facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Is SBP Expensive?

Military Pay and Benefits Insurance Estate Planning

I often hear people say that the Survivor’s Benefit Plan (SBP) is expensive. Is that the case? I’m not sure that it is, but let’s take a look. I’ll try to take a look at it a couple of different ways.

Compared to What?

If selecting the full amount, a military retiree will have his or her pension reduced by 6.5%. When the service member passes, his or her spouse (in most cases) will receive 55% of the unreduced pension. How does that compare with other pension plans? 

The Federal Employees Retirement System (FERS) also offers a survivor benefit (all pensions are required to do so). Its survivor benefit calculation is similar. If the full survivor benefit is selected, the retiree’s retirement pension is reduced by 10% and the surviving spouse receives 50% of the unreduced pension amount.

How about civilian plans? Of course, there are many, but I looked at a pension plan available to one of my clients. In this case, at age 65, the reduction amount is 11% and the survivor benefit is 50% of the reduced amount. Also, the pension is not inflation adjusted like a military or FERS pension.

If we compare the 3 options, the pension reduction for SBP is less than FERS and civilian plan and the benefit is a higher percentage of the pension amount. Seems like SBP isn’t expensive compared to these two examples.

When Will “I” Get “My” Money Back?

Actually, you won’t. You’ll be dead. But your spouse will receive a benefit. When will your spouse get back the money you both gave up during your military retirement? It’s important to remember that you will only have your military pension reduced for 30 years or until you reach age 70, whichever is later. For this analysis, I’ll use the 30-year standard as the cohort of those who enter military service younger than age 20 and retire at 20 years is relatively small and would not significantly affect the payback time (about 3 months).

To keep the calculations simple, I’ll ignore inflation and since the pension reduction and benefit payable are both increased by the same inflation factor, this will be a relatively minor assumption. So, if the pension is reduced by 6.5% for 30 years, you’ll pay 195% of your first year’s pension. Your spouse will receive 55% of your pension. Dividing the 195% reduction by the 55% pay-out, results in the reduction being paid back in 3.55 years.

Seems like a pretty short pay back and if the reduction last less than 30 years, the pay back is even shorter. Doesn't seem expensive.

How Much is Your Spouse’s Peace of Mind Worth?

It’s been a few years since I’ve looked, but the median income for a female over age 85 is less than $20,000 per year (men aren’t in a whole lot better place). It is shockingly close to the average Social Security Survivor’s Benefit. Imagine the stress of living on that small of an amount of money. How much is it worth for your spouse to not have to worry about that?

If you’re thinking you’ll buy insurance and invest the difference, be very careful. For every $100 that you save per month and invest at 7% until the SBP reduction ends you’ll have just under $122,000. If inflation for those 30 years is about 2.5%, the $122,000 will have the buying power $61,000 has today. If your insurance has expired when you pass away and your spouse has between $121,000 and $242,000 (investing between $100 and $200 per month), how long do you think that will provide a payout equaling the SBP payment? I’ve run the numbers and it will run out at approximately your spouse’s average life expectancy in most cases. Just hope that he or she doesn’t have the audacity to live a long life.

Military Finances are Different

While there are some civilian pensions out there, none of them are the same as a military pension. That’s not where it stops. There are a lot of things that are different between military and civilian finances. We think that if you’re going to work with a financial advisor or planner you should work with one that deals with military finances each and every day. If you’d like to chat, give us a call or schedule a free initial consultation.




If you found this article useful, you might like the following blog posts:

To SBP or Not SBP? That is the Question


SBP and Long-Term Care Insurance


It Actually Looks Like the DIC Offset to SBP Might Go Away






Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.