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

Believe it or not, 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 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 or DoD, 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, a dollar given 10 years from now isn't worth a dollar 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 timeframe 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 — to better understand the numbers behind the BRS lump sum option.

Scenario 1: Active-duty retiree

Active-duty assumptions: Retire with 20 years and 0 months, PEBD: January 2024, Born: January 2004, Current grade: E-1, Retirement grade: E-7, Inflation of retirement pay: 2.75%, Discount rate: 6.32%, TSP withdrawal age: 67, TSP contribution rate: 5%, TSP rate of return 6%, TSP rate of return after being withdrawal: 3%, Life expectancy: 85 years, 2.5 times basic pay continuation pay at the completion of 12 years of service for 4 years paying in 1 installment and deposited 0% into TSP account.

Using the assumptions listed and the DoD BRS calculator, we see that this active-duty member's retirement has a lifetime value of $3,587,839.

By taking the 25% BRS lump sum option, they receive:

• A lump sum of $147,026.
• A monthly pension reduced from $3,679 to $2,759.

This choice effectively reduces their military retirement by 7.54%, a loss of $270,662.

If they take the 50% BRS lump sum option, they receive:

• A lump sum of $294,051.
• A monthly pension reduced from $3,679 to $1,839.

This choice effectively reduces their military retirement by 15.09%, a loss of $541,325.

Scenario 2: National Guard or Reserve retiree receiving pension at age 60

Guard or Reserve assumptions: Retire with 20 years and 0 months, PEBD: January 2024, Born: January 2004, Current grade: E-1, Retirement grade: E-7, Inflation of retirement pay: 2.75%, Discount rate: 6.75%, TSP withdrawal age: 67, TSP contribution rate: 5%, TSP rate of return 6%, TSP rate of return after being withdrawal: 3%, Points per year: 63, Life expectancy: 85 years, 0.5 times basic pay continuation pay at the completion of 12 years of service for 4 years paying in 1 installment and deposited 0% into TSP account.

Using the assumptions listed, this National Guard or Reserve member's retirement has a lifetime value of $643,241.

By taking the 25% BRS lump sum option, they receive:

• A lump sum of $27,049.
• A monthly pension reduced from $1,562 to $1,172.

This choice effectively reduces their military retirement by 1.37%, a loss of $8,787.

By taking the 50% BRS lump sum option, they receive:

• A lump sum of $54,098.
• A monthly pension reduced from $1,562 to $781.

This choice effectively reduces their military retirement by 2.73%, a loss of $17,575.

In either scenario, here's the important takeaway again: Taking the BRS lump sum lowers the lifetime value of your military retirement. Due to the discount rate, you'll have more money in your pocket long term if you don't take the lump sum.

It's not a one-for-one swap. In other words, taking a lump sum of $100,000 doesn't mean your military pension is reduced by $100,000. As you can see in the 25% lump sum active-duty example, the retiree receives a lump sum amount of $147,026, but the total value of their military retirement is reduced by $270,662. You give up future dollars to have money in your pocket today.

A National Guard or Reserve member who starts receiving their military retirement at age 60 sees less reduction than the active-duty member simply because the timeframe until the military pension is fully restored is shorter.

Pro 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 this article where we dive into 7 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 spending plan or budget as it's sometimes called is vital to your financial security.

3. Emergency fund.

Begin with a goal of $1,000. Once you have that saved, continue saving until you have a fully funded emergency fund: 3 to 6 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.

I'm often asked where to keep an emergency fund. USAA believes 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?

If you've always wanted to start a small business, the one-time lump sum can help provide up-front financing. As I said earlier, you maximize money in your pocket by not taking the lump sum, but sometimes, life is about fulfilling your dreams. If you're thinking about starting a business, check out these 11 resources to help veteran-owned businesses grow.

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, 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.

Remember my friend's dad? He took his Social Security benefits as early as possible but then lived to 2 weeks shy of turning 101. He regretted betting against himself and taking the money too early. Fortunately, he had other savings to help him live in retirement, but he agreed that he would have more money in his pocket now if he had delayed taking his Social Security benefit.

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 DoD's BRS comparison calculator.^{See note1}