Why I Opted Back in to SBP
AUTHOR’s NOTE: This article originally ran in July 2023. There are few minor updates, but you’re seeing it again because the end of Open Season is just a few weeks away. Additionally, my TSP application is still pending due to the backlog that DFAS has in processing requests. DFAS has stated that December 31st is the deadline to apply, not to be fully opted back into (or out of) SBP.
If you’re like Gary from Team America: World Police and you just know things like, “I will never die,” you should skip this article. Everyone else, read on!
When I retired from the Air Force in 2020, I opted out of Survivor Benefit Plan (SBP). This past summer, I opted back in. I thought I would share my story with a good deal of behind the curtains details in case it’s helpful to those considering the Open Season option and those nearing military retirement.
Before diving in too far, let’s review what SBP is all about. When you retire from the military, you’ll get a pension that is approximately 40% (BRS) or 50% (high-3) plus an extra 2% or 2.5% per year for the rest of your living years. We joke that this is called the check-a-month club, but it goes away when you die. If your future income assumptions involve your military pension, you need to know about the Survivor Benefit Plan.
This Survivor Benefit Plan provides for part of your retirement check to continue flowing to your surviving spouse, your children until they complete college, or even a special needs trust if you have a special needs dependent. The maximum amount that SBP pays is 55% of your retirement check. You can opt for less but it’s hard to argue a case for doing so. The cost of SBP is 6.5% of your retirement pay each month if you choose the full 55% benefit.
On the bright side, the SBP premium comes out of your check before you pay taxes. On the downside, not only is it a chunky three-figure premium each month, but when your spouse receives the benefit, it’s taxable.
Most people reading this article will have at least a modest allergy to paying a lot for an insurance product. Perhaps it’s because that semi-sleazy guy from the insurance company outside the gate next to the pawn shop tried to sell you and annuity or whole life policy as a lieutenant, or maybe you just saw someone else get suckered at a free steak dinner presentation…
Most of us realized that the most effective way to get insured is to use term life insurance. But term life insurance is cheap, and it conditions us to expect insurance to be cheap.
It’s very common for retiring military members to make a comparison between term life insurance and SBP. It’s not hard to create a math scenario where term life insurance is cheaper and seems like it would be better than SBP. That’s what I did.
Additionally, when we’re transitioning from the secure government paycheck every month to an unknown civilian world filled with layoffs, furloughs, and other uncertainty, we tend to be pretty cost sensitive. We don’t want to add expenses. Especially not the type that don’t bring prompt gratification.
My First SBP Decision
I studied up on SBP for quite a long time prior to retirement. I even read the book on SBP (side benefit, I’m now friends with the author). My calculus was that if I had a reasonable amount of term life insurance, about $1.5 million lasting until my early sixties, and a pretty decent nest egg already growing in IRA’s, TSP, and taxable accounts, then my wife would be better off receiving the insurance payout and investing it then relying on what felt like barely half of my retirement.
If SBP costs $400 to $500 per month, surely, I could invest $350 of it after buying a $1.5 million insurance policy for $150 per month? The insurance policy would pay out tax free. My wife would only have to invest it and earn a modest return for my math to workout. I had plenty of earnings power in front of me to continue to grow my investments. It seemed like I had it all figured out.
I did not try to bowl my wife over with my preference for skipping SBP. I think I tried to argue the case both ways and let her make the decision. Ultimately, she deferred to me and we opted out of SBP.
Life Without SBP
As you probably know from reading my material, I switched careers after the Air Force and became a financial planner. This career transition has opened my eyes to a great many new ways of thinking.
There is a sizable body of research that suggests that people reliably and comfortably spend from secure monthly income. You probably didn’t feel like you had to save your entire military paycheck. Unless the government closes its doors, you knew the money was coming in and you didn’t need to stress about whether or not it would show up.
The other side of that research says that we don’t feel good about dipping into savings. If we spend decades deferring gratification and saving for potential future needs, we program ourselves not to touch the nest egg. It’s stressful to touch the nest egg even if the nest egg is really big.
There’s research, and then there’s reality. I work with many widows. All but one spends their secure income and not much more. While I’m sure there are many reasons, my conversations indicate that each feels a scarcity, even if it is a self-imposed one, such that it’s okay to spend the SBP money, any other pension money, and Social Security. But there’s always a reason why it’s just not time to crack the nest egg yet. Each of these widows has a comfortable 7-figure net worth. It is incredibly unlikely that they could ever spend even half of what they are sitting on.
Yet they only let themselves spend the secure monthly income. It’s a habit. It served them well through thick and thin during the pre-retirement years. It’s a hard habit to break even if the math says it’s okay to do so.
Helping families with their money has given me other new optics on the SBP versus term life insurance debate.
