The Blended Retirement System Lump Sum – Probably Not a Good Idea
Now that the Blended Retirement System (BRS) opt-in period is well underway, it is time to start digging a little deeper on some of its features. While monitoring social media for new information to post in our BRS Resource Center, I came across what appears to be a pocket card put out by the DoD Office of Financial Readiness to explain the lump sum feature of the BRS:
Reading through the card, I think it does the best job I’ve seen so far at explaining how the lump sum option works, especially for those who don’t understand what discounting is:
Discounting is the process of determining the present value of a payment or a stream of payments that is to be received in the future. Given the time value of money, a dollar is worth more today than it would be worth tomorrow. Discounting is the primary factor used in pricing a stream of tomorrow’s cash flows.
When discounting future cash flows to determine the present value, you have to use what is very much like a reverse interest rate, called the discount rate:
The discount rate also refers to the interest rate used in discounted cash flow analysis to determine the present value of future cash flows.
The higher the discount rate, the lower the present value of your future cash flows and the smaller your lump sum would be. Some have criticized the DoD for setting the discount rate too high. While adjusted annually, it is 6.99% for 2018.
What I really found interesting about this pocket card I had found, and what caused me to write this blog post, was this part of it:
Note that the DoD Office of Financial Readiness is admitting, “For most Service members, a guaranteed stream of income for life is likely better than a lump sum.”
Yes! This is probably one of the strongest arguments against the BRS. You can’t screw up a guaranteed stream of inflation-adjusted income.
You can screw up a lump sum, reduced by a high discount rate, by blowing it on an expensive car, too large of a house, a weekend in Vegas, or whatever else people like to waste money on. Yes, you could use it productively, perhaps to start a business, buy a franchise, or acquire high-paying skills with further education. But you could just as easily buy one of these:
Do yourself a favor. If you are planning to retire from the military, you should probably keep the current/legacy retirement system because you can’t screw it up. If you do opt-in to the BRS, when the time comes think long and hard before you reduce your future income streams and take a lump sum payment. As the DoD itself admits, “For most Service members, a guaranteed stream of income for life is likely better than a lump sum.”