One of the biggest decisions you will make when retiring is rarely talked about in transition classes and not often discussed when you are in the military. Your Survivor Benefits Plan election is one that will affect your family’s financial future by many hundreds of thousands of dollars. There are many articles out there on this topic, and this article is not intended to provide financial advice, but it is a topic that I think every military retiree needs to think about. It is also one that will take a LOT of time to fully explore your options.
I think the most useful factors when considering this option are the decision timeframe, the impact/risk, the opportunity costs, and the alternatives. There is no simple decision, but there is a right decision for you and your family that only YOU can make.
When you retire, you must make an SBP “election.” Throughout my career, I heard about the Survivor Benefits Plan, and knew that I needed to decide upon retirement with my spouse. What I did not realize was the timeframe. You must make this election prior to full retirement. It is largely irrevocable, with a small window between months 24 and 36 of retirement to change your “election”.
When you consider retirement, you will probably attend a pre-retirement seminar and receive a whirlwind of information. It is worth attending this seminar at least once, preferably twice, as you consider retirement. It is best to attend this seminar at least two years before you plan to retire.
If you are married, a law states that you are, by default, enrolled in the SBP with your spouse as the beneficiary. There are other clauses in that law for people who are divorced, but it didn’t affect me so I didn’t study it very much. Details are in the link below.
Links for this section:
The impact and the risk
What makes this such an important decision is that it impacts your family regardless of the election you make. If you die as a retiree and you have not taken SBP, your family receives none of your retirement after you are gone. That is enough to give any retiring service member pause, as we worked hard to earn that retirement and care for our family. Essentially, the SBP is an annuity that you buy over a 30 year period and pay up to 6.5% of your retirement check to (including COLA adjustments) in pre-tax dollars. For that buy in, your beneficiary will receive up to 55% of your retired pay. For most of us, that number comes nowhere close to providing the security a family requires.
Another factor is inflation. Your retirement pay and SBP are inflation indexed. This cuts two ways. Over your time paying into the program, your contributions will increase along with inflation, i.e. you’ll pay more from your retirement into SBP each year. On the plus side, your beneficiaries could receive a payout that could grow with inflation, protecting their purchasing power if you are gone.
You will need to run some math to figure out what the potential benefit for your family is and what the program will cost you. The Army has a great website that helps you calculate your retirement and SBP cost (link below). Other services probably have an equivalent tool.
This problem is essentially a risk calculation. Are you comfortable with risk? Do you think you have a high risk of mortality in the next few years? Some people I talked to told me they come from a family where many members died young. Others had ancestors who routinely lived to 90. There is no way to answer this question, none of us know when we will die. This all comes down to you (and your family’s) risk tolerance, your current (and future) financial assets and if you think paying for SBP will lead to a financial benefit for your family.
Links for this section:
Military Retirement: Should You Take SBP? – Military Financial Advisors Association – This is a pretty good description of the risks.
https://myarmybenefits.us.army.mil – For Army retirees. Great link with estimated retirement pay and your SBP costs. It works best in your retirement year.
The opportunity costs
If you take SBP, there are several opportunity costs. First, you are giving up 6.5% of your retirement you could invest for the future and build over 30 years, or contribute to your spouse or kids’ education, etc. Those numbers could be pretty significant over a 30 year return in an investment or a paid off house, etc. Second, if you survive your beneficiaries, it’s a sunk cost into the program that no-one will be able to recoup; you gave up 6.5% of your retirement (up to that point; since you can stop SBP contributions with a divorce decree or a death certificate) with no benefit.
If you don’t take the SBP, there are other costs. First, your spouse and/or children might lose out on that 55% of your retirement (with COLA) over the rest of their lives (note: children can only retain that coverage until they are 21 and in school or if they have a qualifying condition). Second, you are leaving your family with a potentially large payout to your family which they will have to manage. For a disabled child, or an elderly spouse with dementia or Alzheimer’s, this might be a concern. That gets into some much larger considerations well outside the scope of this article. Additionally, any money you spend in term insurance is a sunk cost, if you survive the term, you won’t get any of the money back.
There are some alternatives to SBP that you should explore as you consider retirement. One of the classic options is to consider commercial insurance. This could be a term life policy(ies), whole life, or some combination of both. In some cases, the alternatives with insurance can be hundreds of dollars less expensive than the SBP. That all depends upon your actuarial risk (health, family history and age). Some retirees may not be able to get insurance due to health issues, others may get incredibly low rates.
For term insurance, consider how much insurance you will need at various points of your life, as you can control the cost by potentially “laddering” term insurance to provide the right amount of payout and “taper” that payout as your assets grow, your house is paid off, and your kids move out and get their own jobs. By laddering, you could save a lot in insurance premiums.
If you think insurance is something to consider, it is worth exploring this before you submit retirement paperwork. You will most likely have to go through an onerous medical qualification process, turn in records, get blood drawn, etc. It can take months to resolve. In the end, your insurer will provide a determination on carrying a policy for you and the rate they’ll charge you. If you find a good deal on term insurance, consider investing the difference to grow your nest-egg and prepare for the future.
Don’t forget about Social Security! If you die, your minor children will receive a defined benefit based on your contributions. That amount is not insignificant. In my own calculations, this benefit exceeded what SBP would provide by nearly 175%. I have a few, non-military, family members who received this benefit after the death of a spouse and successfully navigated that event. Widows and widowers are also able to draw social security at an earlier age than normal.
Links for this section:
Life Insurance Calculators
– Life Insurance Needs Calculator | Take our Quiz | AAFMAA (from AAFMAA; I think it’s pretty good. Many military folks were savvy with real estate as the PCS’d and it allows you to address this).
– Insurance Calculators – NerdWallet (I don’t like how this one addresses additional assets you may have).
SmartAsset article on Term Laddering – A Guide to Life Insurance Laddering – SmartAsset
Social Security Survivor Benefits – https://ssa.gov/benefits/survivors/
You (and your family’s) decision
Making this decision is complex. My wife and I reached a unique decision based on our family situation that straddled a bit of the pro and con SBP camps. I won’t go into the specific details, but we did a lot of deep thinking and found something that worked for our family. I think that was worthwhile, and I wish you the best of luck in making a decision that works for you and yours.
Links for this section:
A pro SBP position – Why You Should Care About the Survivor Benefit Plan – Military Saves (author is a financial advisor)
A con SBP position – https://the-military-guide.com/why-you-should-strongly-consider-not-participating-in-the-survivor-benefit-plan/ (author is selling a book on this position)
A blog I read that seems pretty well thought out – Retiring Military: Should You Choose SBP? • KateHorrell (author is a military financial coach and military spouse)
A Pro/Con comparison – The Survivor Benefit Plan: Pros and Cons – Military Families Learning Network