Survivor Benefit Plan-to take or not to take?

[aknowhow78]

Greetings to everyone,
I am a female officer (06 CAPT) and plan to retire 2021 (30 years of service and would be 52 at that time). Upon my retirement, my husband will continue to work until he is 59.5. I attended a pre-retirement seminar and am more confused about Survivor Benefit Plan (SBP). Here is our current situation and plans:
1. We have 2 children (4 and 14 years old). I have transferred my Post 911 GI bill to both kids and college wise--have a Custodian Acct for the oldest and saving in backdoor Roth IRA intended to be used for the youngest.
2. Husband has 401K and currently contributes 31k/year. Plan to go up on this as he is turning 50 this year. Plan is to do 2% withdrawal rate upon his retirement. (Anticipated balance based on 5% rate 1M).
3. I have a TSP and max contributions of 18k/yr. This will stop 2021 upon my retirement and we will not touch until required to at 70-- anticipated balance based on 5% rate will be 900K.
4. We have an after tax savings in various CD (ladder) contributing 36k/yr. Plan is to use this money to buy a house in 2021.
5. My retirement pension (COLAed) will be 84K. I have a life insurance policy of 500K (USAA ends when I turn 65) and while active also have the SGLI (400K). Husband has life insurance of 750K via work and will end when he retires.
6. Our current spending ranges from 8k to 9k/mth and expect to remain the same until in our 60s (have young children and can be expensive).
So if everything goes according to plan, we will have 1.9M between his 401K and TSP. Husband is healthy and parents still living, healthy in their 80s. My parents also healthy and still living in their 70s (my grandmother lived until 97). Based on the above info and the longevity on both side of our family, do we need to take SBP insurance on my pension?
Much obliged for your input.

 

[exnavynuke]

If you don't have any serious medical conditions, most of my retired friends found that private insurance was a much more affordable alternative to SBP. I'd recommend checking the difference in cost before electing the SPB if you find such financial protection financially necessary.

To replace your $84k/year at a 4% rate you'd need a nest egg of at least $2.1 million at the age it starts (i.e. in 2021). In your early-mid 50's, however, a 3.5% rate would be more conservative and that would need a nest egg of closer to $2.8 million.

Since it seems you're saying you'll have ~$1.9 million at that time, I'd say you could likely get an insurance policy for the difference (and more if you want it to cover complete spending instead of just replacing retirement income) for significantly less than the costs of electing the SBP.

 

[HawkeyeNFO]

This is one item that the military and VA do a horrible job explaining to their people. The TAP class I went to didn't mention a word about it, and when you start asking questions, nobody has a solid answer.

From my own research, I am leaning towards electing no SBP. I am finding that Ex-nuke is correct, that civilian insurance is cheaper, unless you have major health issue.

 

[augam]

If you don't have any serious medical conditions, most of my retired friends found that private insurance was a much more affordable alternative to SBP. I'd recommend checking the difference in cost before electing the SPB if you find such financial protection financially necessary.

To replace your $84k/year at a 4% rate you'd need a nest egg of at least $2.1 million at the age it starts (i.e. in 2021). In your early-mid 50's, however, a 3.5% rate would be more conservative and that would need a nest egg of closer to $2.8 million.

Since it seems you're saying you'll have ~$1.9 million at that time, I'd say you could likely get an insurance policy for the difference (and more if you want it to cover complete spending instead of just replacing retirement income) for significantly less than the costs of electing the SBP.

84/yr @ 4% does this take into account any other forms of income like SS?

 

[braumeister]

SBP or not is always a tough decision, and most of us wrestled mightily with it.
We elected to skip it, and that turned out to be wise, but I know several others who are extremely glad they took it. Very personal decision and everyone's situation is different.

Have you read this?
5 Factors You Should Consider When Evaluating the Survivor Benefit Plan - Military Guide

 

[exnavynuke]

84/yr @ 4% does this take into account any other forms of income like SS?

