Understanding Your Future Retirement Benefits

Under TheBlended Retirement System

Presented byShane Ostrom, CFP®

Lt Col, USAF (Ret)Deputy Director, Financial and Benefits Information

Military Officers Association of America

The Military Officers Association of America (MOAA) does not endorse or favor any commercial supplier, product, or service.

This program is designed for general financial and benefits educational purposes. It should not be construed as giving specific investment advice. Investment allocations in this program are for

illustration purposes.

Please consult your personal financial advisor, tax advisor or legal advisor for your specific situation.

Your presenter does not provide personal financial planning services to attendees of financial education briefings.

Disclaimer

BRS Implementation PlanBlended Retirement Plan

• Entered Service before 1 Jan 2006– Stay in current system; no option to change– Be prepared to counsel subordinates

• Entered Service CY2006 after; opt-in option– Opt-in window opens in CY2018

• Enter in and after Jan 2018– All-in new program

Setting the StageKnow What You are Comparing

DOD compares:• Current Retired Pay alone against… • BRS retired pay and TSP w/Match

Issues:• Current retired pay also has TSP• Is it a DOD benefit when you have to use your own money?• Does counting a future 401k count as a DOD benefit?• TSP monies are not available until age 59½; not at military retirement• The BRS results depend on you; your savings rate and your investment

returns

For apples to apples comparison:• Compare BRS retired pay and TSP Match only (without investment returns)

Understanding the NumbersPresent Value• Lump-sum value at the

beginning of retirement• An amount that will

provide for retirement given a rate of return

• Assumes 7% return and 2.5% COLA

Lifetime Value• What you are paid over

a lifetime• Sit back and collect• No lump sum; nothing

invested; no return• Assumes COLA 2.5%

Time

7% approximates the average return used by DOD2.5% COLA approximates the national historical average for retired pay

Current Retirement BenefitTSP w/o a match, no bonuses – Part 1

– Max contribution in 2017, $18,000 year/$1500mo– Value is in addition to the pension benefit

Vested Retired Pay at 20YOS – Part 2– 2.5% per YOS times Hi-3 Base Pay

• 50% @ 20YOS to 75% @ 30YOS

– 20YOS E7 -- $2170mo• For 50 years, w/2.5% COLAs, Lifetime Value: $2,589,000

– Present Value: $302,125 at 20 years of service*

– 20YOS O5 -- $4137mo• For 50 years, w/2.5% COLAs, Lifetime Value: $4,936,000

– Present Value: $576,000 at 20 years of service*

*Value at retirement; 20YOSPV = 50yrs, 7% rtn with 2.5% COLA avg for retired pay, given lifetime value

The BRSPart 1

TSP with a match and 12YOS bonus• Max contribution in 2017, $18,000 year/$1500mo• Value is in addition to the pension benefit• 1% automatic DOD contribution—begins start of service• 4% max match rate—starts beginning of 3rd YOS• Match stops at 26YOS• Vested in match after 2YOS—starting in the third YOS• Bonus at 8-12YOS: minimum amount equal to 2.5 times base

pay AD; half AD monthly base pay for Guard-Reserves• Max possible up to 13 months base pay/6mos Res/Grd• Service commitment of 3 years

The BRSPart 2

Vested Retired Pay at 20YOS• 2% per YOS times Hi-3 Base Pay

• 40% for 20YOS up to 60% for 30YOS

• 20YOS E7 -- $1736mo• For 50 years, w/ 2.5% COLAs, Lifetime Value: $2,070,000• Present Value: $241,560 at 20 years of service*

• 20YOS O5 -- $3310mo• For 50 years, w/2.5% COLAs, Lifetime Value: $3,949,000

– Present Value: $460,800 at 20 years of service*

*Value at retirement; 20YOSPV = 50yrs, 7% rtn with 2.5% COLA avg for retired pay, given lifetime value

Retirement Plan ComparisonCurrent

• TSP no match• Plus Retired Pay

– (2.5% X YOS) X High-3 base pay = Retired Pay

– COLAPresent ValueRetired Pay Only*:E7 -- $302,125O5 -- $576,000

BRS• TSP w/match and

Bonus• Plus Retired Pay

– (2% X YOS) X High-3 base pay = Retired Pay

– COLAPresent ValueRetired Pay Only*:E7 -- $241,560O5 -- $460,800

*Value at retirement; 20YOSPV = 50yrs, 7% rtn with 2.5% COLA avg for retired pay, given lifetime value

TSP With A MatchWhat’s The Difference?

