The Blended Retirement System (BRS) and You

As a service member, you have access to one of the most powerful retirement savings tools in the country: the Blended Retirement System (BRS). But many in the military are unsure of how it works and how to maximize its potential. As we've covered in other blog posts, our Podcast, and in our first book Service and Wealth, you're going to need to take full advantage of the BRS to retire. In fact, if you're in uniform today, you should plan on at least $2.5 million in order to retire in 20-40 years!

What Is the Blended Retirement System (BRS)?

The Blended Retirement System combines two essential components to help military members save for retirement. The combination is what makes it so rare as most employer's retirement plans are just the "Defined Contribution" system in which you save for retirement in a 401(k) or 403(b) and your employer also saves a little more for you. About 2 in 3 non-government employees have this plan. On the other hand there is also the "Defined Benefit" system, in which you are guaranteed a set amount of money when you retire. This is also called a pension. In 2023 in the US, less than 11% of workers were in jobs that included the benefit of a pension.

The BRS was introduced because before 2018 only about 15% of service members left the military with any retirement benefit: only those who made it twenty years and retired. In order to help 100% of America's military have something for retirement after their time in uniform, the Defined Contribution part of the BRS was introduced. Every service member is now automatically enrolled in saving for retirement in the Thrift Savings Plan (TSP), the military version of a 401(k). So your BRS retirement benefit components are:

1. Defined Benefit Pension: Like the older legacy retirement system, BRS offers a lifelong pension if you serve at least 20 years. This pension is calculated as 2% of your highest 36 months of base pay for every year of service. For example, if you retire after 20 years, you’ll receive 40% of your base pay for the rest of your life.

2. Thrift Savings Plan (TSP) with Matching Contributions: BRS introduced the matching component to give you more control over your retirement savings. The government will match up to 5% of your base pay into the TSP. You are automatically enrolled with a 1% contribution, but as you save more the government adds more: 2% + 2%, 3% + 3%, 4% + 4%, 5% or more nets you an extra 5%.

This dual structure helps you build a retirement nest egg through both guaranteed income and personal savings. But there is a "catch" (there's always a catch, right?) with the matching: you don't get anything for the first 60 days of your service, and your match is capped at 1% for the first two years. If you contribute 20% of Base Pay as an E-1, E-2, or O-1 at the start of your career, you'll still only get 1% matching contributions until the 25th month when it will bump up to 5%.

Why The BRS Is Good For Everyone

First and foremost, we should all be realistic and recognize that the BRS wasn't created because the government actually cares about you and your retirement savings. If they did, they wouldn't have capped the matching at 5% or reduced the Defined Benefit portion from 2.5% to 2% per year of service, and they may even have considered offering Defined Benefit pensions to everyone who served honorably. The reality is the Department of Defense needed to cut their budget. Dropping the pension rate by 20% (from 2.5% per year to 2.0% per year is a 1/5th reduction) saved them 20% per year on their personnel costs for retirement. The 5% matching to everyone's TSP costs much less than that, so they win.

And you also win. Even if you do nothing and just let the Defense Finance Accounting Service (DFAS) automatically contribute 5% of your Base Pay each month for just a single 4-year enlistment or officer's contract, you should leave the military with about $10,000 in retirement savings. That's not bad.

But if you get on a Flight Path as laid out by the Military Wealth Coach and target a specific savings amount every month for the next 20 years, you can benefit massively.

• Over an average 20-year enlisted career that reaches E-8, the government will pay you an extra $47,751.48 in TSP matching contributions. That can be enough to help your total retirement savings pass $400,000 by age 40 when you leave the military, and will have you solidly on the Flight Path to $2.5 million between the ages of 62 and 65.
• In 20 years of service as a commissioned officer and retiring as an O-5, the government will pay you an extra $88,733.76 in matching contributions to your TSP. Assuming you've commissioned straight out of college and retire at age 43, you also will be on the MWC Flight Path to having $2.5 million right around age 63.

Because enlisted members can start sooner, they actually catch up and can have the same amount of TSP wealth as an officer, proving that the BRS can benefit all service members equally. Additionally, the $100,000-200,000 of extra income you can withdraw every year in retirement from a $2.5 million TSP portfolio will be worth WAY more than that little sliver of a pension you gave up.

If we assume that we'll all live into our 80s, which means that you will live 40 years after you retire from the military, we can start to see the real benefit of the BRS. Again assuming you've followed the MWC Flight Path from our upcoming book The  Ultimate (Military) Retirement Plan, your lifetime retirement benefits break down like this:

• Enlisted
  • Legacy. Assume 40 years earning $3,000 per month as a pension, the "Present Value" of all those 480 payments (indexed up for inflation) is $813,041.45.
  • BRS. If you do nothing with the BRS and TSP and just collect 40 years of the reduced $2,400 a month pension, the "Present Value" of your pension drops to $650,433.16.
  • When you add the $407,523.78 you can have in your TSP using our Flight Path when you retire and add it to your pension, the total "Present Value" at retirement is $1.06 million!
• Officer
  • Legacy. 40 years earning $5,000 per month as a pension delivers a "Present Value" of all your future monthly checks of $1.355 million.
  • BRS. Again in the do-nothing scenario in which you only receive the 2% multiplier and a 40% pension instead of 50%, the value of the pension drops to $1.08 million.
  • Adding in the $509,050.04 you can have in your TSP by following our Flight Path for 20 years ramps up the "Present Value" of your military retirement to $1.59 million!