It's following the rule of thumb that says if you have 25x your annual spending, you should be able to withdraw 4% of that each year. For longer periods, a lower withdrawal rate is advised since the rule of thumb was originally generated based on a 30 year retirement, hence why I mentioned the lower WR numbers as well.

The numbers I stated were just showing how much of a portfolio would be needed to replace the retirement income. As the SBP doesn't replace SS income etc either, I didn't include those in the calculations.

 

[Lawrencewendall]

I looked at the cost versus the payout and opted out. Used what it would of cost and put it towards investments and now (13 years later) have more in investments than what SBP would have paid.

 

[DrRoy]

DW and I are 56, 57, pretty good health, and expect to be RE for 30+ years. In our situation, the hit to the max pension payment in order to allow for the survivor benefit seemed excessive, and we waived it. Also, the survivor payment would be even less significant after inflation.

 

[samclem]

There are a lot of "barracks actuaries" who give folks some very poor advice on SBP. So you are smart to do your own research.

1. An important factor you left out of your post: What is your husband's age? He's a male, so that means (on average) that he can be expected to >likely< not outlive you if you are the same age. If he's considerably older than you, that decreases the likely value of SBP in your situation. Edited to add: I missed it the first time--he's about 2 years younger than you. Got it.

2. SBP is inflation adjusted and the premiums you pay are tax free. Be sure to include that in any comparisons you do. The inflation adjustment is especially significant--when you price out what it costs to buy commercial life insurance or an annuity to match that, it may water your eyes. In most "apples-to-apples" cases, a commercial policy that really does what SBP does (inflation-protected lifetime income for the surviving spouse--which is what is needed to truly replace your USN pension check) is considerably more expensive than SBP.

3. We've covered this SBP issue frequently here, and there are also some go online sources of legit info (and some really poor ones too). Maybe start here. Or here. The DoD Actuary's site on SBP is a tremendous resource that the services (incl the TAP classes) should do a much better job of recommending--lots of tools there. Start at the "Survivor's Benefits Plan" tab at the upper right of the page.

4. SBP gets supplemented by the federal government--the premiums paid in do not cover all the payouts. You can bet that's not the case for private insurance--the premiums are considerably higher than the expected payout. That tells you right there that--on average--SBP is the better deal. That does >not< mean it is a moneymaker for your family (it depends on hubby's age and health relative to yours) but it a factor worth noting.

In a nutshell: >If< your husband will be dependent on the value of your USN pension in the future to maintain his standard of living (i.e. your investments and SS won't be enough to keep things going in a household of one if you depart before he does), then SBP may be the very least expensive way to assure that a portion of that retirement check keeps coming if you die first. You don't need to buy the whole amount, and when I did a deep dive on this years ago, the very first few hundred dollars were so heavily subsidized that it was really a "no brainer." If he doesn't need any money from your pension, and you can be sure he'll never need it (poor investment results, etc), then you might not want to buy SBP or any other form of insurance on that income stream. So, first decide if he'll need the money from your pension if you predecease him, then look for the best way to replace it if he will. Start at the DoD Actuary's site.

If you can get a copy of "The Military Guide to Financial Independence and Early Retirement", it is highly recommended. It was written by Doug Nordman (USN, Ret) who is nearly a plankholder at this board you are now reading. No commercial endorsement is implied--the book may even be in your base library.

Look this over really carefully, do your own math. Best wishes, and welcome aboard (doooo-WEEEEE-ooooo-weee! That's the low-rent "virtual Boatswain" piping you aboard.)

 

[samclem]

Also, the survivor payment would be even less significant after inflation.

The survivor benefit being considered by the OP is inflation adjusted, guaranteed by the USG, and goes on for the life of the spouse. So, in this case, inflation isn't a factor or is even a factor in favor of choosing the SBP.

 

[ExFlyBoy5]

For specific questions on SBP, you will meet with a counselor and they will explain the specifics and answer any questions you may have. This person should be well versed on the ends and outs of the program that you may not understand. The information you get in the TAP is basic and rudimentary.

