exposure regardless. The extra 10% also gets market exposure (assuming I save as planned)

 

[Baron Samedi]

In response to 1: I still view it as income from my employer. My employer is giving me an additional 5% (yes I agree it is tax advantaged and that is a factor) for 15 years of my lower earning years. The other option is an additional 10% of higher earning for 30-40 years .

But it's not as simple as that. There's a reason private practice docs and lawyers typically shuffle as much of their salary into a 401k employee contribution as possible(up to the 54k/yr limit) -- because your money is worth much more in these types of accounts than a simple raise is.

Regardless, it's no skin off my teeth if you or anyone else takes the High-3. BRS is an absolutely great change to military retirement and an absolute no brainer for anyone who is even considering getting out before 20 years, especially the younger you are. Very few people who are current residents or young attendings would come out ahead in High-3.

 

[Cooperd0g]

So a potential increase of a whopping $5000 (with a lot of big ifs) instead of the most safe, stable, and predictable monthly distribution in the world.

If you plan on doing a full career you would be crazy to opt into BRS.

Plus, if you are doing BRS it would be crazy to do a full career. I foresee staffing issues in the future because there will no longer be a carrot on a stick. People will do their 4-7 years and get out, especially the surgical subspecialties.



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These statements are rather odd. Many people who think they will do a career end up getting out. Many who plan to leave stay in for a career. It is difficult to truly know early on in a military career if you will stay until retirement.

Now, if you are pretty close to retirement, but have the option to switch to BRS then that would be silly. If you are relatively new and have a short commitment then it would be equally silly to NOT switch simply because you don’t know if you will do 15-18 more years.

 

[pgg]

Unless you are 100% invested in the G fund or F fund, no it's not.

Average Market Returns

From 1928 to 2010, the average yearly return in the S&P500 was 11.31% and even from 2001 to 2010(where we sustained both a terrorist attack and a major market crash) the average was 3.54%. The C fund(which mirrors S&P500), since inception in 1988, has performed at 10.16% and that includes the dismal 2001-2010 timeframe.

Barring an apocalyptic end to the US Stock Market, 8% after adjusting for inflation should be easily achievable. If you are concerned about risk, you can always mitigate through further diversification.

In your initial post, you wrote

Assuming you've maxed TSP and a conservative rate of return of 8%,

This casual assumption includes an asset allocation of 100% in equities, in order to get that "conservative" return of 8% on the entire TSP balance.

I got news for you son, a 100% equity allocation isn't the least bit "conservative".

If you choose an allocation more in line with the age-old definition of conservative (for example "age in bonds") then you're looking at a 60/40 equity/bond allocation from the mid career contribution point down to 35/65 at the withdrawal point, and even assuming 8% equity returns, the portfolio returns will be half that. Not counting inflation.


To say nothing of the entirely separate discussion concerning whether or not the US and international equity markets are likely to perform at historic averages over the next couple decades, given today's valuations, sovereign debt levels, and so on. The old truism "nobody knows nothin" is probably just as true now as it always has been, but there are reasonable arguments for having a less optimistic eye toward the next 20 years.

Expecting decades of 8% returns (and 8% real returns at that!), to the point that you make financial planning decisions that depend on it, is foolish. The last few years have seen quite an uptick in the number of confident investors posting on internet forums like this one.

The best thing about an 8 year bull market is that everybody makes money.

The worst thing about an 8 year bull market is that everybody thinks the reason they made money is because they're smart.

 

[pgg]

But it's not as simple as that. There's a reason private practice docs and lawyers typically shuffle as much of their salary into a 401k employee contribution as possible(up to the 54k/yr limit) -- because your money is worth much more in these types of accounts than a simple raise is.

No, the real reason concerns marginal tax rates during peak income years vs retirement.

If what you said was the "reason" then high income people would be choosing post-tax Roth 401k accounts instead of pretax 401k accounts. Yet very, very few are doing that.

 

[Baron Samedi]

If you choose an allocation more in line with the age-old definition of conservative (for example "age in bonds") then you're looking at a 60/40 equity/bond allocation from the mid career contribution point down to 35/65 at the withdrawal point, and even assuming 8% equity returns, the portfolio returns will be half that. Not counting inflation.

It sounds like you get your retirement planning advice from 30 year old textbooks. Theres no reason you couldn't put 100% of your 5% match into equities. Obviously this doesnt apply to your entire portfolio.

8% equity returns is already adjusted for inflation, as is the 11% number I quoted earlier.

