A Financial Comparison of the Blended (New) Retirement System and the Current (Soon to Be Old) Defined Benefit System

摘要

The NDAA of 2016 presents the officer corps with a significant decision to be made regarding retirement Both systems have advantages and disadvantages. Individuals will analyze the exact same information and reach exactly opposite decisions. In the end, it will depend on one's attitude towards risk. Risk tolerance will influence the rate of return a servicemember is attempting to achieve with his or her retirement investment portfolio. Some may contend that the new system shifts the risk, fairly or unfairly to the servicemembers, as a sizeable portion of their retirement is in their TSP account. Servicemembers must now contend with the variability of market returns and its impact on their retirement, something their predecessors did not have to face. However, all servicemembers, whether under the current or new system, face the significant retirement risk that they will not successfully complete the required twenty years to earn their retirement. Under the current system, retirement is an all-or-nothing proposition. Serve less than twenty years, and one leaves with nothing. The risk of not completing twenty years still exists under the new system. However, under the new system, one does not leave empty-handed if he or she fails to reach twenty years of service. Consider a worst-case scenario: tragic life events force an officer to leave the service after nineteen years at age forty-one. Under the old system, that officer leaves with everyone's sympathy, but no pension. If the officer had fully participated under the new system, he or she would have accumulated $242,637 (as an O-4) and $245,570 (as an OS) at 7.5 percent. If the officer placed that money in an account earning only 6 percent and left it there without making any additional deposits until age sixty (age fifty-nine and one-half is the first opportunity to withdraw from a retirement plan without incurring the 10 percent tax penalty), the retirement account would grow to $734,122. This would be enough to pay out $49,816 until age ninety-seven (our earlier estimated mortality). This payment from the TSP-funded account exceeds the $45,006 retirement pay an O-4 retiree would receive under the old system. If the officer left the money in until age sixty-seven (the current full retirement age for those born after I960), the account would grow to $1,103,849. At 6 percent, this account could pay out $80,193 per year for the next thirty years. These payouts are slightly higher if the officer resigns at year nineteen as an OS. And, all of this future retirement income requires no additional deposits after he or she leaves the service. As stated before, one's attitude toward risk will play a significant role in deciding which retirement option to select. Rational people will examine exactly the same data and reach exactly opposite decisions. Predicting future events is tricky business. The best one can hope for is that after a thorough examination of available information, a servicemember can live with the decision he or she makes with minimal regret.