 

[aknowhow78]

I looked at the cost versus the payout and opted out. Used what it would of cost and put it towards investments and now (13 years later) have more in investments than what SBP would have paid.

Thanks. This is what we thinking to do..Invest the money for him...And if he dies not need it ..It can go to kids.

 

[aknowhow78]

There are a lot of "barracks actuaries" who give folks some very poor advice on SBP. So you are smart to do your own research.

1. An important factor you left out of your post: What is your husband's age? He's a male, so that means (on average) that he can be expected to >likely< not outlive you if you are the same age. If he's considerably older than you, that decreases the likely value of SBP in your situation. Edited to add: I missed it the first time--he's about 2 years younger than you. Got it.

2. SBP is inflation adjusted and the premiums you pay are tax free. Be sure to include that in any comparisons you do. The inflation adjustment is especially significant--when you price out what it costs to buy commercial life insurance or an annuity to match that, it may water your eyes. In most "apples-to-apples" cases, a commercial policy that really does what SBP does (inflation-protected lifetime income for the surviving spouse--which is what is needed to truly replace your USN pension check) is considerably more expensive than SBP.

3. We've covered this SBP issue frequently here, and there are also some go online sources of legit info (and some really poor ones too). Maybe start here. Or here. The DoD Actuary's site on SBP is a tremendous resource that the services (incl the TAP classes) should do a much better job of recommending--lots of tools there. Start at the "Survivor's Benefits Plan" tab at the upper right of the page.

4. SBP gets supplemented by the federal government--the premiums paid in do not cover all the payouts. You can bet that's not the case for private insurance--the premiums are considerably higher than the expected payout. That tells you right there that--on average--SBP is the better deal. That does >not< mean it is a moneymaker for your family (it depends on hubby's age and health relative to yours) but it a factor worth noting.

In a nutshell: >If< your husband will be dependent on the value of your USN pension in the future to maintain his standard of living (i.e. your investments and SS won't be enough to keep things going in a household of one if you depart before he does), then SBP may be the very least expensive way to assure that a portion of that retirement check keeps coming if you die first. You don't need to buy the whole amount, and when I did a deep dive on this years ago, the very first few hundred dollars were so heavily subsidized that it was really a "no brainer." If he doesn't need any money from your pension, and you can be sure he'll never need it (poor investment results, etc), then you might not want to buy SBP or any other form of insurance on that income stream. So, first decide if he'll need the money from your pension if you predecease him, then look for the best way to replace it if he will. Start at the DoD Actuary's site.

If you can get a copy of "The Military Guide to Financial Independence and Early Retirement", it is highly recommended. It was written by Doug Nordman (USN, Ret) who is nearly a plankholder at this board you are now reading. No commercial endorsement is implied--the book may even be in your base library.

Look this over really carefully, do your own math. Best wishes, and welcome aboard (doooo-WEEEEE-ooooo-weee! That's the low-rent "virtual Boatswain" piping you aboard.)

Thank you..Very informative

 

[aknowhow78]

For specific questions on SBP, you will meet with a counselor and they will explain the specifics and answer any questions you may have. This person should be well versed on the ends and outs of the program that you may not understand. The information you get in the TAP is basic and rudimentary.

We spoke to an advisor and he thinks we may not need it...Said that if we don't touch my TSP and SS until I am 70.5 ..Both would provide the same amount that SBP would if I die after 70. As my life insurance of 500k expires at 65...I worry about the time from 65-70. He said if I die between 65-70, then my husband should take his SS (he would be 67 then and can draw at FRA) and increase 401K withdrawal rate to 4%. Probably need to meet with him again...

 

[Rustic23]

I opted in. It was a question of would I invest the money on or regular basis or take it out to cover some 'emergency'. In hind site I think we would have kept the investing going, however it is now paid up and cost nothing to have it. SBP with SS will give DW, other pensions, and IRA's will be more than she needs.

 

[aknowhow78]

This is one item that the military and VA do a horrible job explaining to their people. The TAP class I went to didn't mention a word about it, and when you start asking questions, nobody has a solid answer.

