The intent of this blog entry is to stimulate you to consider how you will secure your family’s financial future after retirement from the U.S. military. Based on my research and calculations, The Survivor’s Benefit Plan, offered by the military upon your retirement, may not be the most advantageous way to accomplish this goal. In many situations, I believe that a retiree would be better off securing a private life insurance policy and investing the difference between the life insurance premium and the SBP fees.

According to the Defense Finance and Accounting Service (DFAS) website (http://www.dfas.mil/retiredpay/frequentlyaskedquestions/survivorbenefitsplanfaqs/sbpgeneralfaq.html), the Survivor’s Benefit Plan was created in 1972 to ensure the survivors of retirees are financially secure and that SBP is the “sole means by which survivors can receive a portion of military retired pay.” At the time of retirement, you are offered the opportunity to elect to receive reduced retirement payments over your lifetime for the added benefit of providing 55% of your retired pay for your spouse and/or dependent children. If you’re married, your spouse must concur with your decision to cover a base amount of anything less than your full retirement benefit. The cost of providing this benefit is 6.50% of the monthly retirement benefit you wish to select as the base amount. The base amount can be any amount between $300 and your full retirement benefit.

I think to understand the situation it’s best to look at an example. The following calculations and discussion are based on these assumptions:
1) Rate of Annual Investment Return: 8.00%
2) Rate of Annual Inflation: 3.00%
3) Annual Military Pay Raises: 3.50%
4) Life insurance estimates are based on a 37 year old, non-smoking male without significant pre-existing health issues

In order to clarify my position, I would like to examine the sample case of a 37 year old, active duty Major with over 14 years of creditable service. This individual will be eligible to retire in just under 6 years (2014) and wants to ensure the financial security of his/her family. Since this person entered active duty after August 1986, they will likely receive retirement pay under the High 36 plan. This means that his/her monthly retirement check will be based on 50% of the average of his/her highest 36 months of active duty pay. In my sample case, this individual would likely receive 12 months of O-5 over 16 pay and 24 months of O-5 over 18 pay. The proposed pay rates for 2009 for O-5 over 16 and over 18 are $7,287 and $7,493 respectively. Based on my assumption of an annual military pay raise of 3.50%, this sample officer would receive monthly pay of $7,806 in 2011, $8,307 in 2012, $8,598 in 2013. This would result in a High 36 average pay of $8,237 or an initial retirement pay of $4,119 a month. This monthly payment will be adjusted for inflation each year. The sample officer would be 42 years old at the time of retirement. Assuming that the retiree lives to be 85 years old, the value of his/her retired pay, at the time of retirement, would be $928,555 or $585,147 in 2008 dollars. Put another way that is how much money he/she would need in a personal account to replicate the benefits he/she would receive from the government over 43 years.

Unfortunately, the SBP only pays 55% of your elected base amount of retired pay to your surviving spouse in the event that you die before he/she does. In the case of my example officer above, he/she would be required to pay $267.73 per month to cover a base amount equal to his/her full retirement benefit of $4,119. If he/she dies before his/her spouse in the first year after retirement, then he/she would receive 55% of $4,119 or $2,265. Also, once his/her spouse reaches the age of 62, his/her SBP benefit drops to 35% of the selected base amount. At the time of retirement in 2014, the total value of the spouse’s SBP (assuming he/she lives to be 85) is $465,473. Another alternative is to purchase a private life insurance policy. A $500,000, 30-year level-term life insurance policy for a 37 year old, non-smoker male can be obtained for approximately $45-$75 a month. This assumes insurability…a major factor in this example! Purchasing such a policy would provide the same amount of initial retirement pay protection for the spouse at a savings of as much as $220 a month over SBP fees. I realize that this policy expires when the retiree reaches age 67, but it’s essential to invest the monthly savings between the two programs. If the $220 a month is invested at an 8.00% return for 25 years, it would result in an account balance of $328,000. This account could then generate an annuitized payment of $2,279 a month from age 67 to age 85. This is essentially equal to the reduced payments that your spouse would be receiving after the age of 62 under the SBP.

Some other negative aspects of SBP are:
1) If your spouse and children die before you do, then any payments you’ve made into the SBP are lost.
2) If your spouse remarries before age 55, then SBP benefits terminate.
3) Once your children reach 18 (or 23 if full-time students) SPB benefits terminate.

Some of the other positive aspects of a private life insurance policy are:
1) It’s paid in one lump sum so your spouse can cover immediate needs.
2) Once it’s paid out, it becomes the property of the surviving spouse and can be willed to his/her beneficiaries.
3) Payment is not affected if your spouse remarries or your children grow up.

The time to start thinking about how you will secure your family’s financial security is today…not when you’re filling out your retirement paperwork. Hopefully this blog has prompted you to evaluate your personal situation and start planning for the future.

Major S. Sullivan
Student, Command & General Staff College
Fort Gordon, GA

The views and opinions expressed in this blog are those of the author and do not reflect the official policy or position of the Department of the Army, the Department of Defense, or the U.S. Government. The facts and views presented in this blog are based on the aforementioned assumptions and should not be considered as financial advice. The reader should consult with a financial planner to evaluate their personal financial situation before making investing and insurance decisions.

Major Sullivan I commend the efforts of your due dilligence on this one. It is a very outdated act. This could drain a retirement check quickly. Their are many other financial instruments that are more worth while.

Educating yourself is the Key.

Thank you for the in-depth example and explanation, Major Sullivan. I have been pursuing alternatives to SBP for the last ten years. I appreciate the information you provided but have a question about the investment account balance of $328,000 at 25 years.

Just to clarify, this was a $220 monthly investment @ 8% return for 25 years or 300 months. The formulas and calculations I've used yield about $100k less. Could you explain exactly where the $328k amount comes from? I would like to know if I am using the wrong information or an incorrect formula. Thanks again for raising awareness about this issue.

Thanks you for spelling it out in this way. I believe one of your statements is incorrect. The SBP benefit no longer drops to 35% of the selected base amount when the spouse reaches the age of 62. How does this change your calculations?