I wrote this response to a friend who is a fellow O-3 coming up on 8 years of service. If I were in your shoes as an O-1 (I assume), I would absolutely opt in. Your chances of it outperforming the high three system are much higher than mine. One caveat, I still do not know where the contributed money is going. I've been told by 2 different TSP reps 2 different things, but I tend to belive the first one, that it will go into the traditional account and be taxed later. Keep in mind this post is written as if it could go into the Roth option, but the math doesn't change all that much. I also was very rough with the math numbers, not using marginal tax rates, and instead used just lump sum rates, but the idea remains the same:
TLDR: Opting into BRS is a cheap way to give you options, secure *Some* retirement income steam, and may even outperform the legacy system, even for someone with 7.5 years in.
1. Your current balance in TSP has no bearing on your decision. You should only be concerned about future wealth and where it's coming from. What's past is past. What you've already been contributing to TSP doesn't have any bearing on the future comparison of one plan over another.
2. Here's my assumptions:
O-3 at 7.5 years at time of opting in (January 2018), remains on active duty to 20 on a normal promotion schedule. He gets a 7% return, contributes 5%, gets 5% match, and dies at 85. Begins withdrawing from TSP at 67. Gets the Navy agreed upon continuation bonus at 12 years and takes a 0% lump sum option. Here's my results, and I use "present day dollars" because the "future dollars" option on the BRS Calculator is misleading at best - it appears to show the spending power of your pension rising at 3% annually, which is false - it's tied to an inflation index. It doesn't rise in spending power.
3. Results:
In this scenario: the total value of the High-3 Legacy System is 2.1 million dollars, keeping in mind that's taxed at whatever the bracket is at the time, let's just say for argument's sake it's 20%, so over the course of time, that comes down to a total value of 1.68 million. The BRS system's value is a combined 1.68 million (pre tax) pension plus 252,000 in (non-taxable, if you did Roth) government contributions & growth for a total of 1.949 million total value pre-tax. Using the same tax bracket, the total value is now (1,680,000*.8)+(252,000) = $1,596,000, so 84,000 less than the legacy system. When we add in the $18,000 bonus from continuation pay and we'll assume you don't invest it at all and blow it in a crazy night in Las Vegas, now the difference is only $66,000 in favor of the legacy system. (If you invested 100% of that bonus and got 7%, by the time we start taking withdrawals in this scenario, the total value would be $168,000 if compounded annually, which would put BRS ahead of Legacy by $80,000, which I got from $168,000-88,000). In either system, and here's the moot point about your own contributions (assuming you would put 5% away in TSP regardless of getting a match or not), you'd have an additional $252,000 from your own contributions and growth. Of note: I'd have to check the math, which I'm too lazy to do right now, but from what I gather, the BRS calculator assumes your TSP money stops growing when you begin withdrawals, which would skew these results to be favoring the legacy system. Your money will continue to grow, at least at some rate as long as you don't keep it in cash exclusively.
4. Analysis:
The results between the two you can see are remarkably similar. If you got 8% in the market, it's even tighter. If taxes go up from that 20%, it favors BRS since more of your money isn't taxed.
So what am I buying if I buy into BRS? It's effectively an insurance policy, and a very cheap one at that, and one with the very real possibility of outperforming my other retirement option. Most service-members to not make it to 20, including officers, so this allows me to walk away with something, which is better than nothing. If you were to FOSx2 (a very real possibility in aviation), then you'll really be kicking yourself. A SWO or Submariner may have a bit different calculus here on how much they value that insurance policy. But it also buys me flexibility. What if I get orders I don't want to take? Well, I can walk away knowing again, that I have something, which is better than nothing, so I've also bought a bargaining chip that I'm keeping in my back pocket - that is, a serious option to leave without being tied to the magical 20.
5. Why am I choosing BRS?
This may get a little pilot specific, but I think a FOSx2 is a real possibility. I want to walk away with something and I want the flexibility of being able to walk away if I don't get something I want to do instead of agreeing to be a staff and boat donkey for 9 years accepting crappy orders from the detailer because he/she knows I've been suckered into 20 years. I'll do the reserves and not take crappy orders if I want. While the value of the retirement changes, the results are pretty much the same (I'll post later my reserve analysis) when comparing the two plans. I also believe, long term, taxes will go up. I want to have the maximum amount I can in tax shelters (ROTH IRA, ROTH TSP, traditional TSP, etc.). I still believe in the American and Global markets and I think investing is a good way to keep my income "streams" diversified. The pension payouts are at the whim of a Congress that continues to struggle with infighting. We assume it won't change because of the high level of military support we enjoy from the American public. Given how small of a population we really are (veterans), we really have little lobbying power in Congress if the American people don't support veterans (take a look at the post Vietnam years and the benefit cuts they saw). In my time in the military thus far, I've almost exclusively seen benefit cuts: Post 9/11 GI Bill eligibility, a 5% cut to BAH (they snuck that one really nicely) a cut to the fact that BAH used to account for the cost of renter's insurance, commissary hours, and so on. I think the only benefit I have seen increase is gym hours have increased on some bases. Call me jaded, but it is what it is - a political reality that can change on a whim. The pension may not be as rock solid as one may think - take a look at the number of city and state pensions that have been cut in the past 15 years.