https://www.youtube.com/watch?v=y2R3FvS4xr4

Arthur King of the Britons might not have been able to afford real horses but he damn sure knew what his quest was…to find the Holy Grail!

BRS vs HIGH 3? Deciding whether to stay with “Ole Reliable” (High-3) or opt into the “new hotness” (BRS) is actually pretty easy, but first you have to answer one important question…

What… is your quest?

Is your quest to stay in the Army for 20 years or do you plan on getting out early?

Bottom Line, Up Front: From a sheer monetary numbers standpoint, you are better off staying on the current system (High-3) while simultaneously investing in your TSP if your Time-In-Service (TIS) is 9-10 years, and you 100% plan on staying in the army for 20 years.  You 100% need to sign up for the new system (BRS) if you plan on serving less than 20 years, while investing at least 5% of your base pay into the TSP in order to max out the government matching contribution.

The High-3 System is one of the best retirement plans in the world, but it’s only the best in the world if you actually stay in for 20 years. Remember, the Department of Defense created this new retirement plan for one main reason: to save them money, not you. That being said, the BRS is not necessarily a terrible plan. Decisions like these are rarely so cut and dry. What the High-3 offers in dependability, the BRS potentially counters with flexibility.

In this article I will explain the characteristics of each retirement system in plain English, weigh the pros and cons of each, and explain when it makes sense to do one over the other. Strap-on tight; this is a longie but goodie…

Amplifying Information

The Legacy Retirement System (High-3):

In simple terms, the legacy retirement system is called the “High-3” Retirement because your pension is based off the average of the highest 3 years of your base pay when you retire. If you retire at 20 years, your pension is 50% of your base pay; 75% if you stay in for 30. Easy math: If you retire at 20 years as a three year E-8 with a base pay of approximately $5100, your pension will be roughly $2500.

A pension is system where the government will continue to give you a reduced monthly paycheck after your retire for the rest of your life. Most civilian employers DO NOT offer pension plans. Additionally, under the current system you can invest in the Thrift Savings Plan, but the government will not contribute any matching funds. The High-3 is an all or nothing system; stay in for 20 and get a pension; leave before 20 and you get nothing from the government (well maybe an ARCOM).

Thrift Savings Plan (TSP)

Traditional employer-sponsored pensions that pay a fixed benefit from retirement until death—once a mainstay for middle-class retirees—have disappeared over the years, replaced by 401(k)-type plans whose payout depends on unpredictable investment returns. -Dr. Bernstein-

The TSP is essentially the government’s version of a civilian 401(k) or IRA. The biggest difference is that under the current system, the government does NOT offer fund matching whereas most major civilian employers will match your saving dollar for dollar or .50 cents to your dollar up to a certain amount (anywhere from 3% to 6%). This is free money.

Under the new system, the government will automatically contribute 1% of your base pay into your TSP and will match a total of 5% of your base pay. This match is inline with or better than the majority of civilian 401(k) plans.

The money you invest in the TSP will grow exponentially through compound interest and time. The longer your money sits in the TSP, the larger it will grow. This is why it’s so important to start contributing when you are young. However, with a TSP/401k/IRA, you cannot withdraw the money until you are age 60 whereas a pension starts immediately upon retirement from the military.

Additionally, how you invest your money in the TSP, determines how large it grows…or shrinks. Your rate of return (the money you earn on your investment) is completely dependent on how your chosen “fund” performs over time. If the market does well, your money grows, if the market does terrible, your money shrinks. However, you only “lose” the money if you withdraw it. The good news is that the market has always bounced back and over time it has always grown (despite some bumps along the way).

There are five “core” funds in the TSP: G, F, S, C, and I. The “G” Fund provides the lowest risk yet lowest reward and the “C & I” Funds provide the highest reward yet the highest risk. The further you are from retirement age (60), the riskier you can afford to be with your contributions. As you get closer to age 60, you want to start protecting your money.

I will write a separate article deep diving each fund, but I am going to pause right here and tell you that if you are still in the Army and your money is sitting in the G Fund, go switch it RIGHT NOW. When you create a TSP account, the system will automatically choose to invest your money in the G Fund. DO NOT make the mistake I did and leave your money stagnating the G Fund for over 7 years because you didn’t know any better.

