The new Blended Retirement System is now up and running. Although skepticism often accompanies change, in my mind, BRS holds some serious promise. The possibility of more military members benefiting, more servicemembers saving for their future, more interest in personal finances and more information and education (yes, some of it mandatory!) could all be positive effects of BRS. However, there are some potential traps you want to sidestep. Here are 5 that come immediately to mind:
- Letting Uncle Sam choose your tax treatment. The Thrift Savings Plan offers both Roth and Traditional options. The default option – your option if you do nothing – is the pretax traditional option. While this approach will reduce your taxable income today, many young servicemembers just kicking off their working career may be better served by contributing to the Roth TSP. The Roth option offers the potential to build a tax-free stream of income in retirement, but you’ll have to visit myPay (or your service’s pay system) and choose to have your investments directed to the Roth TSP. And remember, government contributions to your TSP will always be to the traditional TSP.
- Letting Uncle Sam elect how much you contribute. Those that join the military in 2018 or later, will be automatically signed up to contribute 3% into the TSP. I love this “auto-enrollment” feature because it’s going to create more participation. However, I would have preferred the default contribution be at least 5%. At this level, the participant would get the maximum government contribution of 5%. Don’t settle by just putting 3% into the TSP, shoot for at least 5% and better yet, 10% or more. And remember, no matter where you start today, you can increase your contribution over time. Periodic pay raises and promotions are a great time to boost what you’re contributing.
- Questioning Uncle Sam’s wisdom. I like the new default TSP investment rolled out with BRS. Until now, the default investment election – again, your election if you did nothing – was the G fund. While safe and stable, the G fund is probably not appropriate for many servicemembers saving for retirement 40+ years in the future. For those who join the service in 2018 or later or are first-time TSP participants, the default option is changing to the age-appropriate Lifecycle fund; for someone born in 1983 or later, it will be the L 2050 fund.
- Opting for the lump sum option. If I had to guess, I’d say the DoD was not overly excited about Congress’ requirement to offer a lump sum option as part of the BRS. That lack of enthusiasm translated into what I consider a poor value for servicemembers who elect to take the lump sum. In my opinion, without diving into a lot of detail, if you choose to take the lump sum you will be underpaid for what you’re giving up.
Quit daydreaming during training. Don’t blow off financial training. I’d be lying if I didn’t admit my mind has wandered during more than a few sessions of mandatory training – both here at USAA and during my time in the military. My hope is that won’t be the case for you and the required financial training will push the needle on financial readiness across the military. Take advantage.