7% avg annual rtn, 5% mbr contribution, 1/5% DOD match, normal promotion years, 2% ECI avg

$374,904

$181,680

$193,224

Officer Illustration

Chart1

Year 0Year 0Year 0

111

222

333

444

555

666

777

888

999

101010

111111

121212

131313

141414

151515

161616

171717

181818

191919

202020

Match Only

Member Contribution Only

Match Plus Member Contribution

382

1909

2290

798

3990

4788

2841

6256

9097

6103

9757

15860

10207

14118

24325

14673

18857

33530

19709

24186

43896

25179

29969

55148

31322

36448

67770

37984

43468

81452

45927

51795

97722

54531

60811

115342

64120

70839

134959

74496

81685

156180

85913

93606

179519

98254

106485

204739

112329

121136

233464

127532

136956

264488

144159

154242

298401

162104

172893

334997

181680

193224

374903

Sheet1

Match OnlyMember Contribution OnlyMatch Plus Member Contribution

Year 0$382$1,909$2,290

1$798$3,990$4,788

2$2,841$6,256$9,097

3$6,103$9,757$15,860

4$10,207$14,118$24,325

5$14,673$18,857$33,530

6$19,709$24,186$43,896

7$25,179$29,969$55,148

8$31,322$36,448$67,770

9$37,984$43,468$81,452

10$45,927$51,795$97,722

11$54,531$60,811$115,342

12$64,120$70,839$134,959

13$74,496$81,685$156,180

14$85,913$93,606$179,519

15$98,254$106,485$204,739

16$112,329$121,136$233,464

17$127,532$136,956$264,488

18$144,159$154,242$298,401

19$162,104$172,893$334,997

20$181,680$193,224$374,903

TSP With A MatchWhat’s The Difference?

7% avg annual rtn, 5% mbr contribution, 5% DOD match, normal promotion years, 2% ECI avg

Enlisted Illustration$191,270

$98,679

$92,591

Chart1

Year 0Year 0Year 0

111

222

333

444

555

666

777

888

999

101010

111111

121212

131313

141414

151515

161616

171717

181818

191919

202020

Match Only

Member Contribution Only

Match Plus Member Contribution

201

1007

1208

421

2104

2525

1625

3426

5050

3077

5004

8081

4870

6932

11802

6900

9107

16007

9407

11769

21176

12131

14657

26788

15231

17935

33166

18594

21486

40080

22566

25661

48226

26869

30180

57049

31694

35237

66930

36915

40706

77621

42614

46671

89284

49210

53551

102761

56446

61090

117536

64264

69234

133498

72823

78141

150964

82062

87752

169815

92591

98679

191270

Sheet1

Match OnlyMember Contribution OnlyMatch Plus Member Contribution

Year 0$201$1,007$1,208

1$421$2,104$2,525

2$1,625$3,426$5,050

3$3,077$5,004$8,081

4$4,870$6,932$11,802

5$6,900$9,107$16,007

6$9,407$11,769$21,176

7$12,131$14,657$26,788

8$15,231$17,935$33,166

9$18,594$21,486$40,080

10$22,566$25,661$48,226

11$26,869$30,180$57,049

12$31,694$35,237$66,930

13$36,915$40,706$77,621

14$42,614$46,671$89,284

15$49,210$53,551$102,761

16$56,446$61,090$117,536

17$64,264$69,234$133,498

18$72,823$78,141$150,964

19$82,062$87,752$169,815

20$92,591$98,679$191,270

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

BRS Current

Officer Illustration

Retired Pay with COLALifetime Earnings--Annual Income

Years after Retirement

Lifetime earnings difference = $987,000Consider the Survivor Benefit Program Impacts Also