There is not a single safer investment option historically than the US Stock Market. If you want to hoard gold under your mattress because you believe some big bad boogie-man regarding national debt, etc., be my guest, but those risks are just as real if you are investing in the stock market(as you would be with TSP) vs depending on a federal pension.

No, the real reason concerns marginal tax rates during peak income years vs retirement.

If what you said was the "reason" then high income people would be choosing post-tax Roth 401k accounts instead of pretax 401k accounts. Yet very, very few are doing that.

This makes zero sense when you consider most of these high earners are going to have just as high, if not higher income at age 65 than they do at age 35. How many lawyers and doctors aren't earning more at 65 than they are young in practice? Your money is simply worth more in these accounts than they are in your checking account.

 

[Mace1370]

I don’t follow how money in a 401k or IRA is worth “more” than in another account other the marginal tax benefit.

 

[cgk]

If you max early, you will miss out on some of the match. If you wanted to get the benefit of lump sum investing(i.e. maxing early), you could near-max out early and then save enough of your remaining contribution limit to contribute 5% of your base pay the remaining months. It requires a bit of math but could be done.

Does anyone know what the cutoff date is for active duty army to change the contribution percentage so it reflects in the January LES?

 

[militaryPHYS]

Even if you plan on doing 20 years, some people will likely come out ahead by taking BRS.

Using 2017 dollars, the difference between 40% pension and 50% pension for an O-6 with 20 years of service living 40 years after retirement is approx. $494000.

A 5% match starting at someone with 5 years of service who stays in for another 15 years ends up with $63000 dollars of employer contributions that continue to gain compound interest. Assuming you've maxed TSP and a conservative rate of return of 8%, at age 45 those employee contributions are worth $107,000 and at age 65 when you would withdraw would be worth $499000 and could continue to earn interest even after that age.

The numbers are even more in BRS's favor if you are younger, savvy with investing, beat the historical average of 8%, and continue to contribute to a 401k/IRA after exiting the military.

I agree with the majority of this.

The utility of high income earners to put an additional 5% of their base pay in a tax deferred account at this point in their careers is invaluable, especially in to something as cheap and affective as the TSP. Also, even if you don't assume great returns like 8%, even modest growth (3-5%) cuts the "20% retirement pay cut" to 10% or less. For physicians who invest wisely and are savvy, this is a time (age 45-65) when they will likely have sustained income many times the value of the High-3 or BRS pension. The risk for physicians getting out before 20 years (even when not planning on it now) is just too high to risk missing out on the matched contributions in to tax deferred accounts now.

Worst case scenario is I make it to 20, still make money for waking up in the morning, and it is only 10% or less of what I would have been collecting otherwise...all while I am financially independent and hopefully earning an additional 6 figures just doing locums or insurance reviews...maybe even joining a practice and really continuing to earn during these years. Who knows, but I can accept a 10% or less pay cut in my pension if it gives me more flexibility to leave the military if I want, plus be able to stash away more money in my TSP now.

 

[Gastrapathy]

I love reading posts from people who’ve only invested in the bull market.

 

[Baron Samedi]

I love reading posts from people who’ve only invested in the bull market.

Thank you for your valuable contributions to this discussion.

 

[backrow]

Thank you for your valuable contributions to this discussion.

He certainly has a point.

Was anyone in this thread invested in the market during the 97-00 timeframe? I was, luckily not much, but I had acquaintances and family members who lost a significant amount of their retirement money during those years.


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[Baron Samedi]

The people who lost a lot were invested in individual stocks, not in diversified funds. Nobody is advocating a high risk investment strategy for your entire retirement -- we are talking about a 5% employer contribution of a single investment vehicle. In addition you still get a pension with BRS, its just slightly smaller.

Your risk of exiting the military prior to 20 years is much higher than any huge market crash at the time of your retirement. You are betting against the odds by assuming you'll do 20. The safest part of this is that most of us can still work as docs and avoid dipping into retirement funds even if there is a crash and you have to wait a bit for recovery.

 

[pgg]

It sounds like you get your retirement planning advice from 30 year old textbooks.

Heh, it sounds like you get your retirement planning advice from 30 year old bloggers who've never known anything but investing since 2009.

Theres no reason you couldn't put 100% of your 5% match into equities. Obviously this doesnt apply to your entire portfolio.

8% equity returns is already adjusted for inflation, as is the 11% number I quoted earlier.

