Survivor Benefit Plan: Swimming Against the Current

The Common Survivor Benefit Story

The military retirement Survivor Benefit Plan or SBP. No other retirement topic seems to elicit more hand-wringing or staunch heel-digging than the SBP decision every retiree is forced to make just a few months prior to retirement.  Usually, the story as to why someone might elect out of SBP goes something like this:

“The math says that for a cost of 6.5% of the service-member pension pay for the next 30 years or age 70, whichever is later, total premiums equal “x” (there may be some expletives left out when the total 30-year premium amount is realized). And after all that, the maximum pay that the spouse will get in return is 55% of the monthly pension check?! That doesn’t seem efficient unless the service member passes away early – hopefully not. We can do better than that if we take that same 6.5% and invest it in a growth mutual fund or ETF with an assumed 8% rate of return. That will leave the spouse with something in the future. In case the service member passes between now and then, we can go get a 20-year, $1 million term life insurance policy for 1/5th of the cost of SBP. That’s the plan.”

The herd mentality

Does this story sound familiar? Yes? Probably, because we’ve all received information about the SBP in a large classroom or while scrolling mindlessly through a PowerPoint presentation and not taken the time to really process what the consequence of this decision actually means. We’re told that we have to make the decision and so we apply our best analysis, having spoken to our friends and peers who are all making the same decision and all have a similar opinion. For some people, the above plan works out. For others, not so much. While not common, stories of the Veteran passing, shortly and unexpectedly after their retirement, without life insurance and the SBP, do exist. These are the saddest stories of all, when a spouse expects the government to step in and provide some kind of benefit for all their years of military service, and what they get is far less than that. 

Reframing the problem

Let’s take a look at a few of these considerations and where they usually go wrong. First, the plan outlined above only works if you execute both parts; buy a term life insurance policy and invest what would have been the premiums regularly. While many do get a term life insurance policy, some don’t.  And worse, regardless of whether a term policy was purchased, many don’t invest what they would have paid in premiums for the SBP. This could leave a significant gap in retirement funds.    

Secondly, even if you did invest the premiums, comparing the SBP and the stock market is a comparison of apples to cars. The SBP is an annuity product that provides insurance against longevity. Your spouse will never outlive the benefit, a set amount based on your hard years of earnings, plus adjusted each year for inflation. This layer of income adds to other layers like Social Security, which by themselves, may not seem like much. Stacked together, these guaranteed income streams are powerful ways to provide choices and flexibility to your partner in retirement. The markets, on the other hand, could care less if you pass away, let’s say… when we’re in the middle of a pandemic or a housing crisis. The market will be where the market will be whether your portfolio is ready or not.    

Thirdly, and this is the point most people miss, this logic might not account for your spouse’s preferred method of income when you’re gone. This plan assumes that the spouse will be content to carry on with the finances in the same manner as you, the one reading this right now, are doing.  Is this a valid assumption?  When the above plan goes into effect, you won’t be there and your spouse has to live with the decision(s) you made. So, did you have a good conversation with your spouse about this decision? No, a really good one? A conversation that simulates that you are no longer there to help with the finances? Is your spouse comfortable taking that huge term policy insurance check and paying off the house and/or investing it in such a way that it lasts their lifetime? Or if the term policy has expired, taking distributions from your retirement account in a way that lasts their lifetime? This could be a gross assumption, but if you’re the one reading this, you’re probably the Chief Financial Officer (CFO) of your house. If your spouse isn’t involved in your finances now, what makes you think they would want to do anything more than manage their day-to-day financial efforts when you’re gone? If you’re the spouse of the CFO, have an informed conversation.  Simulate the death of the CFO.  What happens next with the finances?  Is that what the surviving spouse wants to happen?  No?  Now, you have something to work with.   

Driving it home

Let’s take one of our clients, we’ll call “Mike” and his wife “Sarah”.  As Mike approached retirement, he had it in his mind to opt out of SBP to save a few dollars by coming up with this “simple” plan to hand over to Sarah when he was buried. Mike and Sarah found our firm as another step in their retirement plan to get advice in other areas of their lives. Naturally, as part of retirement planning, we talked about SBP.  Mike told us about his plan and the result of that conversation was finding out that Sarah would have been nothing but happy to collect a partial pension, coupled with social security benefits, in a few guaranteed checks each month; easy day. To Mike, this was shocking.  It didn’t make sense.  It was going to be costly.  This wasn’t the “right” way to do this.  We gently explained to Mike that sometimes, the value derived from SBP is more than a tangible paycheck; SBP can also provide intangible benefits like reducing stress, anxiety, and responsibility when he is gone.  Sure, whatever they saved up in retirement funds would also be nice and Sarah, with our help, would be aided greatly by their diligent saving.  However, she was almost giddy that she wouldn’t be forced to figure out how to pull money from retirement accounts simply to have money for gas and food each month, particularly while grieving for him.  Mike was amazed, but the sense of relief between them both, was palpable.  She was relieved because the plan for her in the future was sound and easy for her to implement.  He was relieved because he felt like he didn’t have to guess about SBP and that Sarah was truly comfortable implementing the plan. 

Epilogue

There is another important beneficiary of SBP; your children. There is an option to include your children in SBP for what amounts to just a few pennies to a few dollars each month in premiums. As long as your children are under the age of 18, or under 22 if a full-time students, and unmarried, they are eligible to receive SBP payments. Why would you include your children in SBP? First, the cost to include them is so incredibly low, why not? Second, and no parent wants to think about this, but in the case that your child is disabled or becomes disabled while under the ages of 18 or 22, they are eligible to receive SBP payments for the rest of their lives as long as they remain unmarried. This is particularly helpful if your child is going to need assistance for the rest of their life and you aren’t there to provide it. Again, SBP insures against risk. Just remember that the risk you are insuring is you and your income potential. When you’re gone and your family is left picking up the pieces, SBP is a way to make that puzzle a little less difficult to put back together.

Need help?

Did the story of Mike and Sarah resonate?  If this all seems a bit overwhelming, expensive, stressful, etc., then perhaps you would find one of two financial professionals, helpful.  The first is free and that is a Personal Financial Counselor (PFC) assigned to many U.S. bases. PFCs are required to at least be an Accredited Financial Counsellor (AFC®), but some may even carry the Certified Financial Planner (CFP®) designation.  A PFC can provide answers to your questions regarding SBP or they can at least point you in the right direction.  Unfortunately, they won’t be able to tie your decision regarding SBP to your overall financial situation; they have to give more educational, broad guidance. Hence the second recommendation; hire a fee-only financial advisor.  NOFA Fee Only has advisors you can trust, but you can also head over to the Military Financial Advisors Association and browse fee-only, fiduciary advisors there.

In any case, be sure to have the SBP conversation with your partner now. Get their opinion on how they would want to handle finances after you are gone. Quite literally, tell them, or better yet, simulate the plan you have in place for when you pass, and then don’t talk. Let them tell you. If their answer is anything different than you expected, you probably need to have a deeper, more meaningful conversation about SBP.