Unlike some civilian pensions, there is no option to take the full military pension as a lump sum. However, servicemembers retiring under the Blended Retirement System (BRS) must carefully evaluate the lump sum option when retiring. One of the components of the Blended Retirement System (BRS) is the ability to take either 25% or 50% of the discounted lump sum value of the servicemember’s pension at the time of retirement.
BRS Lump Sum Details
- Of note, the earliest anyone under BRS will actually be eligible to get the lump sum will be in 2026. Active duty BRS enrollees had to have less than 12 years of service on 1 Jan 2018 which means that it will be 8 years from then before the first possible lump sum can be awarded at retirement after 20 years of service.
- The retiree must make the decision to select the Lump Sum payment NLT 90 days before their retirement date. For the Reserve Component, the member must make the decision NLT 90 days before first becoming eligible to receive retired pay under the non-regular retirement program (usually at age 60).
- The servicemember may elect to receive the discounted present value of either 25 percent or 50 percent of the gross estimated retired pay.
- DFAS will make lump sum payments to the retiree NLT 60 days after the date of retirement.
- The subsequently reduced pension lasts until the member reaches full retirement age (FRA) according to the Social Security Act. FRA is currently 67 for most servicemembers. The member’s FRA is grandfathered in at the time when they make the lump sum selection in case the FRA would otherwise rise later on.
- The retiree may choose to receive the lump sum payment in up to four annual installments paid over no more than 4 years.
- Survivor Benefit Plan (SBP) under the Lump Sum
- The retiree remains eligible to elect to cover their spouse, dependents, or qualified insurable interests through SBP. The next update to DoDI 1332.42, “Survivor Annuity Program Administration” will address the manner in which premiums are handled when a member elects a lump sum distribution.
- Retirees who accept the lump sum distribution may not seek any kind of retroactive review or challenge of the amount.
- Lump sum payments to retirees remain subject to the same conditions as military retired pay for divorce decrees and other court orders.
Time Value of Money
Before getting into the specific lump sum methodology, we need to cover the financial concept of the Time Value of Money. Receiving money today is worth more than receiving the same amount money in the future because you can invest money today at a given rate of return. A simple example can help illustrate the point – would you rather have $100 today or $100 a year from today? If you could invest $100 at a safe 5% rate, next year you could have $105 ($100*.05 + original $100) instead of $100. This example illustrates the point that money is worth more today than in the future because of what you can do with it in the meantime.
Present Value of an Annuity
We also have to understand how to value a pension to understand this principle better. Ultimately, a military pension is an annuity that will pay the retiree a guaranteed stream of income for their rest of his or her life. The formula to determine the value of a retiree’s lump sum is calculated by the Present Value of an Annuity where a discount rate is used to determine how much the future set of cash flows are worth in today’s dollars. Go watch this Investopedia video if you would like another example.
Blended Retirement System Lump Sum Discounted Value Calculation:
The Time Value of Money means that any lump sum payment the retiree will receive will be discounted back into today’s dollars. In the E-7 example (linked here), the retiree might receive close to a total pension sum of $976,000 (using a 3% annual inflation adjustment) from age 39 – 67. The discounted value of $976,000 in the present would only be worth about $348,000.
- According to the BRS Implementation Memo, computing the discount for the lump sum will be determined by taking the inflation-adjusted, 7-year average of the Department of Treasury High-Quality Market (HQM) Corporate Bond Spot Rate Yield Curve at a 23-year maturity plus an adjustment factor of 4.28%. The inflation-adjustment applied is the Department of Treasury “Breakeven Inflation Spot Rate Yield Curve.”
- The Deputy Assistant Secretary of Defense for Military Personnel Policy (DASD (MPP)) calculates the discount rate annually by June 1 of each year. It’s effective as of January 1 of the following year.
- The current BRS Lump Sum discount rate for 2024 is 6.26%
- A general way to think about this is borrowing from your retirement pension at an interest rate of 6.26%. That’s pretty steep when you consider the guaranteed nature of the pension.
I’ve created a very rough lump sum “guessestimate” calculator on Google Sheets.
Bottomline
A military pension is incredibly valuable so the decision to take the lump sum is a serious decision. Given how many servicemembers elected REDUX in the past, there is clearly a temptation to elect to receive a large cash sum.
I’m absolutely a huge fan of the BRS overall, but the lump sum has some headwinds. Based on an adjustment factor of 4.28% plus the prevailing market conditions, it will be very difficult for any military retiree to gain more through investing the lump sum amount than he or she would have earned keeping the full pension. Add in the taxes paid on the large lump sum payment/s and the decision to take the lump sum becomes even worse.
Rather than taking a lump-sum option, servicemembers may have other resources available for large cash needs. A few alternative ideas include:
- Starting a business: Low-interest SBA loans, Boots to Business program
- Buying retirement dream house: VA lending with 0% down
- Paying off consumer debt: NFCC plans that will be more manageable with the higher monthly retirement income
Based on all of this, I cannot recommend that anyone should take the BRS lump sum as it is a steep discount for what the servicemember could otherwise get as the guaranteed pension. Happy planning!
Resources:
A Guide to the Uniformed Services Blended Retirement System
Official Department of Defense BRS website