The BRS lump sum option isn't a bonus: the mistake of treating it that way

What is the BRS lump sum option, and is it a bonus?

The BRS lump sum option is an advance of 25% or 50% of the discounted value of your retired pay from the first check until 67. Your monthly retired pay drops by that same 25% or 50% until 67, so the cash comes out of your own pension instead of being added to it.

Most people assume it works like a bonus on top of the pension. It doesn't. You get a slice of your future retired pay early, and the monthly check shrinks to pay for it. At 67 retired pay goes back to the full amount, including the COLAs that built up while it was reduced.

Only Blended Retirement System members can elect it. Legacy High-3 retirees have no such choice. You can take the cash as 1 payment or in 2, 3 or 4 annual installments, and the IRS taxes every dollar as ordinary income in the year each payment arrives.

DoD sets the discount rate each year, so the same pension produces a different lump sum depending on the year you elect. Get the current figure from DFAS and don't reuse an old estimate from a forum post or a coworker. Savant Wealth Management advisors ask for the DFAS quote first, because every other number in this decision hangs on it.

When do I have to choose, and can I change it?

Active-duty members elect with their retirement paperwork, no later than 90 days before the retirement date. Reservists like Lamar elect on the application for retired pay at 60, so the due date follows that application. Ask your service's retired pay office for the exact date in writing.

Until the application is processed, you can change the box. Once retired pay starts, the election is permanent and the cut runs every month until 67. There's no second window at 62 when the truck dies.

Some reservists start pay before 60. Qualifying active duty after January 28, 2008 lowers the start age by 3 months for every 90 days served, but not below 50. Each year pay starts earlier adds another 12 months of the cut, so a 25% election at 57 costs Lamar's kind of pension $7,500 more than the same election at 60.

Lamar, at 58, has about 2 years before his application. That's enough time to get the DFAS number and a tax estimate without rushing.

Which papers settle the decision?

Six items settle most of it: a DFAS lump sum estimate for your exact pay, your retirement points statement, any court order dividing retired pay, last year's tax return, recent pay stubs and current TSP and 401(k) statements. Gather them before you talk to anyone.

Ask DFAS to put its answer about the court order on paper, and have it in hand before you check any box. A phone answer won't help you if the split later turns out to be different from what you were told. Savant Wealth Management asks clients for this stack before it runs any numbers, and the court order is the paper people forget they own.

• DFAS lump sum estimate for your exact pay
• Points statement from Navy Personnel Command
• Divorce order, from your attorney or county court file
• Last year's tax return
• Recent hospital pay stubs
• Current TSP and 401(k) statements

How much does the cash really cost?

Lamar's 25% lump sum of $33,000 costs him $42,000 in retired pay by 67, so the cash runs out about 5.5 years in, before tax. Compare the after-tax cash with the after-tax pay you give up over the years from 60 to 67, not with $500 a month.

Here is the arithmetic for one made-up reservist. Lamar is 58, a divorced Navy Reserve chief with 24 good years and a court order on his retired pay. He manages IT for a hospital system and has $540,000 across the TSP and a 401(k). At 60 he expects his share of retired pay to be $2,000 each month.

The 25% option cuts that by $500 each month. That's $6,000 each year, and over the 7 years from 60 to 67 it adds up to $42,000. Say DFAS quotes $33,000 (illustrative; the real figure depends on the discount rate DoD sets for the year he elects). Divide $33,000 by $6,000 and the pretax break-even is 5.5 years, about age 65 and a half.

Partway through year 6, at about 65 and a half, the running cost passes the lump sum. By the end of that year Lamar is $3,000 behind, and by 67 he is $9,000 behind, before tax, growth and COLAs.

Tax changes the picture. Taken as 1 payment while he still earns a salary, at an illustrative 30% rate, the tax cost is $9,900 and he keeps $23,100. Taken as 4 installments of $8,250 after he stops working, at an illustrative 15%, the tax cost is $4,950 and he keeps $28,050.

Now set that against the pay he gives up. At 15% the $6,000 yearly cut is $5,100 after tax. The $23,100 covers only about 4.5 years of that, and the $28,050 covers about 5.5 years. Either way, the cash runs out before 67.

Quick test: divide the after-tax lump sum by the after-tax yearly pay cut. If the result is fewer years than you have left until 67, take the cash only for a named use that costs you more than the cash would earn, such as a high-interest balance. Otherwise keep the full monthly pay. Lamar's 4.5 and 5.5 both fall short of 7.

Before Savant Wealth Management suggests any box on the form, it lines up the installment years against the year Lamar's salary stops. The example ignores COLAs, investment growth and how the court order splits the cash, and legacy High-3 retirees have no lump sum choice at all.

What happens if I take it all while still working?

Taking the full lump sum as 1 payment in a year with a full salary taxes it at your highest rate. Lamar's $33,000 would lose $9,900 at an illustrative 30%, against $4,950 at 15% spread over 4 installments, so the two choices together cost him $4,950 more.

Two small mistakes tend to come together: choosing 1 payment, and receiving it in a year with a full salary. Alone, each is fixable. Together they cost Lamar about $4,950 in extra tax on $33,000, and the cash doesn't last any longer for it.

If you'll keep working past 60, ask a CPA whether installments that start in your first lower-income year cost less tax. Adjust withholding or make estimated payments so the lump sum doesn't leave you owing money in April. Yes, that means waiting for some of the cash. Put these to DFAS, a CPA or an advisor:

• How does my court order apply to the lump sum?
• Do installments add up to the same total?
• How much federal tax is withheld per payment?
• What's my marginal rate in each installment year?
• Would a debt payoff or 401(k) deferrals use it better?

Does single, married or divorced change it?

Yes. Divorced, like Lamar, the court order may send part of the lump sum and part of each reduced check to a former spouse, so run the math on your own share only. Married readers must weigh the surviving spouse's need for the monthly check.

The spouse who relies on that check after you're gone has a stake in a 7-year or 27-year cut. The Survivor Benefit Plan election is a separate decision with its own page.

Place yourself with one subtraction: years of reduced pay equal 67 minus the age pay starts. That's 7 years for a reservist at 60, 25 years for an active-duty retiree at 42 and 27 years at 40. The longer the cut, the smaller the lump sum looks next to the total you give up.

Balance size matters too. With a large TSP that can cover the gap, the cut matters less. With a modest pension and little savings, $500 each month may be rent money. And if you invest the cash instead of spending it, the investment can fall below what you started with, so the $33,000 may not be there when the cut still has years to run.

Who usually raises the lump sum at home?

The person with a specific use in mind usually raises it first, such as a car loan, a house down payment or a child's tuition. Settle it by writing that use and its cost next to the break-even year before the application goes in. Lamar, single, has the same talk with himself, plus one check of what the court order gives his former spouse.

What would Savant Wealth Management check first?

Savant Wealth Management would first compare the year Lamar's hospital salary ends with the year his retired pay starts, then read the court order's wording on dividing retired pay. After that, it would check whether his $540,000 in the TSP and 401(k) can cover a $500 monthly gap for 7 years without selling at a bad time.