BRS Breakdown, Part 3: What About the Rest of Us? A Guide for Non-retirees and Reservists

The Blended Retirement System (BRS) was designed to modernize military retirement benefits, ensuring that all service members, not just those who serve a full 20 years, can build toward a secure retirement. In previous posts we've shared the math behind how the BRS can be like adding rocket fuel to traditional savings plans with the Pension, TSP 5% Match, Continuation Pay, and (as you'll read about next week) the Lump Sum Option. But only retirees get all of those benefits. But what about the majority of service members (5 out of every 6) who leave the military before reaching retirement? Or the 1 million reservists and National Guard members, who have unique retirement rules?

For Active Duty Service Members Who Leave Before Retirement

Each year, over 160,000 service members separate from active duty. Most will do so long before the 20-year mark needed for a pension. While this can seem like a disadvantage, BRS offers benefits that can jumpstart your retirement savings, even if you don’t retire from the military.

Under BRS, even if you separate early, you’ve already contributed to your Thrift Savings Plan (TSP), taking advantage of matching contributions. In fact, your service will sign you up to make 5% contributions every year, so you have to go out of your way to not save for retirement. And with the 5% Match, by contributing just 5% of your Base Pay you automatically get 5% more money, meaning the BRS is like a "freebie" of extra money while also helping you reach a Personal Savings Rate (PSR) of at least 10%. In 2023 the average PSR in America is a pathetic 3.8%, so with BRS you are already doing 3x better than most.

And even if you get out after just 4 years, you will have a great start on retirement savings. Did you know that as of March 2024, 28% of Americans have $0 in savings (source: MarketWatch.com)? Or that the average household savings is only $8,000 (source: USNews.com)? There's are horrifying numbers as anyone at this level there's no possibility to ever retire. But with the BRS after just 4 years, you will already have $10,000-20,000 in retirement savings (see Figure 1 below).

Figure 1. Baseline TSP Balances After 4-Year Enlistment/Commissioned Service

Remember, this is just saving the minimum 5% to get your 5% Match -- remember also that the absolute minimum you can afford to save for retirement is 15%. With a 15% retirement savings rate, you'll be able to retire in about 40 years. So consider at a minimum logging into MyPay and setting your TSP contribution to 10% of Base Pay . It's just the minimum and you should naturally target a higher number to do better. So with the TSP, you will be on your way to a retirement, and it will be on you to keep it up in the years to come after you separate. But the benefits don’t stop when you leave.

 Why You Should Keep Your TSP Open After Separation

When you leave active duty, it’s tempting to cash out or roll over your TSP. But here’s why keeping your TSP open is a great move:

1. Cheap Investment Options: The TSP is famous for its **low administrative fees**, far cheaper than most 401(k)s or IRAs. The Total Expense Ratio for the C Fund is just 0.054%, and gets just as good returns as any other mutual fund in the category.
2. Easy Rollovers: If your new employer offers a 401(k), you can roll your TSP into that plan. On the flip side, if your new 401(k)'s investment options are more expensive -- and they can have 30x higher fees!!! -- you can also rollover in your new 401(k) savings into your TSP. This way you can get the employer match at your new job, the tax benefits, AND better investment options in the TSP.
3. Continued Growth: Your TSP will keep growing tax-deferred, allowing your money to compound for decades. Please don't ever, ever interrupt this process!

Retiring Early

 One other advantage of keeping your TSP open is that the TSP "Plan Administrators", or the people who write and enforce the rules of the TSP, designed the TSP to comply with the IRS "Rule of 50" and "Rule of 55". Normally you can only withdraw your retirement savings after age 59 1/2 without paying taxes, paying a 10% penalty, and possibly losing the Roth status of your savings. But the Rule of 55 allows you start living on your retirement savings if you retire in the year you turn 55 and worked as a public safety employee. If you are a public safety employee and retire after 25 years of service (or more) in the year you turn 50, you can also start withdrawing a retirement income tax- and penalty-free.

The key is not the age or career -- those boxes are easy to check -- but whether your retirement plan allows for it. Most 401(k)s do not. Which means keeping your TSP open can unlock early retirement! The very fact that you serve in the military under the BRS, and thereby have been automatically enrolled in the program, is an invaluable perk of the program. Even if you have a lucrative 401(k) at your next job and decide to rollover your TSP funds to their program, keep at least $200 in each of your TSP accounts (Roth = $200 and Traditional = $200) in order to keep your account open. Later you can transfer all your retirement accounts back into your TSP to load up for an early retirement (just know you must do this 5 years before you start withdrawing, so by age 45 or 50, depending on your Personal Financial Plan (PFP).

What If I Don't Have a 401(k)?