The Blended Retirement System (BRS)

The new retirement system gets its name by “blending” the two systems together.  If you stay in 20 years, you will still get a pension (reduced to 40% from 50%), but the government will also match the money you contribute into the TSP (up to 5%) like in a civilian 401(k).  If you contribute 5% of your monthly income at say $200 a month, Uncle Sam will also contribute $200 a month into your TSP. If you get out before 20 years, you can keep all the money in your TSP and role it into a civilian 401(k) or IRA. You can do this on the old system as well, minus the government contributions.

At age 60, you can start withdrawing money from your TSP without any penalties. If you tap into it before age 60, you will suffer a 10% tax penalty. This means if at age 45 you pull out $100,000 from your TSP; $10K goes straight to Uncle Sam. So unless you like giving away your money, don’t do that except in extreme circumstances.

The BRS has two additional incentives:

Continuation Pay:

• When you reach 12 years of service and you commit to 4 more years, you will be eligible for a cash incentive of 2.5 to 13 times your regular monthly basic pay if you are Active Duty and 0.5 to 6 times your monthly basic pay if you are in the reserves. I can almost guarantee you the infantry guys will get 2.5% cause #godhatestheinfantry. So, if you are an E-7 infantry “person” (see what I did there?) your continuation pay would be approximately $10,450 (before taxes).

Lump Sum Benefit:

• You can either get your full monthly pension retirement when you retire or opt to get a lump-sum benefit of either 25% or 50% of your gross estimated retired pension pay. If you take the lump-sum you will get a reduced monthly retirement check until age 67 when your retirement pay goes back up to the full amount. This lump-sum option is quite common in the corporate world, but there is a catch. The military is using a much higher discount rate (6.99%) to calculate your lump sum than the corporate world (~3%) and a higher discount rate means a smaller lump sum payout. So what does this actually mean? I will use the handy dandy Blended Retirement Service Calculator to demonstrate two examples; an E-8 and an O-5.
• Let’s say you retire this year at age 38 as an E-8, and you decide you want the 50% lump sum payment:
  • The 50% lump-sum offer at age 38 is approximately $193,578 in return for forfeiting 50% of your retired pay until age 67.
  • From age 38 to 85, the E-8 would receive a total pension payout of $2,375,481 (including the lump sum payment).
• Now let’s say you retire this year at age 38 as an E-8, and you do not take the lump sum payment:
  • From age 38 to 85, the E-8 would receive a total pension payout of $2,841,700.
  • $2,841,700 – $2,375,481 = $466,219
  • Keep It Simple Stupid (KISS) explanation: In exchange for $193,578 at age 38, an E-8 would accept a loss of $466,219 over 29 years! (See Graphics below)
  • Oh and by the way, this $193,578 payment is not tax free. Congratulations, you just hopped up two rungs on the income tax bracket ladder! Your taxes just jumped from 12% to 24%. 🙁

50% Lump Sum (E-8)

No Lump Sum (E-8)

• Now lets say you retire at age 42 as an O-5, same 50% lump sum payout:
  • The lump-sum offer would be $308,717 at age 42 to take a 50% retired pay cut until age 67.
  • From age 42 to 85, the O-5 would receive a total pension payout of $3,502,028 (including the lump sum payment)
• Same guy, no lump sum payment:
  • From age 42 to 85, the O-5 would receive a total pension payout of $4,092,793.
  • $4,092,793 – $3,502,028 = $590,765
  • KISS explanation: In exchange for $308,717 at age 42, an O-5 would accept a loss of $590,765 over 25 years! (See Graphics below)
  • Oh and by the way, this $308,717 payment is not tax free. Congratulations, you just made it into the second highest income tax bracket! Your taxes just jumped from 22% to 35%.

50% Lump Sum (O-5)

No Lump Sum (O-5)

These hypothetical examples demonstrate that service members who select the lump sum payments will put themselves at risk of a significant drop in the lifetime value of their own retirement package. A six figure lump sum will absolutely appeal to many service members. It will be more money than 99% of them have ever had access too at once. In fact, it is this very assumption that made Congress include this option, because IT SAVES THEM MONEY, NOT YOU. In these two examples alone, the DOD saved $1,056,984.

