Retirement: BRS/High 3

[pourts]

I am honestly pretty stuck between the two options and was wondering if someone could explain to me how the retirement system works if say, you separate from active duty at the 11 year or so mark of service and then serve the remainder of your 2o years as a reservist? I know that a lot is up in the air whether you even get the opportunity to go to 20 (0-4 blood baths) but it seems like there are some options in the reserves so I talked to a reserve IP about a month ago and he told me that if you are in a flying job reserve-wise each of your years in the reserves will count as a full year towards your retirement because the flying days add up a little bit more than a regular reserve job. I tried to mess around with the BRS calculator and I know there was actually an example in the JKO about an aviator going to the airlines while flying in the reserves to make 20 and opting in, but I am really with @pourts here that since the government is trying to save money on this retirement system I might want to take a long hard look and make sure opting in to BRS is really the best option. I keep hearing over and over again that you will walk away with nothing if you don't opt in but this seems like somewhat of a fallacy to me because even with BRS most of your retirement is coming from your own personal contributions, which you can do under the old system. Anyone have any experience that can shed some light?

Crap, that's not really what I meant. I was mainly trying to give a compliment before I started an argument. In that context, I was saying you have to use some rosy assumptions for BRS to beat high 3 IF YOU STAY FOR 20. Only about 15% of military stay for 20. I'll link the data if I can find it again, but USAF officer has the highest percentage staying until 20 (~33%), USMC enlisted the lowest (~8% OORAH!), and the other services/ranks in between.

I think the BRS is best for most folks purely for the optionality. Even if you do 20 and only get 40% retirement instead of 50%, it was a fair trade off for the insurance/ option of leaving earlier with all those matching funds. But, if you are an 11 year O-4 in the USAF and have no plans to leave, you should probably be choosing the traditional retirement.

Probably a little on the backside of the power curve at this point since you already lost matching for Jan even if you were to decide today. DFAS/MyPay works super slow. There are lots of great threads on other websites that are more personal finance focused like this one at Bogle Heads https://goo.gl/8Zb5bX ("Nords" at that website is a prior Navy submariner and very knowledgable on military finance, even current issues)

 

[Spekkio]

If you are only worried about spending for a house, dependent's college or major medical expenses, then I am saying (politely) that you are wrong. You can have your cake and eat it too. Everyone needs readily available savings for emergency that isn't tied up -- but again, penalty free withdrawals of principal from your Roth IRA can be your piggy bank if necessary.

You're making a lot of assumptions, many of them incorrect here. But like I said, it's your money.

My two purposes for posting in this thread is to highlight that
1) the BRS system is a net loss if you are in it for 20 years.
2) There are other factors besides maximizing total dollars at 60 years old to consider when financial planning, such as what your budget needs are going to be at various times in life of the chances you live until a certain age, and these need to be factored into your overall calculation.

I don't know why it's so difficult for you to accept that I, along with most people, will need more money at 46 to live comfortably than I will at 66, and thus I am not electing an investment strategy that puts me in a position to make significant life decisions with a tough financial constraint, but whatever floats your boat.

I also find it ironic that you are a proponent of taking less financial value in opting in to BRS because you might decide to get out of the military (or the military might decide that for you), yet you are selecting an retirement investment strategy that relies on a lot of uncertainty factors to go in your favor to realize its full value while simultaneously assuming all of them go that way.

 

[insanebikerboy]

100% agree with you the reason was to save money. The result may just end up be better though, and for the vast majority of our force, it will be better in the long run as they will walk away with something instead of nothing.

They will walk away with something as long as they do something about it. The high-3 system required nothing other than hitting the finish line to be vested in it.

My personal opinion is that the DoD is banking on a lot of people doing nothing or starting to contribute after having been in for a bit, such that the DoD obligations are much lower long term, as a whole.

I can recall as a brand new E-3 out of bootcamp that the last thing I was thinking about was investing.

 

[DanMa1156]

They will walk away with something as long as they do something about it. The high-3 system required nothing other than hitting the finish line to be vested in it.

My personal opinion is that the DoD is banking on a lot of people doing nothing or starting to contribute after having been in for a bit, such that the DoD obligations are much lower long term, as a whole.

I can recall as a brand new E-3 out of bootcamp that the last thing I was thinking about was investing.

Yes and no. At a certain point early in their career, they will get 1% government contributions even if they put in 0%. And while you may not have been thinking about it, my experience with my divisions thus far has been almost all of my Sailors signed up TSP at 5% because they were advised to at Boot Camp. The only problem is, they never followed up with it and it stayed in the G fund. That too is changing (has changed?) as it's going into an L fund for new signups nowadays.