Delta: $3,949,000 vs $4,936,0002.5% COLA avg for retired pay

Chart1

00

11

22

33

44

55

66

77

88

99

1010

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1212

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1616

1717

1818

1919

2020

2121

2222

2323

2424

2525

2626

2727

2828

2929

3030

3131

3232

3434

3535

3636

3737

3838

3939

4040

4141

4242

4343

4444

4545

4646

4747

4848

4949

5050

BRS

Current

39720

49644

40713

50885.1

41730.825

52157.2275

42774.095625

53461.1581875

43843.448015625

54797.6871421875

44939.5342160156

56167.6293207422

46063.022571416

57571.8200537607

47214.5981357014

59011.1155551048

48394.9630890939

60486.3934439824

49604.8371663213

61998.5532800819

50844.9580954793

63548.517112084

52116.0820478663

65137.2300398861

53418.984099063

66765.6607908832

54754.4587015395

68434.8023106553

56123.320169078

70145.6723684217

57526.403173305

71899.3141776322

58964.5632526376

73696.7970320731

60438.6773339535

75539.2169578749

61949.6442673024

77427.6973818217

63498.3853739849

79363.3898163673

65085.8450083346

81347.4745617765

66712.9911335429

83381.1614258209

68380.8159118815

85465.6904614664

70090.3363096785

87602.3327230031

71842.5947174205

89792.3910410782

73638.659585356

92037.2008171051

75479.6260749899

94338.1308375327

77366.6167268646

96696.5841084711

79300.7821450363

99113.9987111828

81283.3016986622

101591.848678962

83315.3842411287

104131.644895936

85398.2688471569

106734.936018335

87533.2255683359

109403.309418793

89721.5562075443

112138.392154263

91964.5951127329

114941.85195812

94263.7099905512

117815.398257073

96620.302740315

120760.783213499

99035.8103088228

123779.802793837

101511.705566543

126874.297863683

104049.498205707

130046.155310275

106650.73566085

133297.309193032

109317.004052371

136629.741922858

112049.92915368

140045.485470929

114851.177382522

143546.622607702

117722.456817085

147135.288172895

120665.518237512

150813.670377217

123682.15619345

154584.012136648

126774.210098286

158448.612440064

129943.565350744

162409.827751065

133192.154484512

166470.073444842

Sheet1

BRSCurrentColumn1

0$39,720$49,644

1$40,713$50,885

2$41,731$52,157

3$42,774$53,461

4$43,843$54,798

5$44,940$56,168

6$46,063$57,572

7$47,215$59,011

8$48,395$60,486

9$49,605$61,999

10$50,845$63,549

11$52,116$65,137

12$53,419$66,766

13$54,754$68,435

14$56,123$70,146

15$57,526$71,899

16$58,965$73,697

17$60,439$75,539

18$61,950$77,428

19$63,498$79,363

20$65,086$81,347

21$66,713$83,381

22$68,381$85,466

23$70,090$87,602

24$71,843$89,792

25$73,639$92,037

26$75,480$94,338

27$77,367$96,697

28$79,301$99,114

29$81,283$101,592

30$83,315$104,132

31$85,398$106,735

32$87,533$109,403

34$89,722$112,138

35$91,965$114,942

36$94,264$117,815

37$96,620$120,761

38$99,036$123,780

39$101,512$126,874

40$104,049$130,046

41$106,651$133,297

42$109,317$136,630

43$112,050$140,045

44$114,851$143,547

45$117,722$147,135

46$120,666$150,814

47$123,682$154,584

48$126,774$158,449

49$129,944$162,410

50$133,192$166,470

Total$3,872,078$4,839,513

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

BRS Current

Years after Retirement

Retired Pay with COLALifetime Earnings--Annual Income

Enlisted Illustration

Lifetime earnings difference = $519,000Consider the Survivor Benefit Program Impacts Also

