Old vs New Retirement System

[Spekkio]

I seem to have missed something on your spread sheet on the first block of Cumulative New Pay. Why is it negative? I read the comment but it didn't make any sense. Also, your "running total in TSP" formula is off by one block. It should be $k$2 not $l$2.

Because under the new retirement system, 6% of your pay is paid into TSP (to get the max 5% match). Thus you begin year 1 of retirement with 6% of your cumulative pay invested, whereas in the old system there is no match and that pay would be in your pocket (or if you wanted to invest above and beyond, I assume you would do the same under both systems and it becomes a wash anyway... maybe a poor assumption when you are working with 94% of your pay and 95% of your BAH, but hey it's a start).

Invested cash flows are negative, even if they go into an appreciating asset. This is the same as if you had a rental property and were paying toward a mortgage, even if the house is an appreciating asset and the payment is going toward the equity, your cash flow is negative...you recouperate that value via rent and/or selling down the line. In the case of TSP, they become positive when you can withdraw the money at 60, hopefully at a higher value, but the 6% of pay you put in is a negative cash flow until then.

Good catch on the L2 reference on the enlisted tab, again like I said it was a quick throw together. Yes it should be K2.

 

[Stephen Hall]

Because under the new retirement system, 6% of your pay is paid into TSP (to get the max 5% match). Thus you begin year 1 of retirement with 6% of your cumulative pay invested, whereas in the old system there is no match and that pay would be in your pocket (or if you wanted to invest above and beyond, I assume you would do the same under both systems and it becomes a wash anyway... maybe a poor assumption when you are working with 94% of your pay and 95% of your BAH, but hey it's a start).

Invested cash flows are negative, even if they go into an appreciating asset. This is the same as if you had a rental property and were paying toward a mortgage, even if the house is an appreciating asset and the payment is going toward the equity, your cash flow is negative...you recouperate that value via rent and/or selling down the line. In the case of TSP, they become positive when you can withdraw the money at 60, hopefully at a higher value, but the 6% of pay you put in is a negative cash flow until then.

Good catch on the L2 reference on the enlisted tab, again like I said it was a quick throw together. Yes it should be K2.

Spekkio, I took your advice and made a change to my spreadsheet. The spreadsheet now allows users to reduce their return (down to 0% if they choose) after reaching age 59.5. The user can choose between a 0% and a 12% return if they wish. I think this makes it more practical. Thanks for the suggestion.

 

[KilroyUSN]

I feel like you should be able to select if you plan on putting your retirement pay, towards your TSP retirement.
In other words, do not include the money received from the navy out of retiring, into your "benefit with return" section. Otherwise it could be very misleading to those comparing an income versus potential money in their retirement account.

 

[KilroyUSN]

Stephen Hall, really nice excel document. After tweaking it, I made my retirement income part of my cumulative gross, but removed the retirement income from the benefit of return, assuming the worst of using my retirement from the Navy to offset any losses in pay in going to the civilian world. It DRAMATICALLY changed what "looked" like a better deal.

After removing retirement income from the benefit of return values (subtracted that amount and let the computer crunch the rate of return on what was already in the gross retirement). I re added, but pasted the numbers it showed without the retirement income. I then added my retirement income WITH my rate of return, to see how much money I would actually have (if I didn't put any of my navy retirement into my TSP).

The new system (included rate of return on TSP and gross retirement income) only provided me with more money (cumulative), than the old system(jst gross retirement income), until I was 46 (5 years after I retired). This doesn't even take into account any money I would start pulling from my TSP after I hit 62.... which then the new system would do even worse, as that pot of money decreases, while my retirement income stays the same.

Nothing specifically wrong with the excel sheet, or the intended use of what you wrote it for, just more realistic for those looking at more options than just "rate of return on ALL money toward retirement from the Navy vs. gross money earned toward retirement".

 

[Stephen Hall]

I thought I password protected the sheet, how were you able to tweak things?