 

[DanMa1156]

You're making a lot of assumptions, many of them incorrect here...
I also find it ironic that you are a proponent of taking less financial value in opting in to BRS because you might decide to get out of the military (or the military might decide that for you), yet you are selecting an retirement investment strategy that relies on a lot of uncertainty factors to go in your favor to realize its full value while simultaneously assuming all of them go that way.

I would argue that's exactly the problem with High-3. I, along with probably many of my peers was a "lifer" and it looks like the Navy is going to decide that actually "no, you're not." Like I said in my original post - this is a different calculus for a Submariner or SWO who isn't concerned about O-4, but it remains a very real concern in many communities of aviation.

 

[Spekkio]

For an E-3 4-and-out, the mil spends like $1500 to match a 5% contribution... for their entire enlistment. There is no match for the first two years of service.

 

[DanMa1156]

For an E-3 4-and-out, the mil spends like $1500 to match a 5% contribution... for their entire enlistment. There is no match for the first two years of service.

I understand that. Still better to that member than it was for that E-3 who got out on January 1st.

 

[Spekkio]

I would argue that's exactly the problem with High-3. I, along with probably many of my peers was a "lifer" and it looks like the Navy is going to decide that actually "no, you're not." Like I said in my original post - this is a different calculus for a Submariner or SWO who isn't concerned about O-4, but it remains a very real concern in many communities of aviation.

That makes sense, but that wasn't your argument. Your argument is that you stand to make more money under BRS if you reach 20 years and retire. Not only that, that a person with 8 years of service stands to make more money by opting in. Both of those are not true.

But taking less value guaranteed instead of more value with uncertainty is reasonable.

What you are starting to factor in but pourts is not is the utility of guaranteed money vs. uncertainty. In other words, if I were to offer you $50,000 or a 10% chance to win $500,000, what would you take? What about $25,000 or a 5% chance to make $500,000? Eventually you find a crossover point, although all of these gambles are mathematically equivalent in terms of expected value, the amount of guaranteed money at stake doesn't have the same value to you personally. At some point you make enough money doing your day job where the amount offered guaranteed is inconsequential to the gamble, and this applies even when the expected value isn't equivalent (ie would you take a 80% chance to win 1,000,000 or a 100% chance to win $500,000)?

The overall point is that this isn't a purely maximizing financial value decision. Pourts is making it into one and that is overlooking a lot of factors. In math terms means that he's overlooking the utility function.

So yes, paying off my mortgage early is less of an overall expected value. I know this. But having a guaranteed $300,000 saved in my pocket from interest and $20,000 less in expenses at 46 in order to retire is life-changing. Having a 6-figure income at 70 years old isn't. And so the former is more valuable to me, even though it's less money.

 

[DanMa1156]

That makes sense, but that wasn't your argument. Your argument is that you stand to make more money under BRS if you reach 20 years and retire. Not only that, that a person with 8 years of service stands to make more money by opting in. Both of those are not true.

I, and the math I displayed show that is is very possible for someone to do these. I stand by these statements. We'll never agree it seems, but I'm the one who has literally put the entire math equation out there and shown that you'd be within $60k at only 7% at 8 years. Someone joining now that earns that or higher would certainly outpace the high 3 system.

 

[Spekkio]

We'll never agree it seems, but I'm the one who has literally put the entire math equation out there and shown that you'd be within $60k at only 7% at 8 years.

The only one who has done the math? Within $60k in 8 years? I posted a spreadsheet on the previous page that proves that you're flat out wrong. Someone who opts in after 8 YCS will stand to lose about $100k with your ridiculous 8% average return assumption, and with a more reasonable 6% they stand to lose about $200k.

 

[pourts]

I don't know why it's so difficult for you to accept that I, along with most people, will need more money at 46 to live comfortably than I will at 66, and thus I am not electing an investment strategy that puts me in a position to make significant life decisions with a tough financial constraint, but whatever floats your boat.

I totally accept that. I myself, and most folks, will need more at 46 than 66. I think you are overlooking how easily you can get your money at 46 if you want it, depending on the type of account. I also think you are mis-valuing the benefit of the mortgage interest tax deduction for the full 30 years. Granted, millions of variables there, but we are talking generics here.

 

[tarjas]

Anyone run the math look for legacy vs BRS with service of longer than 20yrs? Say O5 over 25 or O6 over 30. The percentage and absolute gap widen quickly. Perhaps I am simply stating the obvious here but I assume some folks at less than 12 years have a pretty good idea if they are tracking to make O5 or not (OP DH selects/transitions) .

 

[pourts]

That makes sense, but that wasn't your argument. Your argument is that you stand to make more money under BRS if you reach 20 years and retire. Not only that, that a person with 8 years of service stands to make more money by opting in. Both of those are not true.

