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 DifferentWhile 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.
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