The BRS Lump Sum Option at Separation

Time comes for us all.

Veterans of the Global War on Terror watched as BDUs gave way to every branch having its own distinct working camo, only to see everyone (except the Marine Corps) revert to OCP. We also watched as everyone just allowed the military to end the pension system and force the Blended Retirement System on incoming troops.

That was 2018. And now the troops who were new back then are starting to separate, or even retire. If you came in under the BRS, you might not be aware that you can elect to take half of your retirement as a lump sum when you separate.

But there’s a catch. Because there’s always a catch.

The military will hand you a large amount of money right then and there (could be as much as six figures) in exchange for a smaller monthly check for the next several decades. This is the BRS lump sum option. 

It’s not “Let’s Make a Deal,” but it’s not far off. 

The BRS Lump Sum 

Under the Blended Retirement System, service members who qualify for retired pay can opt to receive either 25% or 50% of their estimated lifetime retired pay as a discounted lump sum at the time of retirement.

In exchange, their monthly retirement check is reduced until they reach full Social Security retirement age, which for people born after 1960 is 67. Taking the 25% option drops the monthly check to 75% of the full amount. Taking the 50% option drops it to 50% of the full amount. At age 67, the monthly payment reverts to the full amount, regardless of which option was elected.

The lump sum can be received as a single payment at retirement or spread into equal annual installments over up to four years. The timing doesn't change the money; the trade-off is the same either way.

A service member who retires at 20 years, earns a $3,000 monthly retirement check, and elects the 50% option receives roughly $150,000 to $250,000 upfront (the exact figure depends on the actuarial discount rate applied at the time of retirement).

Their monthly check then drops to $1,500 until age 67. If they retire at 42 and live to 85, that's 25 years of receiving half the check they could’ve had.

The Discount 

“Discount” likely does not mean what you think it means. If you went to business school, you’re probably already crunching these numbers in your mind. If you didn’t, are you ready for the math? It’s going to hurt most of us.

The lump sum isn't equal to the raw dollar value of the monthly payments you're giving up. It's discounted to present value using a Department of Defense Governmental Discount Rate (GDR) published each June for the following calendar year.

The GDR is basically the interest rate DoD uses to figure out how much a smaller check today is "worth" compared to larger checks spread over years. DoD is calculating what your future monthly payments are worth in today's dollars, then offering you that present value as a lump sum.

For you to come out ahead financially, you'd need to invest that money and consistently earn a return that exceeds the discount rate used to calculate the present value (6.32% in 2023).

If you can consistently earn a 7% annual return (roughly the historical long-run average for a diversified index fund) by investing on your own, the math becomes defensible for taking the money and running.

At 4% or below, waiting almost always wins over a normal person’s lifespan. 

In this case, the math says our example retiree would have been paid out around $432,000 had he not taken the lump sum.

For most service members, a guaranteed lifetime income is likely preferable to a lump sum. But what do we know? You might be an investing guru, and if that’s true, then the lump sum might work. The rest of us should just wait.

The Tax Man Gets a Cut 

If you opt for the lump sum, Uncle Sam is gonna take his cut. Be prepared for that. A retiree receiving a $200,000 lump sum faces a hefty tax bill, on top of whatever other income they made that year.

Depending on their total income (which could include any final active duty pay, separation bonuses, or civilian income), the lump sum could push them into a higher federal tax bracket. The effective after-tax value of the lump sum is considerably less than the gross number on the check.

This isn't a reason to automatically refuse the lump sum. But it does mean the comparison isn't "lump sum vs. full monthly pay." It's "after-tax lump sum vs. after-tax monthly pay," and the math stops mathing even more once taxes are factored in.

If you’re still considering taking the lump sum, work with a financial advisor or an accountant to see how you could potentially ease your tax burden for that year without ending up in a federal prison. 

The Deadline for Taking the Money

Service members must notify their personnel overlords at least 90 days before their retirement date. For Guard and Reserve members, the notification deadline is at least 90 days before the date they first become eligible for monthly retired pay, depending on qualifying active duty service.

If you miss the window, you’ll get the default setting: full monthly retirement pay, no lump sum.  For the majority of retirees, that’s for the best, but this decision must be made deliberately and on a timeline, not when you’re freaking out about everything else related to getting out of the military.

Who Should Take the Lump Sum

Despite the generally unfavorable math, there are specific circumstances where the lump sum is defensible—and you don’t need to be a financial wizard to agree on what those circumstances look like.

1. A retiree carrying significant high-interest debt has a compelling case.
Paying off a 20% credit card balance with lump-sum funds delivers a guaranteed "return" of 20%. This is dramatically higher than any realistic investment projection.

The same logic applies to vehicle loans or personal loans at rates above 7%. Eliminating high-cost debt immediately changes your personal monthly cash flow picture enough to offset the reduction in a retirement check.

If you were paying thousands every month to stay afloat and suddenly you aren’t, congratulations: you have increased your wealth (and probably sanity).

2. A retiree who is a disciplined investor.
A savvy investor with a specific investment plan for the money, such as investing in or opening a business, has a plausible case. So does a retiree whose spouse has independent income that can cover the reduced monthly check, making the cash flow reduction livable in exchange for a meaningful upfront capital event.

For the investor crowd, the target average return every year is 7%. If you don’t think you can make that, just take the monthly check.

If your military retirement check is your primary income stream, or you don’t have a whiz-bang concrete investment plan for the funds, the lump sum is probably not the way for you.

Other BRS Considerations

There is no do-over. You make the lump sum election once, at retirement, and cannot reverse it under any circumstances. You either take the money or you don’t, and another stock market crash or housing crisis won’t open the door to another lump sum offering.

This is also probably something you should discuss with your spouse. The BRS lump sum interacts with the Survivor Benefit Plan (SBP), which is calculated as 55% of the elected base amount. This means a reduced monthly retirement check also produces a reduced SBP payout. 

The lump sum isn't a gimmick; it's an offer that saves the government money over time while offering a very (very) narrow set of good uses. The problem is that it's a big number being offered to people in the most stressful times of their lives, with a hard deadline. Just do the quick math to figure it out.

Or tell your spouse about their SBP check. That’ll settle the issue in a hurry.