 

[KilroyUSN]

I just enabled macros, no password was required on my end.

 

[AllAmerican75]

So I'm an engineer and not a money guy, but BLUF it seems like the Old System is better than the new, yes?

 

[Tycho_Brohe]

If you're close to 20, old system is better. As a non prior with 2.5 years, I'm probably gonna opt into the new system, because I have more time to utilize the match, it'll give me something if I leave after my initial obligation, and because getting to 20 is far from a sure thing from what I saw in the O-4 board thread, even if someone gets multiple EPs and wants to stay in. That obviously may be different when it's my turn for the board, but it's the uncertainty that clinches it for me.

 

[Spekkio]

So I'm an engineer and not a money guy, but BLUF it seems like the Old System is better than the new, yes?

If you intend to actually retire from the military, yes. If you intend to transition out of the military, no.

 

[AllAmerican75]

If you intend to actually retire from the military, yes. If you intend to transition out of the military, no.

So as long as after 20 years I walk out of the Navy and into a sweet civilian job making about the same net income as I did in the Navy, I'd be golden?

 

[Stephen Hall]

I just enabled macros, no password was required on my end.

Thanks for pointing that out. I made a quick change before I left the office (I don't have Excel at home) and forgot to reactivate the workbook password. It's back now.

 

[Stephen Hall]

So I'm an engineer and not a money guy, but BLUF it seems like the Old System is better than the new, yes?

My opinion is that the old system is less risky, not necessarily better. I think that a person entering the service today would be better off with the new system if they were not risk averse in their investments. But that's just an opinion of course.

 

[Stephen Hall]

If you're close to 20, old system is better. As a non prior with 2.5 years, I'm probably gonna opt into the new system, because I have more time to utilize the match, it'll give me something if I leave after my initial obligation, and because getting to 20 is far from a sure thing from what I saw in the O-4 board thread, even if someone gets multiple EPs and wants to stay in. That obviously may be different when it's my turn for the board, but it's the uncertainty that clinches it for me.

You bring up another great point. You are hedging yourself against being forced out. The fact that you DON'T KNOW that you actually CAN stay in for 20 years make the new system more attractive to a new service member. If you knew your Military career future would be 20+ years, the Old System would become more attractive.

 

[Stephen Hall]

So as long as after 20 years I walk out of the Navy and into a sweet civilian job making about the same net income as I did in the Navy, I'd be golden?

Either way you would be "golden" perhaps one might be a 24k and the other 22k

 

[Spekkio]

My opinion is that the old system is less risky, not necessarily better. I think that a person entering the service today would be better off with the new system if they were not risk averse in their investments. But that's just an opinion of course.

You need to see a CAGR* of about 6% to make out better with the new system... 5% is about equal, and 4% you lose. That's not insurmountable, but a nasty side-effect of all these spreadsheets using deterministic estimates is that they give the user a false sense of security with the stock market. There certainly are scenarios where a person could end up seeing well under that and making less in retirement than they would in the old system.

Secondly, there's the time value of money aspect at play. What could I do with $87,000 in my pocket throughout my military career? What could I do with $10,000 more a year in retirement from age ~45-60? I could build equity in property to avoid mortgage interest. I could pay off debt that I had entering the service. I could decide to invest it into TSP anyway even though I'm getting 50% retirement. You simply don't have as much flexibility with liquid cash flow in the new system, and this equates to lost wealth even if you do eventually make up the difference on your 73rd birthday.

Finally, there's the challenge is bringing John Q Sailor up to speed on how to manage his investment portfolio beyond "just buy 20XX L" fund. I think that is going to be a bigger task than a lot of people think.

*For the 'not a money guys:' CAGR is NOT the same as average annual return....CAGR accounts for 100 x 1.07 x 1.07 =/= 100 x 1.21 x .93. TSP posts average annual return, not CAGR. You can actually have a zero or slight positive average annual return and a negative CAGR.