I recently gave a presentation on the military’s new Blended Retirement System (BRS) at the Family Law Bar Association – San Antonio. The paper I wrote is on our website under the “Forms” tab.
A lump sum option may be selected by a Servicemember within 90 days of retirement. The first lump sum option is a 25% lump sum with 75% of regular monthly retired pay. The second is a 50% lump sum with 50% of regular monthly retired pay. The lump sum / reduced retired pay extends from retirement until the Servicemember’s full Social Security retirement age, which for most is 67 years of age. At full Social Security retirement age, military retired pay returns to its full amount.
The Secretary of Defense controls all variables in calculating the lump sum and discounting it to its present value. Servicemembers and spouses or former spouses should know that the variables might not prove to be fair in the end. Here’s why.
Calculating the lump sum is a two step process. The first step is to calculate the aggregate retired pay the Servicemember will receive from military retirement age until full Social Security retirement age. In this calculation, the first five years’ COLAs come from the Office of Management and Budget (OMB) Future Years Defense Plan (currently 2.2% for 2021 and 2.3% for 2022 through 2025). Beyond that, the DoD Office of the Actuary uses a standard assumed COLA of 2.75% (currently for 2026 through the year the Servicemember reaches full Social Security retirement age. I did a notional calculation for an O-5 with 24 years of service who retired at age 46. The calculations are detailed in my BRS paper. In short, the aggregate sum of retired pay for this notional O-5 equaled $1.468M at age 67. The second step is to discount the aggregate sum to its present value at time of military retirement. DoD publishes the discount rate used annually. For 2020, the discount rate is 6.75%. The result is the present value of the $1.468M aggregate sum is $763K at time of military retirement. From that lump sum, the 25% or 50% option would be applied.
I believe Servicemembers, spouses and former spouses should be aware that the difference between the assumed 2.75% COLA (for most years) used to determine the aggregate sum and the 6.75% discount rate used to determine the present value gives DoD a “4% hedge” against errors in assumptions. That’s significant. For example, to see the difference, I used an assumed 4.00% discount rate and the aggregate sum of $1.468M then had a present value of $972.6K — a difference of $209.6K more in favor of the Servicemember. It appears that DoD will continue to give itself a significant “hedge” against making any assumption that doesn’t work to its advantage. For those facing a military divorce, be aware.
You might ask, so what? Doesn’t the Servicemember have some recourse if DoD assumptions prove unfair over time? The answer is, “no.” The law that enacted the BRS made it clear that no legal recourse exists if [or when, one might say] the Secretary’s assumptions over time prove to be detrimental. See Title 10 United States Code Section 1415(b)(6).
Download and read my paper if you want to learn more about the BRS.
Author Jim Cramp is a retired active duty colonel and the founder and principal attorney at the Cramp Law Firm, PLLC. The firm provides a spectrum of family law-related services to clients in the greater San Antonio region, across the United States and throughout the world. The firm specializes in Federal Civil Service and Military Divorce matters.