BRS Breakdown, Part 1

No, we're not talking about a breakdown like Australia's breaking sensation Raygun, who kangaroo-hopped her way to a perfect 0.0 in the first-ever Olympics breakdancing event. That was special -- I hope you had the chance to see it. Despite the viral flop, she's still #1 in the world because she legitimately won the Oceania (that's an actual region of the earth in the South Pacific Ocean) championship for the year. So maybe she isn't as bad as we thought . . . 

Similarly, you might have been led to believe that the Blended Retirement System (BRS) is also a major letdown, and a bad deal for service members. Who might be telling you this? Of course the Old Breed of senior officers and enlisted who are still in the Legacy High-3 system. In that system, and assuming they serve for 20 years, they will get 50% of the average monthly Base Pay from their highest three earning years for a pension. For the typical enlisted who retires as an E-8, that could be $3,000 a month for the rest of their life, for a W-3 possibly $3,500, and for an O-5 it will be more than $5,000 a month.

The main rip on the BRS is that the multiple for the pension goes down from 2.5% to 2% per year, which means a 20-year retiree will get 40% of their Base Pay, not 50%. That reduces the monthly pension check by 1/5, or 20% to: an E-8 can expect $2,400, a W-3 would get $2,800, and an O-5 would receive $4,000.

Sure, losing out on $7,000-12,000 per year in pension income can seem like a bad deal, but to really understand the BRS and the retirement you might get requires taking a closer look at the BRS as a whole.

First, Definitions 

The TSP is often confused with other retirement vehicles like IRAs and 401(k)s, or sometimes even just thought of as a "Roth", which is something else entirely.

The 401(k) was created in 1978 by the Internal Revenue Service (IRS) as a special kind of account to provide retirement benefits to workers. They did this because the big corporations could no longer afford to pay pensions to people, so they started canceling pensions. This was unpopular (obviously). The compromise between Washington and Wall Street was the 401(k) -- and to this day the main beneficiary in dollars saved and taxes saved is the big corporations. But at least the average worker gets something.

The catch was that the IRS wrote the law that 401(k)s have to be sponsored by a private employer, and the government is not "private." So in 1986 the government created the Thrift Savings Plan. It functions just like a 401(k), except that it has limited investment choices. The government doesn't want to invest in companies in China, for example, but Wall Street doesn't care and just wants to make money. So your TSP has special funds like the C Fund and S Fund and I Fund that are like what most people's 401(k)s invest in, but without some companies that the government doesn't like. Despite that, the TSP's funds perform pretty well!

Up until 2018, you were the only one saving into your TSP, however, so it wasn't really a 401(k) -- it was more like an Individual Retirement Account (IRA), but with higher contribution limits. For example in 2024, you can add only $7,000 to an IRA, and get no employer matching; you can save $24,000 to a 401(k), and your employer will add even more on top of that with their matching plan. With the TSP in its pre-2018 form, you could contribute $24,000, but there would be no matching. See: a 401(k)-IRA Hybrid.

But since 2018 with the Blended Retirement System, you can contribute up to $24,000 AND get a 5% matching contribution from the government. The TSP has finally grown up and is a true "defined contribution" plan. This is a good deal! If you just serve your four years and always contribute at least 5% to your TSP, the government will match it with $3,740.28 for enlisted who separate as an E-4, and $7,323.93 for an O-2 leaving at 4 years. That may not "feel" like a lot -- but who are you to turn down free money?

Going The Distance 

For the other 1 in 6 service members who become "lifers" and stay in to retire at 20 (or more . . . that's a different conversation entirely!), the picture gets more complicated. After all, an O-5 retiring at 20 years might be hyper-focused on getting only $48,000 per year in pension income instead of $60,000. That $12,000 is a bit more of a big deal. And if we assume this O-5 retires at age 43 and lives until 83, and if we assume that the pension payment increases enough to offset inflation, we're talking about $480,000 less in lifetime earnings. That can be life-changing. (And it would amount to about $336,000 less for W-3s and $288,000 less for E-8s.)