There is not a single safer investment option historically than the US Stock Market. If you want to hoard gold under your mattress because you believe some big bad boogie-man regarding national debt, etc., be my guest, but those risks are just as real if you are investing in the stock market(as you would be with TSP) vs depending on a federal pension.

1) Who said anything about gold under the mattress?

2) The risks of gold (or cash, or bonds, or real estate, or anything) are just as "real" as the risk of stocks, but they're not the same.

This makes zero sense when you consider most of these high earners are going to have just as high, if not higher income at age 65 than they do at age 35. How many lawyers and doctors aren't earning more at 65 than they are young in practice? Your money is simply worth more in these accounts than they are in your checking account.

The income of those high earners in retirement may remain high, but they're exceptionally unlikely to have earned income exceeding their peak career earnings. Much of their income will come from taxable accounts where they'll pay the long-term capital gains rate (most likely 15%), not the 39.6% (now 37%) top marginal income tax rate. The RMD from various pretax investment accounts is unlikely to put them in that bracket, either.

Of course high earners max out pretax vehicles like traditional IRAs and 401ks. Of course they do. That's $54K (or more) that they don't pay that top marginal rate on now, and it grows tax free until withdrawal in retirement, when their marginal tax rate will be lower.

If you expect your income to be "just as high, if not higher" in retirement, then the correct answer is to favor Roth accounts to pay the lower tax rate now. But of course almost no high earners do that, because the notion of having earned income that's "just as high, if not higher" in retirement is silly.


You accidentally, tangentially, raise a good point, sort of - in that we can't really predict what tax laws will look like during our retirement, decades away. But somehow I think a discussion of tax diversification will be lost on someone who thinks putting 100% of one bucket of your portfolio into equities is somehow diversified.

 

[pgg]

I love reading posts from people who’ve only invested in the bull market.

I wish I could like this twice.

 

[militaryPHYS]

I’m confused on what the argument is about. We are talking about 5% of base pay, therefore this is an even smaller percentage of the overall investment portfolio. You guys are saying you don’t have even 5% of your portfolio in equities? ?

I’m being facetious, but following recommendations of Jack Bogle and the entire bogleheads community I don’t think is a bad idea (not just 30 yr old bloggers). VTSAX or a 4:1 C:S distribution in TSP is safe investment in the entire stock market. What percentage of overall portfolio each investor chooses to have in said place and when they reallocate is up to them and their risk level. But anyway, some part of my overall portfolio will make 5% or more. If it doesn’t we are all in for a world of hurt but at least I am making 40% of my base pay in retirement and not nothing which is what I’d have if I don’t make it t 20 years and didn’t switch to BRS

 

[militaryPHYS]

But somehow I think a discussion of tax diversification will be lost on someone who thinks putting 100% of one bucket of your portfolio into equities is somehow diversified.

I believe he is talking about diversified WITHIN his equity holidings (i.e. VTSAX and/or 4:1 C:S). your holdings there will follow the trend of the overall US stock market (more or less) and therefore are not necessarily risky with such a long horizon to needing the money.

I’m about 90/10 right now and most of my 90 is a mix of VTSAX and my 4:1 C/S within TSP. Some would argue that is too conservative for someone like me (15 years from military retirement) and with a commitment to pay back (guaranteed income security), but I’m good with 90/10.

 

[Atlas Shrugged]

The situations that would result in less than 8% return over that time are similar to the situations that would result in loss of your pension(ex. total collapse of the US Economy). The situations where you don't make it to 20 years and end up with zilch are much more likely(injury, family situation, career goals changing).

There have been 10 year periods in the last 20 years where growth was 0.3%... I don't see pensions running out any time soon.

There is not a single safer investment option historically than the US Stock Market. If you want to hoard gold under your mattress because you believe some big bad boogie-man regarding national debt, etc., be my guest, but those risks are just as real if you are investing in the stock market(as you would be with TSP) vs depending on a federal pension.

Nothing safer? Say a pension backed by the US government? Adjusted for inflation until you die?

Also, a traditional pension is going to allow you to invest much more aggressively throughout your career than you would otherwise. Who cares if the market dips; just support yourself on $50-70,000 a year until things pick back up. If you can't survive off that I don't know what to tell you. Meanwhile those totally reliant on the market might be going back to work.

 

[Ziehl-Neelsen]

Holy schnikes!! So much meaningless debate over an intensely subjective decision. What's next? A debate as to whether chocolate or vanilla milkshakes are objectively superior (btw, the answer is vanilla)?