Clearly so long as you use the BRS, you will be better off because the "Present Value" is higher for both officers and enlisted. It doesn't really close the gap in lifetime earnings or wealth because of the Defined Benefit pension payments based on Base Pay. Officers will always be paid more, so they will always benefit more in retirement from higher pensions.

Key Features of the BRS You Should Leverage

Seeing that using the BRS can turn you into a millionaire in retirement is proof enough that you should actively participate and take advantage of the various benefits. In our following blog posts we'll dive deeper into the strategies and tips that can help you maximize those benefits, but for now here are some wave tops of what you should be doing with your BRS:

1. TSP Contributions and Matching: The 5% match from the government is free money you should never leave on the table.

2. Continuation Pay: When you hit between 8 and 12 years of service, you’ll receive a bonus called Continuation Pay. This is typically 2.5 to 13 times your monthly base pay. You must agree to serve at least four more years to receive it, and this can be a perfect opportunity to boost your savings.

3.Traditional TSP Contributions: The TSP has both Roth (after tax) and Traditional (before tax) options. Almost everyone knows about and uses the Roth, but the reality is you should contribute to the Traditional in order to be able to deduct those contributions for tax purposes. This starts to make sense once your annual Base Pay is more than $60,000 and you're single, or if your total household income when married pushes beyond $125,000.

4. Deployed Contributions: When deployed, your pay is often tax-free. Contributing to the TSP Roth option during deployment ensures your earnings grow tax-free, giving you a massive advantage for the future: you save tax-free money and you get it back tax-free -- a double win! On the other hand, if you are deployed and not paying taxes, avoid making Traditional contributions as the primary reason is to deduct your contributions and save taxes now (which you already are).

5. Lump Sum Payment: Upon retirement, you have the option to receive a portion of your pension in a lump sum. This can either be extremely costly and leave you poorer in the long run -- or it can be the key to earning even more than you would with just a pension. Check back later this month for a blog post specifically on how to manage your Lump Sum Payment.

Common Mistakes with the BRS

If you truly want to maximize the value of your BRS, and the returns on your cash, there are a few things to consider. First and foremost is that the matching benefit is minimal during your first two years in uniform: 1%. As a result, many service members -- young officers especially -- save for retirement in an Individual Retirement Account (IRA), usually Roth, because they "don't get the full match." Look: 1% is more than 0%, and an IRA is a 0%-matched account. So the only time this logic holds up is during the first 60 days of your military career: after that, you always get at least 1%, so why not take it?

Additionally, the TSP will automatically invest your savings in the Life Cycle Fund appropriate for your age. This is a disaster if you let it happen. Over 40 years of your money being invested in the TSP (for example you enlist at 20 and retire at 60), the TSP Life Cycle Funds average between 5-6% returns while the C Fund averages over 10%. You will have to work at least 6 years longer just to reach the same retirement goal if you leave your TSP money in the Life Cycle Fund. Move every penny into the C Fund -- and save and invest every future penny in the C Fund.

The third misconception or mistake is to "double-dip" and save to the TSP and an IRA simultaneously. This is nonsense. First, you can make payroll deductions of up to $24,000 a year to your TSP, or $2,000 a month in retirement savings. You are probably not going to max that out. But even if you do, and after adding in the most possible matching contribution ($6,159 per year to an O-5 at 20 years), the total saved into your TSP is $30,159. But the IRS allows you to add up to $69,000 per year to your TSP, which means you could throw another $38,841 into your TSP from your take-home pay. That is probably a dumb idea, but since TSP funds are so much cheaper than what you can invest in elsewhere, you should be putting 100% of your retirement savings into the TSP while in uniform. Wait until you get out before adding directly to an IRA.

Examples: How Saving Now Can Lead to a $2.5 Million Future

Example 1: Saving 20% of Your Base Pay at the Beginning of Your Career. If you’re an enlisted E-4 making $40,000 per year, here’s what it could look like:

• TSP Contribution: $8,000 per year (20% of $40,000)
• Government Match: $2,000 per year (5% match)
• Total Annual Investment: $10,000

With an average annual return of 8%, after 30 years, your TSP balance could grow to nearly $1.2 million -- and in 38 years, or right around age 67, which is considered Full Retirement Age (FRA), you will launch past $2.5 million in your TSP.

Example 2: Hitting the 40% Savings Rate as You Progress**
As your income increases, you should aim to reach the 40% savings rate. Let’s say you’re a senior enlisted member or officer making $100,000 per year. Under the Military 40:40:20 Rule, here’s what your savings could look like:

• TSP Contribution: $15,000 (15% of $100,000)
• TSP Match: $5,000 (5% of $100,000)
• Non-Retirement Savings: $25,000 (25% of $100,000)
• Total Annual Savings: $45,000

With an 8% annual return, your total savings will reach $2.5 million in just 21 years and 3 months, making "early retirement" possible. Moreover, your retirement savings will hit $2.5 million in 30 years, and your total wealth will have grown to more than $5 million -- you'll be a multimillionaire and totally financially free in your 50s!

Retiring With Confidence Starts Today

Your military career offers you incredible benefits, but only if you take full advantage of them. The Blended Retirement System (BRS) will make you better off, and allow you to retire in the Top 10%, or maybe even Top 5%, of Americans. But to get there you need to take advantage of the BRS's benefits -- and you need to start today.

Target a high savings rate of 40% using the Military 40:40:20 Rule, and split that between retirement savings in your TSP and non-retirement savings in a brokerage or High Yield Savings Account. For more on this, read Service and Wealth or sign up for our weekly newsletter so you can be the first to read The Ultimate Military Retirement Plan. In this book you'll get the charts and savings plans that put you on a Flight Path to Financial Freedom from any rank or age.