But the value of the BRS matching contribution can offset some or all of this. Depending on rank and Time in Service (TIS), the average BRS retiree will earn $48,000-88,000 in total TSP matching contributions over the course of a 20-year career. Okay, so far that is less than the pension income given up. The BRS also includes a Continuation Pay bonus at 12 years TIS, which can boost the cash value of your incentives to $60,000-125,000. When you invest this money for 20 years in the TSP, you will have $500,000-1,000,000 in your account in your 60s. For those of you who struggled to graduate "Math for Marines", a million dollars is more than $288,000.

So in the long run of retirement planning, the BRS is likely to get you a better "lifetime" deal than the Legacy High-3 system. Sure, you will get less each month from a pension check, but by the time you hit your 60s and can legally retire and live off your TSP, you will have more total wealth thanks to the investment of the matching contributions, and their growth over time. 

What is the Blended Retirement System (BRS)?

The Blended Retirement System is a combination of two key components, with some bolt-on bonuses:

1. Defined Benefit Pension: Like the old system, BRS provides a lifelong pension to those who earn a retirement. This pension is calculated as 2% of your highest 36 months of base pay, multiplied by your years of service. For example, if you retire after 20 years, you’ll receive 40% of your base pay for life.
2. Defined Contribution Plan: In the old system, everyone could invest in the Thrift Savings Plan (TSP), which functioned like an Independent Retirement Account (IRA): you were the only one paying money into the account. Under BRS, the TSP now becomes a  "defined contribution" part of the system, similar to a 401(k), which means your employer also pays money into your TSP. For the BRS, this is 5% of Base Pay, which means you basically make an extra 5% per year.

If you get out before 20 years, in the pre-2018 world, you got absolutely nothing from the Department of Defense for retirement savings. That is in any given year 85% of service members. So now that you get the matching contribution into your TSP, for 85% of the military the BRS is already a better deal than the Legacy High-3 system was.  

And What it Ain't

Because the Thrift Savings Plan is a legal retirement account, it is not going to help you live a better life before age 59 1/2. What's up with 59 1/2? The IRS wrote the rules to state that they consider "early retirement" as age 60, and so in the tax year you turn 59 1/2 they let you start withdrawing from your retirement accounts like the TSP without penalty. If you want to take out money before that age, you could pay taxes AND a 10% penalty -- which sucks.

This is different for Traditional and Roth accounts. Roth accounts are funded with "after-tax" money so that you can withdraw from them tax-free, while Traditional accounts are funded with money "before-tax", meaning that you didn't pay tax on it when you earned it and will have to pay later. Since you already paid tax on the Roth contributions, you can technically take that money back whenever you want. For example, if you save $6,000 a year to your Roth TSP for 20 years, you will have added $120,000 of "after-tax" money. You will also have investment gains, but ignoring those the IRS would let you take that $120,000 back at any age, no matter what. If you did that with a Traditional account, they would tax you on the $120,000.

For this reason a lot of online influencers hype the Roth and claim you can take back your money whenever you want without penalty. Sure -- but don't do that. You need that money to stay invested so you can become a multi-millionaire in the long run, like by your 60s. This means that you have to get it in your head that the TSP is ONLY for retirement: once you put money in, you can't take it out. And that means you can be without any savings or investment income for the next 20 years if you don't have other plans.

This is the main reason why the Military Wealth Coach recommends you NOT max-out your TSP contributions. If you can save $24,000 per year, split it between your TSP and a brokerage account or High Yield Savings Account. In fact, you only need to save about $7,000 per year into your TSP in order to turn it into a $2.5 million Golden Goose in your 60s, so what's the point of saving the full $24,000? You could take that extra $17,000 of free income and invest it in stocks, real estate, or other income-paying assets that have higher rates of return AND can make you money in your 40s and 50s. You can retire early -- but you can't retire early if all your wealth is in the TSP!

