The new Blended Retirement System has been a hot financial discussion topic for the past couple of years. Until January 1, 2018, it’s been a hypothetical discussion. Now it’s real. Game on! With hundreds of thousands of dollars on the line (no, that’s not a typo), you don’t want to make a series of costly mistakes. Here are five to avoid:
1. Sticking with High-3 against the odds. I know what they say about opinions, but here’s mine: If you ultimately qualify for retirement benefits, you’re better off with the High-3 system. However, no one has a crystal ball and knows if they’ll be able to go the distance. There are just too many variables, many over which you have no control. For example, your service may decide they no longer require your services or your family situation may demand an early exit. If you’re early in your career or uncertain about making it 20 years, opting in to BRS may increase the odds of getting something for retirement from the government in the event you separate prior to retirement.
2. Opting-In too late in the game. If you are currently serving and plan on switching to BRS, make the switch as early as possible in 2018. In this article, my colleague Josh Andrews highlighted the fact that delaying the decision could result in losing thousands in retirement. Every paycheck you delay equates to the loss of government-provided automatic and matching contributions to your TSP. Also, if you’re approaching 12 years of service and are switching to BRS to get your hands on continuation pay (I’m not sure this is a good idea!), you also need to opt-in in a timely manner to ensure you’re eligible for continuation pay and have time to get through the required administrative process. Don’t let another payday roll by on your calendar, get it done.
3. Opting-in because the lump sum option is enticing. As a financial planner, the BRS lump sum option at retirement is a little scary. The big chunks of cash that will be offered in exchange for a smaller monthly retirement check from the time you retire from the military until normal Social Security retirement age (today, 67) is likely to be both enticing AND a bad deal for retirees. If I tell you I’m going to give you $100,000 for your house that could sound cool…unless your house is worth $140,000. That’s how I view the BRS lump sum “opportunity.” I understand there could be situations where having a big chunk of cash might be life-changing, but I wouldn’t make the move to BRS solely or primarily because of this feature.
4. Leaving government money on the table. If I’ve said it once, I’ve said it 1,000 times, don’t miss out on an employer’s matching contribution to your retirement plan. With BRS, that means contributing a minimum of 5% to the TSP. Making that move will immediately trigger a 5% employer contribution –essentially, free money -- for those that switch to BRS. Those who join in 2018 and later will receive a 1% automatic contribution to their TSP after 60 days of service but will have to wait until the beginning of their third year of service to get the 4% match, but still should consider getting on the savings bandwagon as soon as they can by contributing at least 5% to the TSP.
5. BRS or Not: Avoiding the TSP. For most, the key benefit of BRS will be those automatic and matching contributions your service will make to your TSP account. If you’re on the fence or sticking with the High-3 system you can duplicate that benefit with one simple move: consider contributing 10% of your own money to the TSP. That’s a potential retirement win – more money in your retirement nest egg -- no matter where you land with your BRS decision. And don’t forget to boost your contribution with each annual pay raise, promotion, or time in service pay increase.
It’s been exciting to see all the energy around the BRS topic over the past year plus, now it’s time for action.
Have a question about BRS or something to add? Share your feedback below.
Author Bio: JJ Montanaro is a Certified Financial Planner® professional and part of the Military Affairs team at USAA. He’s a graduate of the U.S. Military Academy and has over 20 years of financial planning experience.
* Disclosure: "Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements."
The information contained is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional advice before acting on any information you may have found in this article. This article in no way attempts to provide financial advice that relates to all personal circumstances
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