If your new employer doesn’t offer a matching 401(k), you will only be able to participate in tax-advantaged retirement savings with an Individual Retirement Account (IRA). This is not a bad thing -- but it will slow you down compared to the TSP with 5% Matching, or other 401(k) similar matching. That's because in the TSP or 401(k) you can contribute up to $23,000 directly in 2024, and the matching contribution can be worth up to an additional $6,159.00 per year for an O-5. (An E-5 with 8+ years would earn about $2,195 in Matching funds and an O-3 with 8+ would earn about $4,272.)

On the other hand, the annual contribution limit to your IRA is just $7,000. If you are trying to build $2.5 million in retirement savings in order to lock in a comfortable six-figure retirement income so you can have the lifestyle you want, $7,000 a year puts you in the "barely going to make it" category. Besides, you will have to save that money each and every year until you retire, compared to being able to get a head start with the TSP and/or a 401(k) with matching. When you save aggressively for the first 20 years of your working life, you can actually stop saving for retirement in your 40s and still have enough to make your savings goal. Compare the different paths to $2.5 million shown in Figure 2.

Figure 2. TSP/401(k), IRA-Only, and IRA+Brokerage Savings Plans.

First take a look at the total contributions made by age 42 and 62. Notice that if you have the TSP or similar 401(k) matching, by 42 you will have put aside all the money you need. That's because the higher balance will double and make you a million dollars more through compound interest. If you save into an IRA or an IRA+Brokerage (so $10,000 per year for retirement), you'll have to set aside 2-3x more of your own money over the next four decades to reach the same goal.

Also, look at the yellow-highlighted cells. Follow the row over to the age at which you hit those same targets for the different savings plans. 20 years of aggressive saving in a TSP or similar 401(k) with match on average gets you to your $2.5 million goal 3 years faster than other options and plans. This shows the power of the "Match" when combined with saving early and saving more than just the minimum, as you really have a single mega decision that will determine your retirement fate:

1. Early + Aggressive. 20 years + $130,000/$137,000 = $2.6 million
2. Minimum Effort (<15% per year/IRA-only) = 40+ years + $380,000 = $2.6 million

 An early and aggressive savings plan buys you your multimillionaire retirement for $250,000 less in total lifetime savings. The BRS is a superior option -- so if you separate and go find a new employer, negotiate for a 5% match (or better) in your 401(k) plan, and then keep saving the same amount. If you go without a 401(k) after you leave the service, open an "after-tax brokerage" account at Vanguard, E*Trade, Fidelity, or elsewhere, alongside your IRA. Save the IRA maximum each year, and put an additional $3,000 into your brokerage each year, which acts as your own "match" to keep you on track.

For Reservists and National Guard Members

For reservists and National Guard members, the BRS works differently in certain ways. You still get the Pension, 5% Match, Continuation Pay, and Lump Sum Option. But instead of the traditional 20-year full pension, you still must earn points through your service to qualify. Typically, pensions for reservists and National Guard are paid out starting at age 60, so you miss out on 15-20 years of the monthly pensions. But there are still ways to maximize your financial future long before then.

Even though your pension payout is delayed, the BRS still allows you to build wealth through TSP matching contributions. You can contribute up to 5% of your pay, and the government will match that contribution. This is the same deal active duty gets, and it’s one you should take full advantage of. TSP is an "employer-sponsored" "qualifying retirement plan," which means that you can only make contributions while the Department of Defense is your employer. Once you stop working and contributing for the military, the 5% Match turns off. For the active duty service member, this means there is a stopping point for the match. If you are a reservist or guard member who can continue to serve on orders into your 40s and 50s, you can continue to accrue extra Matching benefits.

No one of sound mind ever turned down free money! This may be a strong reason for active duty service members to consider staying on as a reservist after they separate (or retire) as well.

More significantly, a reservist or guard member can leverage the TSP to start gaining retirement income before age 60. So long as you are a public safety employee, you can retire at age 55 using the IRS' "Rule of 55." For five years you can "over-draw" from your TSP to cover your retirement income, and then when your pension kicks in at age 60, reduce the amount you were taking from the TSP. This buys you five extra years of retirement, creates a consistent monthly income, and will prolong the life of your TSP by withdrawing less than you potentially could thanks to your military pension.

The Road to Financial Freedom

The Blended Retirement System might be designed with 20-year retirees in mind, but that doesn’t mean it only benefits those who stay in uniform for two decades. Whether you’re one of the 160,000 service members who separate early, or a member of the Guard or Reserves working toward a different retirement goal, the BRS can help you build wealth. With the right strategies, from TSP matching to leveraging tax-advantaged accounts like Roth IRAs and brokerage accounts, you can create a solid financial future.

No matter when you leave the military, you’re not leaving your wealth-building potential behind. Take control of your TSP, leverage any employer matches in your next career, and watch as your savings grow into a secure, multi-million dollar future.