BRS Lump Sum Options: Understanding Your Choices at Retirement

Key points:

• At retirement, military families can either receive their full monthly pension or elect a BRS lump sum payout.
• Service members who elect a lump sum can choose between a 25% or 50% payout.
• The BRS lump sum is taxed as ordinary income.
• Monthly retired pay returns to its full amount at Social Security retirement age.

Reaching military retirement is a remarkable accomplishment. After years of deployments, relocations, sacrifices and long hours, you've earned a monthly pension that can provide income for life. As you approach retirement, you’ll make decisions focused not on your next service assignment, but on the future you want to build for yourself and your family.

One of the most important decisions you’ll make is whether to take a lump sum payment through the Blended Retirement System (BRS). At first glance, it may seem like a purely financial choice.

For many military families, however, this decision is about much more than dollars and cents — it’s about what comes next. Do you plan to start a business? Buy a home? Pursue a new career? The answers to these questions can help determine whether a BRS lump sum payment makes sense for your situation.

What is the BRS Lump Sum Payout?

According to the Department of Defense, the lump sum option is a feature of the BRS that allows service members to receive a one-time payment representing a portion of the value of their future retirement pension in exchange for reduced monthly pension payments. Retirees may elect a 25% or 50% lump sum or take no action and receive their full pension.

The decision must be made no later than 90 days before retirement. Regardless of the option selected, monthly retired pay returns to its full amount at Social Security retirement age, which is 67 for most retirees.

What are My Retirement Pay Options?

Take no action: Maximize Your Monthly Retirement Payments

Service members are not required to take a lump sum payout. Instead, they can simply turn down the lump sum and receive their full monthly retired pay. For many retirees, this decision provides the most guaranteed lifetime income.   

Taking no action — essentially declining the lump sum payout — may be a good fit for retirees who prefer a higher predictable monthly income, do not anticipate a major purchase or expenditure at their military retirement (for which they have not already planned), or simply have no need for immediate, additional funds.

The 25% Option: Balancing Upfront Cash with Long-Term Security

Service members can elect to receive 25% of their future retired pay as a lump sum at retirement. In exchange, their monthly retirement pay is partially reduced until they reach full Social Security retirement age. This option provides a flexible middle ground between immediate cash and long-term income.  

The 25% option may be a good choice for retirees who need some cash on hand for goals such as purchasing a home, paying off debt, or navigating the transition to civilian life, but still want to retain most of their monthly retired pay.

The 50% Option: Maximizing Upfront Cash

Service members can also choose to receive a lump sum payment equal to 50% of their future retired pay. In exchange, their monthly retirement pay is significantly reduced until they reach full Social Security retirement age. This option provides the most upfront cash, but it also results in the largest reduction to monthly retirement income.

A 50% lump sum payout may appeal to retirees with a specific plan that requires a substantial amount of capital, such as launching a business or making a significant investment. Because this option results in the largest reduction to monthly retired pay, retirees should have a clear strategy for how the funds will be used.

Is The Retirement Lump Sum Payment Taxable?

The BRS lump sum payout is treated as ordinary income and is taxed the same way. Depending on the size of the payment and your other sources of income that year, receiving a lump sum may increase your overall tax liability and could place a portion of your income into a higher tax bracket. This additional income can also limit eligibility for certain tax credits and Roth IRA contributions.

Tax Considerations for BRS Lump Sum Payments

Because the BRS lump sum is taxed as ordinary income, retirees may want to consider the potential tax implications before making an election.

One option is to receive your payment in up to four annual installments rather than a single lump sum. Spreading the income across multiple tax years spreads out the associated liability and may help reduce the likelihood of being pushed into a higher tax bracket.

Every retiree's financial situation is different, so consulting a qualified tax professional before making a lump-sum election can help clarify the potential tax consequences. Making a Thoughtful Retirement Decision

Military retirement marks the beginning of a new chapter, and the BRS lump sum can be a valuable tool when used strategically. Whether you decline the lump sum, or take the 25% or 50% option, the best decision is the one that supports your goals for life after military service.

By understanding the tradeoffs involved, you can make a choice that fits your needs today without losing sight of your long-term financial future. And because monthly retired pay returns to its full amount at Social Security retirement age, the decision is impactful — but not permanent.

Evaluating your options and their financial implications is important, so consider consulting with a First Command Financial Advisor to determine which approach best aligns with your goals and lifestyle.

Frequently Asked Questions

What happens to my retirement lump sum if I get divorced?

In some cases, a former spouse may be awarded a portion of a BRS lump sum payment as part of a divorce settlement. How the lump sum is treated depends on the terms of the divorce decree and applicable state law. Consult a qualified attorney for guidance specific to your situation.

How does a BRS lump sum election affect Survivor Benefits?

If you elect a BRS lump sum and pass away before reaching full Social Security retirement age, your survivor may still receive Survivor Benefit Plan (SBP) benefits based on your full, unreduced retired pay, provided you elected SBP coverage at retirement.

What is the discount rate and how does it affect a BRS lump sum payout?

The discount rate helps determine how much future retirement payments are worth when paid in a lump sum today. In simple terms, if you take a lump sum, you receive less overall because you’re receiving the money earlier.

Can I change my mind after electing a BRS lump sum?

Once a lump sum election is made and processed, retirees cannot retroactively change the decision or challenge the amount of the payment

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.

First Command and its affiliates do not provide legal or tax advice. This material is for informational purposes only and should not be relied on for legal or tax advice. You should consult your own legal or tax advisors before engaging in any transaction.

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