If you've got a clear path to 20, legacy is clearly superior--regardless of how long you've been in as the match is just not high enough to compound enough to equal the lifetime earnings of the legacy pension. But, as I tell the people junior to me who seek my opinion, only ~55% of officers make it to 20. There is no clear path to 20 for anybody with less than 10 years in service. Medical conditions incompatible with service happen. RIFs happen. Looming administrative tours that will harm your ability to practice competently happen. Familial circumstances that require you to ETS happen. And to guard against all these possibilities you only have to give up 20% of the pension? That's a great trade for any junior milmed doctor. Plus, as I tell my residents, the BRS guards against the "sunk cost fallacy" that makes an unhappy doc at 12-16 years stay in to 20 when his life would be significantly better if he would just ETS. And for those who opt in and end up making it to 20, it won't even matter. If you're running numbers and debating on this thread about CAGRs, marginal tax rates, and modern portfolio theory you're going to be a mutimillionaire anyway and the small amount of lifetime earnings you miss out on by opting into the BRS won't matter.

That said, a couple statements on this thread require comment.

The people who lost a lot were invested in individual stocks, not in diversified funds.

What? The S&P 500 (which the C fund is indexed to) declined from a value of 1520.77 on 1 Sep 2000 to 827.37 on 27 Sep 2002 (don't even get me started on 2008--my first TSP contribution was Sep 2007--my intern year). That's a 46% decline in a diversified, index fund with low beta (for an equity fund). If you don't consider that a significant loss and understand the sequence of return risk for somebody in the drawdown phase during a bear market like that, I don't know what to tell you.

From 1928 to 2010, the average yearly return in the S&P500 was 11.31% and even from 2001 to 2010(where we sustained both a terrorist attack and a major market crash) the average was 3.54%. The C fund(which mirrors S&P500), since inception in 1988, has performed at 10.16% and that includes the dismal 2001-2010 timeframe.

This a rather academic topic, but significant changes have been made to the methodology of the S&P 500 index in the last decade of which most investors are unaware.
1. Foreign companies that maintained US ADRs (like RDS and UL) were booted from the S&P. Some of these companies (like RDS and UL) are a significant part of the historical gains of the S&P.
Shell and Unilever kicked out of S&P 500 index

2. The S&P changed to a float-adjusted weighting from market cap weighting. Essentially, this means that the S&P holds smaller positions in high growth components with significant insider holdings because these companies have a smaller float. These growth stocks (AMZN, GOOGL, FB) are responsible for a significant component of the S&P's returns; any methodology that decreases their weight within the index is a bad thing.
https://www.virtus.com/assets/files/sa/wm_did_you_know_6623 (1).pdf

BLUF: The S&P's methodology is not the same as it was for the past 100 years. It has changed (IMO) for the worse with future returns unlikely to match historical returns. Relying on historical S&P rates of return to calculate future rates of return will likely result in dangerous overestimation.

As for me, I'm a gambler, but a cautious one. The kind of guy who bets $5 on the pass line but also puts $2 on C&E during a come-out roll at the craps table. I opted into the BRS and had my wife stay legacy.

 

[Gastrapathy]

My money is on nothing ever changing in that regard.

We already have Navy IAs that get deployed to Army units, and Air Force residents in some of our Navy GME programs, Army staff at some Navy hospitals, etc, but that's not "purple". That's Blue and Green and Different-Blue commuting to an alternate place of business, but still remaining Blue and Green and Different-Blue.

Sensible, reasonable, efficient, but certainly not one unified/purple medical corps.

No flag wants to give up their gig.

 

[militaryPHYS]

And for those who opt in and end up making it to 20, it won't even matter. If you're running numbers and debating on this thread about CAGRs, marginal tax rates, and modern portfolio theory you're going to be a mutimillionaire anyway and the small amount of lifetime earnings you miss out on by opting into the BRS won't matter.

Boom! Or at least we all hope this will be the case...

 

[DeadCactus]

Any reserve component folks switching to BRS? I'm tempted because I prefer a bird in hand to two in the bush so to speak but drill pay is so low that barring 10%+ returns, the TSP portion of the retirement is almost negligible and smaller than the difference between the legacy pension and the BRS retirement.

Edit:

Also, anyone knows how BRS works with other federal retirements? Under the legacy system, I believe you could pay to transfer your years of military service to federal service and then work toward a 20 year government service retirement. Is there a similar option for BRS?