The only thing that the military loves more than acronyms is changing uniforms and retirement options. DoD has had three,* arguably four (if you count Redux), different retirement systems. Those who enlisted prior to January 1, 2018 fall under the Legacy Retirement System (commonly known as High 3). I’ve previously detailed the intersection with Survivor Benefit Plan (SBP) here when I talked about the Basics of SBP.
Blended Retirement System (BRS), which applies to those who enlisted after January 1, 2018 and anyone who opted in to the plan by the end of 2018, offers a government match to retirement savings of up to 5% of a service member’s income, but 20% less of a pension if the service member stays to retirement. The reduction in pension is supposed to be offset by the government match to one’s retirement fund and the magic of compounding in the market (assuming there isn’t catastrophic user error on behalf of the individual panicking and moving in and out of their TSP).
BRS also offers a lump sum option. The lump sum may either be 25% or 50% of the discounted present value of retired pay entitlement for the time between the date of retirement and the date of Social Security eligibility. Note: this is when you are eligible to take Social Security, not when the service member elects to receive Social Security, and these goalposts will likely shift as social security comes under solvency pressure and people live longer. In addition to the lump sum, the retiree will continue to receive a monthly annuity of the remaining percentage of retired pay (75% or 50%) to which they are otherwise entitled.
A participant in SBP who elects the lump sum payment will have coverage at the full base amount unless the member elects to reduce the base amount. The full base amount will be equal to the amount of the retiree’s unreduced monthly retired pay. As such, “SBP premiums for members who elect lump sums under BRS will be equivalent to what they would have been without the lump sum, and consequently, the survivors’ annuities will be equivalent to what they would have been without the lump sum.” Premiums will be deducted from the portion of retired pay that the member continues to receive after the lump sum payment.
An example of how this plays out is the following scenario: two retirees have a monthly base retired pay of $1,616. In this example, both retirees have an SBP monthly premium of $101. If one of the retirees elects a 50% lump sum, he or she will receive an $808 monthly annuity, less the $101 premium payment for a total of $707 monthly. The retiree who does not elect the lump sum will have a monthly annuity of $1,515 ($1,616 with a deduction of $101). However, in both cases, a spouse survivor would receive a survivor annuity of $889 ($1,616 x 0.55). Because the SBP premium is a larger percentage of the monthly annuity for those who take part of their retirement as a lump sum, it may discourage some participation in the program.
Regarding whether a lump sum is a good idea or a bad idea: if done right, lump sum investing can be a better decision. The problem is that whole user error thing I alluded to above, which based on my experience, is massively prevalent. Aesop was on to something when he wrote that, “A bird in the hand is worth two in the bush;” as long as that bird in the hand is money allowed to compound in index funds and not a customized muscle car (or any car for that matter).
*The gravy train of military retirement was the Final Pay System. This required the service member to enlist prior to September 8, 1980.