Building a $500,000 TSP by Age 43

Now, let’s get to the numbers. You don’t need to max out your TSP contributions to build a significant retirement fund. By saving consistently, you can hit a target of $500,000 by age 43, and that can get you to a $2+ million foundation for retirement income starting at age 60. The key is that this invested money will continue to grow at 8-11% per year for as long as you leave it invested. At that rate, your TSP account will double every 7-9 years. If you retire at age 43, you get two doublings by age 60, and three by the legal "Full Retirement Age", or FRA, of 67. That means if you have $500,000 by age 43 in your TSP, you can have $2 million in it by 60 -- and $4 million by age 67. That is enough for a really comfortable retirement.

So it isn't as bad as you think. Most people get overwhelmed by big numbers and long planning timelines -- but we at the Military Wealth Coach eat and sleep that kind of planning. So instead of trying to guide you on some insane 40- or 50-year plan for retirement, we help you turn it into a 20-year sprint.

If you hit your target number by age 43, you can stop saving for retirement altogether, because the investment gains will make up the rest. You will be on autopilot. Here’s a strategy for a military member earning $80,000 a year to get to $500,000 by age 43:

1. Make the right contribution
   1. Enlisted = $6,540 per year ($545 per month) for 20 years, age 20 through 39.
   2. Officer = $6,854 per year ($572 per month) for 20 years, age 23 through 42.
2. Get the BRS 5% Match
   1. Enlisted = $47,751 over 20 years
   2. Officer = $88,734 over 20 years
3. Invest it all in the C Fund to maximize your return. The C Fund will earn on average over 20 years 10.8%, which is an 8% Total Real Return (adjusted for inflation; you need to care about this because it makes sure your dollars are just as powerful in the future as they are now)
4. Stop saving for retirement in the TSP when you leave the military
   
   1. Enlisted: you will have $418,348.14 at retirement, and $531.401.31 by age 43
   2. Officer: you will have $522,308.40 at retirement/age 43

With $500,000 invested, you can stop contributing to your TSP at age 43 and let compound interest do the work. If you leave it alone, that $500,000 will continue to grow to over **$1.6 million** by age 60—more than enough to fund a comfortable retirement:

• Age 60: $2 million
• Age 65: $3 million
• Age 70: $4.5 million

Clearly, this is good enough. There's no reason to save the maximum of $24,000 per year into your TSP. If you do that, you may have $7-10 million by age 60 -- but at what cost? That's an extra $17,000 per year you could have been spending or saving towards other goals like home ownership, real estate investing, travel, crypto, or anything else that you want now (or at least in the next five years).

As one final point, the 5% Matching contribution from your service will be worth more in lifetime value than the lost monthly pension by the time you are 70. The average life expectancy for every American is more than 70, which means that the BRS is a better deal for service members than was the Legacy High-3 program. The only way it isn't is if you don't save your 5% every month to your TSP.

Conclusion: The Bigger Picture

The Blended Retirement System is a great starting point, but it shouldn’t be your "all-in" strategy. Build your TSP to hit a target balance of $500,000 by age 43, which can be done for less than $7,000 per year. Save anything beyond that for things you want to buy and enjoy now, like a new car, dope vacation, or for your first house. Keep saving consistently (and investing aggressively) for 20 years. When you retire -- or when you hit $500,000 in your TSP -- stop. Let it ride on auto-pilot. Invest the rest in non-retirement accounts that you can use to enjoy life now and tomorrow -- not just in 20 or 30 years.

And as a final note: don't settle for anything less. The reality is that inflation will always stay one step ahead of your income and your pension/disability. So you've got to make you have enough in the future, not enough based on today. $2.5 million should be your minimum TSP goal, and the "$500k by 43" strategy will ensure that you get there and can retire while you're still young enough to enjoy it!