To SBP or Not SBP? That is the QuestionRetirement Funding Insurance
Critical Decision for Retiring Military Officers
If you're getting ready to retire, You have a REALLY BIG decision to make. That decision is whether or not you should take the Survivor's Benefit Plan (SBP). Actually...only your spouse can decide to take less than full survivor's benefits. Let's assume you decide together.
There are plenty of folks out there who are ready to give you advice on what you should do. Normally, the advice centers around the ability to earn more money with the money you spend for SBP. Others talk about how to get equivalent protection with some product for less money or a product that can get you benefits with no taxes. But, most of these plans ignore something more important...Risk.
Specifically, the options normally offered don't adequately account for inflation and longevity risk. Inflation risk is the risk that things will cost more than you plan and longevity risk is the risk that the money will run out before your spouse's life ends.
To make a calculation for the money your spouse will need if you pass away, you'll have to estimate an inflation rate. I guarantee that estimate will be wrong. It is just a matter of by how much and in which direction. That error can be catastrophic when it comes to your spouse's future lifestyle. Let's take an example.
- You assume you will live for 20 years after you retire from the military
- You assume the inflation rate will be 3% for those 20 years and for your spouse's remaining life
- You pass away exactly 20 years after you retire.
- But...the inflation rate for your lifespan was 4% instead of 3%. For your spouse's remaining lifespan the inflation rate is 3%
- Your spouse will have 16% less than planned income on which to live
16% less based on a relatively small change in inflation.
I believe longevity risk, is the greater threat. The vast majority of retired military officers do not have portfolios that are large enough to generate income where the income is the only amount withdrawn from the portfolio to support the surviving spouse's lifestyle. Even with insurance it is unlikely that a large enough amount of assets can be accumulated. That means your spouse will probably have to accept some portfolio risk (stocks or mutual funds) and draw down assets. If that draw down starts when the market has experienced a major correction, like 2008 as an example, there is a good chance the money won't last. A portfolio that doesn't beat inflation by enough could run out of funds as well. SBP on the other hand, will continue to pay an inflation adjusted stream of income for as long as your spouse lives. You simply can't guarantee that with investments.
For those of you who are thinking, "I can get a lifetime stream of income with an annuity". To that, I say, "Yes you can...but how much money do you need to fund the annuity?" That takes us back to inflation risk and perhaps investment risk.
I can't think of another method to mitigate both longevity and inflation risk as well as SBP does. It is unique.
Military Officers Need to Get This One Right
The rules on SBP are not very forgiving. If you turn it down, you probably won't get another opportunity to sign up for it.
Most military families should think long and hard before passing up on this important government benefit. There are some times where it might not be the best option for you. These include:
- Military married to Military. If both you and your spouse are military officers and you'll both have a military pension, then SBP might not be indicated. The same may be the case if your spouse has a government pension or corporate pension, if it is inflation adjusted
- You have a special needs child. You generally do not want to name a special needs child as an SBP beneficiary. This is due to how income and state-sponsored aid are coordinated. Since 2015 you've been able to name a special needs trust as a beneficiary. If the trust is structured properly, the child should be able to receive funds as directed by the trustee and still maintain state-sponsored aid.
If this is all a little bewildering to you, we're ready, willing and able to help. Just give us a call. Or if you prefer, check out our newsletter or my book, Well and Faithfully Discharged: Financial TTP for Military Retirement.