Is the Blended Retirement System lump sum option right for me?

The Blended Retirement System, or BRS, lump sum decision is similar to the dilemma faced when considering the proper time to start taking Social Security benefits. You've probably heard stories of people who chose to receive their benefits at the earliest age possible, only to live until their late 90s. My friend's dad faced this exact decision and he, like many of us, has no idea how long he's going to live.

Like the Social Security claiming timing decision, the BRS lump sum decision is often based on the same hard-wired thinking: Money today versus money later seems like a good deal, even if we end up leaving money on the table in the long run.

Before we dig in, let's consider how the BRS lump sum option works.

• The lump sum option is only available to those who retire under the BRS.
• In exchange for a lump sum of cash, your military retirement is reduced until reaching full Social Security retirement age, which for most people is 67.
• The discount rate is set by the Department of Defense, and they use it to calculate the value of your military retirement. A larger discount rate leads to a smaller BRS lump sum and a smaller military retirement. In other words, $1 given 10 years from now isn't worth $1 given today.
• You have the option of either a 25% or 50% partial BRS lump sum. If you choose the 25% option, you get 25% of the discounted value of your military retirement upfront and then your military pension is reduced by 25%. The 50% option works the same way but with a bigger lump sum and a bigger reduction in your military pension.

The BRS lump sum option works the same for National Guard and Reserve members, but the analysis is slightly different. That's because there's a shorter time frame between receiving the lump sum and getting your fully restored military pension.

National Guard and Reserve members typically don't begin receiving their military pension until age 60, only a few years before their full retirement age. That's compared to an active-duty member, who might receive their pension at age 42, 25 years before their pension is fully restored.

In summary: Taking the BRS lump sum lowers the lifetime value of your military retirement.

The BRS lump sum: Active duty versus National Guard and Reserve

Still undecided? Let's look at two hypothetical scenarios: one military member retiring from active duty and the other from the Guard or Reserve.

Scenario 1: Active-duty retiree

For this example, let’s look at an active-duty service member who:

• Is retiring after 20 years of service
• Has a final grade of E-7
• Has a rate of return of 6%

Here’s how their payment options compare:

• No lump sum: The monthly pension would be $2,295.76; the total lifetime value is $2,211,753.55
• 25% lump sum: The monthly pension would be $1,721.82; the total lifetime value is $2,045,078.22
• 50% lump sum: The monthly pension would be $1,147.88; the total lifetime value is $1,878,402.88

What does that mean?

• Taking the 25% lump sum reduces the service member’s retirement income by about $574 per month and lowers the total value of their retirement pension by about $166,675.
• Taking the 50% lump sum reduces their monthly income by $1,148 and drops their pension’s total lifetime value by about $333,351.

This reduction lasts until the service member reaches full Social Security retirement age. For service members who start collecting military retirement in their early 40s, that could be 20 to 25 years.

Example 2: Active-duty retiree

Now let’s look at a member of the National Guard or Reserve who:

• Is retiring after 20 years of service with 1,260 points
• Has a final grade of E-7
• Has a pension beginning at age 60

Here’s how their payment options compare:

• No lump sum: The monthly pension would be $806.53; the total lifetime value is $330,591.42
• 25% lump sum: The monthly pension would be $604.90; the total lifetime value is $325,893.57
• 50% lump sum: The monthly pension would be $403.27; the total lifetime value is $321,195.72

What does that mean?

• Taking the 25% lump sum reduces their retirement income by about $202 per month and lowers the total value of their retirement pension by about $4,698.
• Taking the 50% lump sum reduces their monthly income by $403 and drops their pension’s total lifetime value by about $9,396.

Because Reserve retirees typically begin receiving retirement pay later than active-duty service members and closer to age 60, the time during which their retirement income would be reduced is much shorter, so the overall impact on the pension’s lifetime value is smaller.

Pros and cons of the BRS lump sum option

Each person's situation is different, so we recommend asking yourself the following questions.

Can the BRS lump sum benefit you?

Yes, in certain situations. For example, if you're at risk of being evicted and owe a lot on your mortgage, a one-time influx of cash might help. But realize that you're giving up money in the long run to help meet a critical, short-term need.

Once meeting this critical need, your next step is to develop a solid financial foundation that can help you avoid similar situations in the future. Take these four steps to develop that foundation:

1. Analyze.

What caused this situation in the first place? Was it the loss of a job? If so, check out these steps to secure your finances. Was it a poor financial decision or a series of poor financial decisions? Once you understand the root cause, you can make sure it doesn't happen again.

2. Budget.

To avoid going into debt, spend less than you earn. Keep in mind that without proper spending habits, the problem you face might be so big that emergency loans, or even your emergency fund, won't overcome it. Have a well-thought-out spending plan. A budget or spending plan is vital to your financial security.

3. Build an emergency fund.

Begin with a goal of $1,000. Once you have that saved, continue saving until you have a fully funded emergency fund of three to six months of essential living expenses. You never know when an emergency will arise. And without an emergency fund, you'll go into debt to meet that short-term need.

Where should you keep your emergency fund? We believe that the best place is in a savings account. It keeps your emergency fund secure and ready for when you need it.

4. Pay down debt and save for the future.

Analyze your debt situation and develop a plan to pay it down. You can't imagine the financial peace that comes when you pay down or even get rid of debt. Once your debt is under control, which means you're not adding to it and are paying it down on a consistent basis, strive to balance paying down your debt with saving for future needs like retirement.

Have you considered the tax burden?

The BRS lump sum is fully taxable and can put you into a higher tax bracket, which could leave you with less cash in hand. But you have the option of reducing the tax burden by receiving your payment in up to four installments over four years. Consult with a tax professional to see how this would affect your tax situation.

Do you have entrepreneurial dreams?

A one-time lump sum can help provide up-front financing if you're thinking about starting a business.

Are you financially disciplined?

It's tempting to spend your lump sum on items that don't further your financial security, like vacations, a new car or electronics. Don't make purchases you'll regret later.

Do you tend to make impulsive purchases on your credit card? If so, do you think you might take the same impulsive actions with your lump sum and not use it to secure your financial future? This is something to consider.

What's your VA disability rating?

VA disability rating is important because it guides your eligibility for Concurrent Retirement and Disability Pay, or CRDP. This allows the military retiree to receive both military retirement and VA disability. You currently need a VA disability rating of 50% or greater to qualify. If you're not eligible, your VA disability lump sum will be withheld until it equals your lump sum amount.

Remember that even if you take the BRS lump sum option, your military pension will return to its full amount when you reach Social Security retirement age. This extra income comes at a time when many people fully retire and begin to live off their savings. The pension increase helps reduce the chances that you'll outlive your retirement savings, especially if you budget wisely and withdraw just the amount you need each month.

Military retirement resources

After running the numbers and considering the options, the question of whether or not the BRS lump sum is right for you depends on your situation.

As you decide what's best for you, carefully weigh the benefit of a one-time lump sum now versus more money in your pocket each month over the next 20 to 25 years for active duty or six to seven years for National Guard and Reserve members. To understand the impact, use the Department of Defense's BRS comparison calculator Opens in a New Window.‍ ‍ ^{See note 1}