Delta: $2,070,000 vs $2,589,0002.5% COLA avg for retired pay

Chart1

00

11

22

33

44

55

66

77

88

99

1010

1111

1212

1313

1414

1515

1616

1717

1818

1919

2020

2121

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2929

3030

3131

3232

3333

3434

3535

3636

3737

3838

3939

4040

4141

4242

4343

4444

4545

4646

4747

4848

4949

5050

Years after Retirement

BRS

Current

20832

26040

21352.8

26691

21886.62

27358.275

22433.7855

28042.231875

22994.6301375

28743.287671875

23569.4958909375

29461.8698636719

24158.7332882109

30198.4166102637

24762.7016204162

30953.3770255203

25381.7691609266

31727.2114511583

26016.3133899498

32520.3917374372

26666.7212246985

33333.4015308732

27333.389255316

34166.736569145

28016.7239866989

35020.9049833736

28717.1420863664

35896.427607958

29435.0706385255

36793.8382981569

30170.9474044887

37713.6842556108

30925.2210896009

38656.5263620011

31698.3516168409

39622.9395210511

32490.8104072619

40613.5130090774

33303.0806674435

41628.8508343043

34135.6576841296

42669.5721051619

34989.0491262328

43736.311407791

35863.7753543886

44829.7191929858

36760.3697382483

45950.4621728104

37679.3789817045

47099.2237271307

38621.3634562472

48276.7043203089

39586.8975426533

49483.6219283167

40576.5699812197

50720.7124765246

41590.9842307502

51988.7302884377

42630.7588365189

53288.4485456486

43696.5278074319

54620.6597592899

44788.9410026177

55986.1762532721

45908.6645276831

57385.8306596039

47056.3811408752

58820.476426094

48232.7906693971

60290.9883367464

49438.610436132

61798.263045165

50674.5756970353

63343.2196212941

51941.4400894612

64926.8001118265

53239.9760916977

66549.9701146221

54570.9754939902

68213.7193674877

55935.2498813399

69919.0623516749

57333.6311283734

71667.0389104668

58766.9719065828

73458.7148832284

60236.1462042473

75295.1827553092

61742.0498593535

77177.5623241919

63285.6011058373

79107.0013822967

64867.7411334833

81084.6764168541

66489.4346618204

83111.7933272754

68151.6705283659

85189.5881604573

69855.462291575

87319.3278644688

71601.8488488644

89502.3110610805

Sheet1

BRSCurrent

0$20,832$26,040

1$21,353$26,691

2$21,887$27,358

3$22,434$28,042

4$22,995$28,743

5$23,569$29,462

6$24,159$30,198

7$24,763$30,953

8$25,382$31,727

9$26,016$32,520

10$26,667$33,333

11$27,333$34,167

12$28,017$35,021

13$28,717$35,896

14$29,435$36,794

15$30,171$37,714

16$30,925$38,657

17$31,698$39,623

18$32,491$40,614

19$33,303$41,629

20$34,136$42,670

21$34,989$43,736

22$35,864$44,830

23$36,760$45,950

24$37,679$47,099

25$38,621$48,277

26$39,587$49,484

27$40,577$50,721

28$41,591$51,989

29$42,631$53,288

30$43,697$54,621

31$44,789$55,986

32$45,909$57,386

33$47,056$58,820

34$48,233$60,291

35$49,439$61,798

36$50,675$63,343

37$51,941$64,927

38$53,240$66,550

39$54,571$68,214

40$55,935$69,919

41$57,334$71,667

42$58,767$73,459

43$60,236$75,295

44$61,742$77,178

45$63,286$79,107

46$64,868$81,085

47$66,489$83,112

48$68,152$85,190

49$69,855$87,319

50$71,602$89,502

Total$2,102,396$2,627,995

Making Up the Retired Pay Difference Under the BRS

Current Program Value*:E7 -- $302,125O5 -- $576,000

BRS Value*:E7 -- $241,560O5 -- $460,800

Difference:E7 -- $60,565

O5 -- $115,200

=

*Value at retirement; 20YOSPV = 50yrs, 7% rtn with 2.5% retired pay COLA avg, given lifetime value

Can the New Match Help Offset the Retired Pay Reduction?

Officer Illustration

Retired Pay PV Delta$115,200

Difference between the formulas: 2.5% vs 2%

Enlisted Illustration

Retired Pay PV Delta$60,565

Difference between the formulas: 2.5% vs 2%

To Makeup the Difference in the TSP20 YOS with 7% return

E7 -- $180moO5 -- $350mo

NOOfficer match only

$96,600

NOEnlisted match only

$50,030Remember…to get the max match, you have to contribute 5% of your own pay

It’s All About Leaving with SomethingSo what can you leave with from the DOD after the

initial service commitment?

Enlisted Match OnlyBeginning the 4th YOS,

You could accumulate up to $2800

It’s not like you can actually take the money...not without tax penalties

Officer Match OnlyBeginning the 4th YOS,

You could accumulate up to $5500

This is ONLY the DOD match amount. Assumes maximum match, normal promotions.