SBP cannot be depleted. Life insurance money in a bank or investment account can be spent too fast, invested poorly, absorbed by unscrupulous relatives, or outright stolen by scammers. It’s difficult to do that with a monthly paycheck from the government.
A key assumption of choosing life insurance is that it can be invested to earn a rate of return such that the payments pulled out of it will be higher than the SBP payments. This could be true. It was certainly one of my assumptions.
The reality is my wife would have to invest the money and choose an appropriate income strategy to make sure that the life insurance payout lasted and served its purpose. That might have been a heavy lift to ask of her. While I would want her to hire an excellent fiduciary, fee-only financial planner, I would be on the wrong side of the daisies and unable to ensure that she would always have money in my absence.
SBP is inflation-adjusted. The same cost of living increase that retirement paychecks and Social Security paychecks get each year applies to SBP.
When the stock market is down, it may be really stressful for a surviving spouse to pull money from the life insurance payout account. It’s bad enough that a spouse died young, but stressing about having enough money shouldn’t be salt in the wound.
Finally, SBP by itself is not enough money for most people to live on. It probably equates to 25% of your total pay when you leave active duty. But for most families it’s enough to pay the rent or mortgage and some of the food or utilities. Knowing that there is a roof over the head no matter what, does wonders for stress.
My Second SBP Decision
In the years since I retired from the Air Force, quite a few things have happened that bear on my own thoughts about SBP, life insurance, and how best to take care of my spouse as a potentially senior citizen-aged widow.
First, like many other things from the 1980s, inflation has made a comeback. I had $1.5 million of term life insurance that lasted until my early 60s. $1.5 million is still no small sum, but it’s worth less than it was three years ago and it will be worth even less if I die right before it expires. Of course, I would hope that my investments will have grown to the point where the life insurance would be icing on the cake, but that’s not a gamble I wanted to take.
Second, I now own a business. It’s a new business and if I pass away soon, there really isn’t a lot of value for my family to receive without me running the business. To mitigate this, I actually added another chunk of term life insurance at the end of 2022. This had me feeling better both about the SBP decision and creating a proxy for selling the business upon my death.
Third, without much warning Congress authorized a fairly rare open season for the Survivor Benefit Plan program. During the calendar year of 2023 retirees can both opt out or back into the program. The terms of the program are well described here. If Congress had not authorized the open season, I think I would have felt fine with the extra life insurance. But I couldn’t ignore what I knew about secure income, stress, spending the nest egg, and overall widow(er) quality of life.
Thus, I decided to get a quote for my cost to opt back into Survivor Benefit Plan. The process was pretty simple, the quote came back quickly (it was basically the amount of “missed premiums”), and I talked to my wife about it. I explained that with the extra life insurance that we had, the math said we were even more covered than we would be with Survivor Benefit Plan. Again, she didn’t have a strong feeling about selecting it or not.
I decided that I would evaluate another sizeable chunk of term life insurance bringing my total well over what any calculator says I need. I told myself that if I had $X.X million worth of term life insurance, surely my wife and I could both rest easy knowing that we didn’t need Survivor Benefit Plan.
Then one day, my wife listened to me talking to a prospective client family about the Survivor Benefit Plan. It resonated with her in a whole new way when she heard me explaining reasons to consider it to another family. She looked at me and said “maybe I would feel a little better…” I sent in the SBP selection that same day. I sleep a lot better now. I think she does too.
The mathematical models say that I should probably have someone test my food as I am probably worth a lot more dead than alive. If I die, my wife will have both a sizeable amount of life insurance and the Survivor Benefit Plan payment each month. The amount that I pay for the combination of life insurance and Survivor Benefit Plan is not small. But it’s also not enormous. I earn plenty of money, I’ve got a trajectory to earn more, and what is the money for if it can’t create some peace of mind?
Cleared to Rejoin
I used to be a proponent of bulking up on term life insurance instead of paying two to five times as much in premiums for SBP. I sing a different tune now. I encourage families to bias towards taking Survivor Benefit Plan for the first two years after retirement. Yes, you’ll spend a large four-figure or small five-figure number on premiums for those two years, but the test drive will probably be worth it.
During the two-year SBP test drive, you’ll understand the ways that you feel different after military retirement. If you start a second career, you’ll probably have more income than you’ve ever had in your life. SBP premiums might feel like budget dust once that new paycheck hits alongside your retired pay.
If, however, the SBP premium is a stressor on your budget then you can opt out of SBP between years two and three. After that, you’re locked in unless Congress declares another open season.
Research says that we view our future self as a stranger. It’s one of the reasons we can rationalize eating too many Oreos or skipping the gym. It’s one thing to treat your future self as a stranger, but it’s another to treat your spouse’s future self the same way. As you make your SBP decision, it’s important to be clear-eyed about your spouse’s current financial behaviors. They are probably a good indicator of his or her future financial behaviors. Survivor Benefit Plan can help shape options in that future. It’s worth a second look.
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