But taking less value guaranteed instead of more value with uncertainty is reasonable.

What you are starting to factor in but pourts is not is the utility of guaranteed money vs. uncertainty. In other words, if I were to offer you $50,000 or a 10% chance to win $500,000, what would you take? What about $25,000 or a 5% chance to make $500,000? Eventually you find a crossover point, although all of these gambles are mathematically equivalent in terms of expected value, the amount of guaranteed money at stake doesn't have the same value to you personally. At some point you make enough money doing your day job where the amount offered guaranteed is inconsequential to the gamble, and this applies even when the expected value isn't equivalent (ie would you take a 80% chance to win 1,000,000 or a 100% chance to win $500,000)?

The overall point is that this isn't a purely maximizing financial value decision. Pourts is making it into one and that is overlooking a lot of factors. In math terms means that he's overlooking the utility function.

So yes, paying off my mortgage early is less of an overall expected value. I know this. But having a guaranteed $300,000 saved in my pocket from interest and $20,000 less in expenses at 46 in order to retire is life-changing. Having a 6-figure income at 70 years old isn't. And so the former is more valuable to me, even though it's less money.

I am glad you brought this up. I am a big fan of Kahneman and Taversky's Prospect Theory, and that's exactly what you are talking in your examples. A major improvement in DESCRIBING human behavior over Expected Utility Theory. However, Prospect Theory is descriptive (it describes what people do) not prescriptive (help you make the best decision). ...(extra description for those who may be unfamiliar).

Lets talk about 46: I can get you an extra $20,000 per year in long term capital gains (taxed at 15%) in a taxable account from the money you didn't spend paying off your house early. Or you can withdraw it penalty free from Roth principal. Or I can get you rental properties that cash flow $20,000 annually. That's because I was making 5 or 6% (I think a reasonable assumption) compared to the 3.5% loan you paid off. Granted, my strategy has slightly more risk, but its very prudent risk, and that's why I am beating this dead horse so the young guys out there consider it. A 3% difference may not seem like much in 1 year, but it will make a HUGE difference in the long run.

I understand utility, and why someone may choose something non-optimal in a financial sense because it gives them greater utility. For instance, I know someone (quite wealthy) who paid off a bunch of low interest car and home loans in order to make life easier for his (basically) non-english speaking wife should he pass away early. These are valid decision making factors. However, you didn't really mention anything like that in your post, nor should you have. The reason why I made an argument about it is for the audience of perhaps young and unsophisticated folks so they don't get the impression paying off the house at 3.5% is a slam-dunk financial decision.

If nothing else, our 3 page argument has at least proven that the jury is out on that financial strategy.

 

[pourts]

The only one who has done the math? Within $60k in 8 years? I posted a spreadsheet on the previous page that proves that you're flat out wrong. Someone who opts in after 8 YCS will stand to lose about $100k with your ridiculous 8% average return assumption, and with a more reasonable 6% they stand to lose about $200k.

For the record, you are correct and @DanMa1156 is wrong. For someone that stays 20 years, the High 3 is better. However, as discussed ad nauseum, the option value of the BRS more than makes up for the slightly lower returns.

However, there is a problem with your model on page 4. Let me first say, we all know the stock market doesn't go up smoothly at exactly 7% forever. That is a simplification, but its necessary. In your model, the TSP contributions don't "appear" until the end of the year in a lump sum, and they make zero interest all year. This is reminiscent of the comment @villanelle made earlier about dollar-cost averaging, except its even worse-- the money isn't being "invested" until the end of the year.

A better model would have January's $621 deposit making 6.4% interest by year end, Feb deposit making 5.8%, etc. That gives you an extra $239 at the end of year 1. Do that for every year, and compound those amounts for a lifetime, and it ends up being real money. This problem affects both your High 3 contribution column and your BRS column, but biases towards High 3 since BRS is contributing more.

 

[SlickAg]

...I talked to a reserve IP about a month ago and he told me that if you are in a flying job reserve-wise each of your years in the reserves will count as a full year towards your retirement because the flying days add up a little bit more than a regular reserve job...

That isn't exactly how it works. You have to get a "good year" by getting enough points for that year to count towards your 20 years to qualify for the pension. Yes, reservists that fly typically drill more than non-flying reservists and therefore acquire more points which means they'll more money from the retirement. But unless you were on long-term orders and/or a combination of drills and orders for the whole year, it's not a full year towards your retirement (a full year is 360 points; Uncle Sam spots you 5 or 6 free points a year on active duty).

As one data point, I don't know of a single reservist who will be opting in to BRS.