There’s some official word out for Reservists and the impact of the new “blended” retirement system now. Actually, it’s a month old, but I noticed it just the other day on the Navy Reserve Homeport site. Forgive my tardiness, but I hope I can at least provide some amplification.
They posted a very handy chart showing the basics of the program. There is nothing shocking, but I was anxious this summer to see if anything would come down because in all the initial press, only the Active Component was referenced – there was nothing specifically about how the Reserve Component would be affected. The Department of Defense has now rectified this shortfall.
My concern was this – since the baseline of military pay is so much lower for a Reservist than an active member, matching five percent TSP contributions are five percent of a much smaller number. It was conceivable things might work a bit differently for a Reservist, with that in mind. But it looks like the fundamentals remain the same: there is still a reduced annuity, matching contributions to the 401(k)-style system, and a bonus check at the 12-year mark.
So a few notes on each, in the order presented above:
Here’s how the annuity calculation works. If you are a Reservist, you derive your years of service by adding up all the points you have and dividing by 360. Then you take that number, multiply it by 2.5, put a percent sign after the result, and multiply it by the average monthly pay of your last 36 months of service (using the active duty payscale). The new change is that the 2.5 becomes a 2.0, so the final result will be 20 percent smaller than before.
Let’s do a couple scenarios under the old system and new, using simple numbers for easy math. Let’s say someone earned 5,000 points in a career and ended his career with an average base pay of $6,000 a month (had he been on active duty).
5000 / 360 = 13.89 years of service
13.89 x 2.5 = 34.725 percent of base pay will be monthly annuity
34.725% x $6000 = $2083.50 monthly
5000 / 360 = 13.89 years of service
13.89 x 2.0 = 27.78 percent of base pay will be monthly annuity
27.78% x $6000 = $1666.80 monthly
The question is, can our member with 5,000 points make up a difference of $416.70 a month with contributions from a Reserve salary? That takes us to…
Thrift Savings Plan
So, it should go without saying that you should max out your contributions if your employer is willing to match them. If you don’t, you are voluntarily turning down a part of your compensation package – the money has already been set aside and all you have to do to get it is invest in yourself. If you don’t do anything and the military just does its obligatory one percent contribution, then, no you won’t make up that gap. So this section is not for you.
Simple math again. I’m going to assume a service member who makes $10,000 each year from Reserve service, including monthly drills and twelve days of Annual Training. Oddly, this member was never terribly junior but also never gets a raise over twenty years, so we’ll call her average. If this average member contributes five percent of that year’s pay, it equals $500, which the government matches for an even $1000.
So now we’ve got $1,000 a year going into the pot. Assuming an annual rate of return of three percent over twenty years, this will provide a hair over $27,000 at the time of retirement. But with Reservists being what they are, it’ll be another twenty years until our average members turns 60 and can draw from it. With that additional time and three percent annual returns, the member will have $49,000 to draw from.
But even then, it falls short. Under the contrived circumstances presented, estimated monthly income from the $49,000 saved would be around $267, which is about $150 short of where we’d like to be.
Lesson: Don’t do the minimum. Here’s how it looks for someone who spent four years on active duty plus two year-long mobilizations, with $40,000 in base pay each year. That’s an additional $4,000 in contributions each year, times six – an extra $24,000 in principle, and a more realistic profile for a great many Reservists. If this compounds at three percent until age 60, the member would hold $92,000!
And guess what – for this more realistic member, it not only meets but exceeds the threshold we established earlier, at over $500 a month.
Unintentionally or not, it looks like the blended retirement system is a way of tacitly motivating Reservists to participate more.
Bonus (Continuation Pay)
At the twelve-year mark, members under the blended system have the option to receive a small bonus if they elect to remain in service another four years. Not much to say about this, except that it would make some nice additional principle you can add to a retirement account (whether TSP or another one)… especially if you’re only doing the minimum Reserve commitment.
So what’s the bottom line?
First, my numbers are unrealistic in that they don’t account for inflation and reflect no known species of servicemember, and I agree. But neither were they made up out of thin air, and I believe still help tell the story. (And my calculations were done on bankrate.com, but I don’t where my business school notes are, and I wasn’t going to take the time to find them. So, there.)
Second, retirement from the Reserve will be more dependent upon what you put into the Reserve than before. If you are planning on this being a major source of support in your dotage, then don’t skimp on your efforts now. Max out your points every year and spend some decent time on active duty in order to build up some good TSP contributions.
Third, if you’re a Reservist hopefully you have some other form of work to occupy your time and pay the bills. Let that be your primary means of support. The benefits of being a Reservist provide a wonderful cushion and service opens many doors – but it is still just a part-time job. Ensure you plan for what you do on the outside to be enough to see you through.