First Command Reports: Military Retirees Who Choose DoD’s Lump Sum Buyout Will Likely Pay a High Price
The lump sum program offers retiring service members the opportunity to receive upfront dollars by forfeiting a portion of their working-age retirement pay (either 25 percent or 50 percent of the monthly payment). Retirees can choose to take the lump sum as a single payment or in four equal annual installments. Either way, their monthly retired pay will remain at the reduced level until age 67 and then returns to the full amount.
Lump sum amounts will be determined using the Government Discount Rate, which is an annually approved rate that is currently 6.99 percent. Based on a detailed analysis of the future finances of two hypothetical career military members (one enlisted, one officer) who retire at age 42,
For the hypothetical officer example, First Command based its projections on a pay grade of O-5, an assumed retired pay of
Enlisted personnel face similar challenges. For the hypothetical enlisted example, First Command assumed a pay grade of E-7, retired pay of
In both cases, the dollar amounts are double for the 50 percent option.
“These hypothetical examples suggest that service members who select the lump sum payments could put themselves at risk of a significant drop in the lifetime value of their own retirement package,” said
The Blended Retirement System, which went into effect on
When the first wave of eligible service members who opted into the Blended Retirement System start to retire in 2026, they’ll likely be dealing with a different Government Discount Rate but the challenges promise to be the same.
“The lump sum buyout is clear example of how the choices in the Blended Retirement System can present service members with more risk and more complexity in planning for their financial futures,” Spiker said. “The opaqueness and uncertainty associated with the lump sum buyout reinforces the value of consulting with a financial coach. Service members should plan on working with professionals who have the necessary advanced knowledge to conduct a meaningful analysis of the Blended Retirement System, help them weigh all of the information and make informed decisions.”
Highlights of First Command’s analysis of lump sum payment options
Officer examples
Pay grade O-5 taking a 25% reduction in pension in exchange for a lump sum
Assumptions
- Retirement pay for BRS of
$3,410 , or$40,920 first year - 3.0% post-retirement COLA
- Retirement pension started at age 42
- Discount Rate of 6.99%
- Discounted pension lasted through age 66
Results
- Reduced pension for the first year would be
$30,690 - First year reduction was
$10,230 - Total of the reductions over the 25 years prior to FRA at age 67 totaled
$372,978 - Lump sum at retirement in exchange for the reduced pension using the Discount Rate of 6.99% totaled
$157,250
Pay grade O-5 taking a 50% reduction in pension in exchange for a lump sum
Assumptions
- Retirement pay for BRS of
$3,410 , or$40,920 first year - 3.0% post-retirement COLA
- Retirement pension started at age 42
- Discount Rate of 6.99%
- Discounted pension lasted through age 66
Results
- Reduced pension for the first year would be
$20,460 - First year reduction was
$20,460 - Total of the reductions over the 25 years prior to FRA at age 67 totaled
$745,987 - Lump sum at retirement in exchange for the reduced pension using the Discount Rate of 6.99% totaled
$314,500
Enlisted examples
Pay grade E-7 taking a 25% reduction in pension in exchange for a lump sum
Assumptions
- Retirement pay for BRS of
$1,770 , or$21,240 first year - 3.0% post-retirement COLA
- Retirement pension started at age 42
- Discount Rate of 6.99%
- Discounted pension lasted through age 66
Results
- Reduced pension for the first year would be
$15,930 - First year reduction was
$5,310 - Total of the reductions over the 25 years prior to FRA at age 67 totaled
$193,600 - Lump sum at retirement in exchange for the reduced pension using the Discount Rate of 6.99% totaled
$81,622
Pay grade E-7 taking a 50% reduction in pension in exchange for a lump sum
Assumptions
- Retirement pay for BRS of
$1,770 , or$21,240 first year - 3.0% post-retirement COLA
- Retirement pension started at age 42
- Discount Rate of 6.99%
- Discounted pension lasted through age 66
Results
- Reduced pension for the first year would be
$10,620 - First year reduction was
$10,620 - Total of the reductions over the 25 years prior to FRA at age 67 totaled
$387,197 - Lump sum at retirement in exchange for the reduced pension using the Discount Rate of 6.99% totaled
$163,245
About First Command
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