The Lump-Sum Retirement OptionChoice is made at retirement

• The law allows a lump sum payment at retirement• Get lump sum, take decreased monthly income until age 67• You choose a 25% or 50% lump sum option—or don’t take it• DOD is allowed to pay the “present value” (PV) at retirement

– PV involves a “discount” percentage determined annually by DOD; in 2017 it is 7.3%

– The “discount rate” makes a big difference in the lump sum amount

Example of how Present Value calculation worksE7, 20 YOS, $1736mo, 2.5%COLA, 39-66yo/28yrs

From retirement to age 67 you would collect $843,500You can choose between the 25% or 50% lump sum

So you get $211,000 or $422,000 right?

The Lump Sum Option

*By the way, the lump sum is taxable...

Wrong!When discounted at 7%

(the predicted investment return over the 28 years)

You would get:25% - $31,735* 50% - $63,470*

Thrift Savings Plan (TSP)

Four options:

1. Keep in TSP

2. Roll into your future 401k plan

3. Roll into IRA

4. Pull out of TSP and use the money

• Don’t even think it unless necessary • Withdraw Early is costly (prior to age 59½)

What can you do when youleave the Service?

Your Future RetirementYour Success; It’s all on You

How Much $$ Do You Need?

• What will your expenses be?– Mortgage, cars, travel, health care, college, hobbies, debts,

cost of living where you retire, continue to work…

• What will your income be?– Sources of income

• How you manage your portfolios will determine how much you can draw per year– 3 – 5% per year from portfolios– Draw less for conservatively managed portfolios

40 Years of Unemployment

Today’s Seniors—Where Their Retirement Income Comes From

Social Security

Pensions

Investments

Work Income

Other

Source: EBRI Data Book Chap 3 2014 latest data in 2016

3%

30%

11%

18%

38%

Defined Contribution PlansThrift Savings Plan (TSP) and 401ks

YOUR PRIMARY INVESTMENT ACCOUNT Defined-Contribution Plan Contribution Limits

• $18,000 salary deferral• $6,000 “catch-up” provision for age 50+

Your TSP investment optionsC – Large company index fundS – Small company index fundI – International company index fundF – Bond index fundG – Stable value fundL – Allocation fund by year

Traditional vs. Roth AccountsWhat’s it all mean?

Gross Pay $60,000Trad 401k - $12,000Taxable income $48,000Taxes 20% - $9,600Take Home Pay $38,400

Gross Pay $60,000Taxes 20% - $12,000Net Pay $48,000Roth 401k - $12,000Take Home Pay $36,000

Traditional TSP/401K Roth TSP/401K

Take home pay $2400 less with RothHowever...tax-free retirement income

Annual Amounts

IRAs in 2017Contributions and Deductions

IRA Contribution Limit##MAGI

Phase-out

Traditional$5,500

+ $1,000 Catch-up for age 50+

DEDUCTION@$62-72k Single

$99-119k** Married

Roth SamePROHIBITION$118-133k Single$186-196k Married

Spousal(Traditional or Roth)

SameDEDUCTION

(Traditional rules apply)

ORPROHIBITION(Roth rules apply)

## Of “earned income.”** MAGI if both taxpayers are covered by an employer plan OR for the spouse who has the employer plan. If only one spouse has an employer plan, phase out is $186k-196k for the non-employer plan member.@ There is NO deduction phase-out for Trad IRA if filing single, or married, and no one has an employer plan. See IRS Pub 590 for details!

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Understanding Your Future Retirement Benefits�Under The�Blended Retirement SystemSlide Number 2BRS Implementation Plan�Blended Retirement PlanSetting the Stage�Know What You are ComparingUnderstanding the NumbersCurrent Retirement BenefitThe BRSThe BRSRetirement Plan ComparisonTSP With A Match�What’s The Difference?TSP With A Match�What’s The Difference?Retired Pay with COLA�Lifetime Earnings--Annual IncomeSlide Number 13Making Up the Retired Pay Difference Under the BRSCan the New Match Help Offset the Retired Pay Reduction? It’s All About Leaving with SomethingThe Lump-Sum Retirement OptionSlide Number 18Thrift Savings Plan (TSP)Your Future Retirement�Your Success; It’s all on YouHow Much $$ Do You Need?Today’s Seniors—Where Their Retirement Income Comes FromDefined Contribution Plans�Thrift Savings Plan (TSP) and 401ksTraditional vs. Roth Accounts� What’s it all mean?IRAs in 2017�Contributions and DeductionsSlide Number 26