That being said, it is still an interesting option that provides the service member flexibility. There is a lot of really good things you could do with this lump sum. You could pay off your house, pay off your cars, pay off all your credit cards, send a kid to college, or start a new business. There are also a lot of bad things you could do with it:

You can blow it all on penny stocks Wolf of Wall Street style:

via GIPHY

You can rage HARD in Vegas for a week Hangover style:

via GIPHY

You can buy your own hotel in Bratislava Eurotrip style:

via GIPHY

Just know what you are getting into, once you spend this money it is gone, it isn’t coming back, and you are absolutely going to need to get another well paying job in order to counter-act the hit your pension is going to take over the next 25-29 years.

When does it make sense to opt-in to the BRS?

There are two situations where it may make sense to opt in. The first is if you plan on leaving the Army before 20 years. Then you absolutely should opt-in, as you will still be able to take the governments matching contributions with you wherever you go.  The 2nd situation is if you have less than 8 years TIS and plan to stay in for 20 years.

I have ignored the TSP matching contribution of the BRS up until this point. In my previous examples, I used an E-8 and an O-5 that would retire in 2028, meaning that they currently have 10 years TIS. As you can see in the images above, the High-3 Retirement system wins in both cases by approximately 160K with the E-8 and 400K with the O-5, regardless of the lump sum payment options.

This disparity shrinks as your TIS shrinks. I did the math, and the two systems start to balance out around the 7 to 8 year TIS mark (with certain assumptions). A young specialist or officer with 4 years in could absolutely make more money over time with the BRS under certain circumstances. Why don’t we check it out? I’m here for you after all :-).

• For my next example, we’ll use a E-4 with four years TIS, who is high-speed and retires as an E-8, and eats his kale and lives to be 85. We’ll assume he invests 5% of his base bay (thereby receiving a 5% match) and a receives a 7% return on his investment plus 3% inflation over time. No lump sum.
  • The service member will receive a continuation pay of $11,711 at year 12.
  • The BRS Calculator sneakily doesn’t include any TSP savings you make if you stay under the legacy system in it’s calculations, so don’t forget to add that in (see the red below).
  • $5,372,208 – $5,268, 242 = $103,966
  • With a 7% rate of return, the BRS will beat the High-3 by $103,966 over time.

E-4 BRS Parameters (4 years TIS)

E-4 to E-8 BRS (retire at 20 years TIS)

I’d show the Officer graphic under the same parameters, but the #’s aren’t that different, and I think you get the point.

While the BRS wins in this situation, it is imperative that you understand two facts about these numbers:

The 1st is that number on the bottom right is an absolute estimate and is completely dependent on how much or little you invest, what fund you invest in, how well or crappy the market does over 40+years, and how long you live. That number could end up being much bigger, but it could also end up being much smaller.

The 2nd is that you will not be able to touch almost $2 million of that money until you are 60 (the TSP portion). If you are one of those guys who lives off Big Macs, and drinks seven Monsters and dips three cans of Copenhagen a day…well let’s just say you might only get to tap into that money for like three years. #YOLO

BRS vs HIGH 3…what have we learned?

• The High-3 Legacy Retirement System provides
  • A greater, more stable source of income over time for those who currently have 8-12 TIS.
  • Reliability as it is not tied to market performance
• The Blended Retirement System provides
  • A retirement package for those who leave before 20
  • Flexibility in the form of continuation pay, lump sum payment option, and personal investment strategies
  • Flexible options that can succeed epically or fail just as epically
  • A potentially greater source of income over time for those who currently have less than 7 years TIS (under certain conditions)

In summary, the High-3 is stable yet limited, while the BRS is volatile yet flexible. The option you choose requires you to know your personality and how much risk you can tolerate. Regardless of which plan you choose, you absolutely need to invest in your TSP. Like I said before, the government adopted this plan for one main reason, to save them money.  Don’t be blindly tempted by the incentives without fully understanding the consequences. I wrote this article not to tell you which decision to make, but to hopefully help you make an informed decision. Hopefully, I helped clear away some of the fog.

If you are interested in diving deeper into some of these concepts, I have listed some good books below. Feel free to contact me with follow-up questions. Please share this page on Facebook or Tweet it out to your friends if you found this information helpful.

You’re Welcome