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Is the Blended Retirement Lump Sum Fair?

Blended Retirement

In approximately ten years when the first wave of active duty personnel who opt into the new Blended Retirement System (BRS) start to retire, they may be asked: Do you want your full immediate annuity? Or do you prefer to get part of its value in a discounted lump sum at retirement in return for forfeiting either one half or one quarter of your retired pay until age 67, when you would see full annuities restored?

But if the Department of Defense (DoD) Board of Actuaries has its way, that won’t happen. The board has called the system inappropriate and has asked Congress to rescind the choice.

While lump-sum buyouts of pension obligations are common in the corporate world, the formula Congress has prescribed for setting military lump sums is not. The amounts offered will be too large to ignore for many retirees seeking to get out of debt, buy a home or start a business. But the lump sum choice also will lower the lifetime value of retirement packages significantly.   This is a huge financial consideration.

The formula to be used for setting an aggregate personal discount rate for enlisted and officer retirees will combine an inflation-adjusted, 7-year average of the Department of Treasury High-Quality Market (HQM) Corporate Bond Spot Rate Yield Curve at a 23-year maturity with an adjustment factor of 4.28 percentage points. That last factor seeks to capture some of what past studies have learned about military personal discount rates.

This is a formula that is very difficult to understand for most of us.

The BLS plan enacted for new entrants starting in 2018, with an opt-in option for current members having fewer than twelve years of service by then, is the vision of the Military Compensation and Retirement Modernization Commission.

The Department of Defense asked Congress not to include the commission’s lump sum scheme in the final BRS plan. The House initially agreed while shaping its retirement reform legislation. Senators, however, favored the feature to hold down costs. So, the final compromise that became law allows lump sum offerings for accepting a 50 percent and a 25 percent cut in retired pay until age 67.

The board predicted accurately that the department would settle on “some type of aggregate personnel discount rate” for both enlisted and officers. But it also predicted the resulting lump sums could produce behaviors by retirees significantly different than what the commission or Congress had projected. It also could feed a belief the lump sums are designed “to take advantage of our service members.”

When considering these options that significantly impact your financial future, obtain all the information and make informed decisions.
Tell us if you think this is fair by emailing us at: [email protected]

 

New Blended Retirement Plan Coming Soon

military blended

By Debbie Gregory.

In February, the primary tool to introduce the blended retirement system (BRS) to active and reserve component service members will be a two-hour online course that explains features and compares potential lifetime values with the legacy “High-3” retirement plan. They also will have access to a new online calculator to compare BRS with High-3 using age, years expected to serve, planned contributions to Thrift Savings Plan (TSP) with government matching (a key feature of BRS), historic rates of return on TSP investment options, personal tolerance for investment risk and more.

Now if that first paragraph made your eyes glaze over, financial guru Suze Orman wants to help.

Orman has recently formed an educational partnership with the Army, one that is accessible to all service members on SuzeU.com. Using the coupon code “USA” the program, which typically costs $54, is free for troops using the code.

Orman wants those in the military to protect their money as aggressively as they do the nation.

Servicemembers  with less than 12 years of active duty service and National Guard and Reserve members with less than 4,320 points will have until Dec. 31, 2018 to choose whether to remain in the current system or opt into the new one. The new blended retirement system is a three-pronged program.

Prong 1 consists of a defined pension benefit upon retirement. Prong 2 consists of a Thrift Savings Plan (TSP), which is similar to a 401K plan. And Prong 3 is a one-time continuation payment for Soldiers with eight to 12 years of service.

Orman said the military is moving to BRS for the same reason most companies have trimmed or replaced their defined pension plans with employer contributions to portable 401k plans: It saves them money.

“If you’re smart and you let me teach you, I can show you how you can have more money [with BRS] than if you stayed with the simple legacy system,” Orman said.

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