From my own research, I am leaning towards electing no SBP. I am finding that Ex-nuke is correct, that civilian insurance is cheaper, unless you have major health issue.

Thanks HawkeyeNFO. Is the only reason you are leaning toward no SBP, the cost? What are your plans that will support no SBP? just trying to see what others are doing..

 

[aknowhow78]

84/yr @ 4% does this take into account any other forms of income like SS?

So it does not include SS..Plan to take it at 70 and husband may take his at 67.

 

[aknowhow78]

SBP or not is always a tough decision, and most of us wrestled mightily with it.
We elected to skip it, and that turned out to be wise, but I know several others who are extremely glad they took it. Very personal decision and everyone's situation is different.

Have you read this?
5 Factors You Should Consider When Evaluating the Survivor Benefit Plan - Military Guide

Braumeister, thank you for the link...Why did you skip it?

 

[samclem]

We spoke to an advisor

. . . somebody without a vested interest in selling insurance, right?

Said that if we don't touch my TSP and SS until I am 70.5 ..Both would provide the same amount that SBP would if I die after 70.

Virtually everyone on this board (myself included) is making projections about what their investments (i.e. TSP etc) may be worth in the future. None of us knows. Your advisor does not know what your TSP will be worth when you are 70, so he doesn't know how much your husband could safely draw from it at that time. It might be as much as the TSP would provide, but it might not be.

As my life insurance of 500k expires at 65.

Hmm we have something to discuss later. If you aren't working, you may not need this life insurance--especially if you'll be taking SBP anyway.

 

[Carlos2]

I took the SBP

I came to this board and bogleheads with this very question. I had the benefit of time and thought that if I used insurance instead of the SBP that I would be better off. However, I pay nothing for the SBP and when I was considering the insurance I had 10 years before retirement. However, I would have been paying premiums for ten years prior to retirement where I don't have to pay for anything for my teachers pension. In my situation, my wife is over ten years younger than me so the money would have to last longer for her. Plus, I get a COLA. She has 401K that she contributes the max to and I do to with a 403B and a 457. I made the decision for the SBP early too because it gave me more money than if I made the decision when I retired. Insurance loses its value over time as well and when a person gets a lump sum of money like that they have to manage it well and there will be people looking to fleece them when they have that large amount of money, starting with the insurance salesman. My SBP will give me slightly less than what I get working. I did lots of research on this and I wanted to have as much security as possible for her and my daughter who is 3. I would say that your pension is free and after 30 years you will have earned it. You don't have to give the 100% choice but I would select one of them to guarantee some income in case of emergency or unforeseen circumstances.

 

[braumeister]

Braumeister, thank you for the link...Why did you skip it?

DW had her own DB pension that would cover most basic expenses. We looked at the overall picture and decided jointly that the amount we would pay for SBP could be better used in our investments. That turned out to be a good decision for us, but it could have gone either way. It's important that it be a joint decision. If the non-military spouse isn't completely sold on it, that could be disastrous.

 

[rayinpenn]

My brother was 53 when he retired and 54 when he passed away with no insurance and no survivor benefits. Needless to say it wasn't good. Term life or SBP you know the answer.

 

[Callitaday2022]

We were in a very similar situation to yours. My wife retire as an 05 with 24 years and our thinking was chances that me living longer than her we're not that great. We are both the same age and in good health, so we only got the bare minimum cheapest Survivor benefit plan , however right before did get a very large Term Policy on her that was a fraction of the cost of the Survivor Benefit Plan. Our thought was with a long-term policy we would be self-insured when the term runs out, and that seems like it's going to pan out well for us

 

[samclem]

I opted in. It was a question of would I invest the money on or regular basis or take it out to cover some 'emergency'. In hind site I think we would have kept the investing going, however it is now paid up and cost nothing to have it. SBP with SS will give DW, other pensions, and IRA's will be more than she needs.

Similar situation here. I believed we'd probably have enough for DW with our investments if I checked out early, and probably she'd be able to steer clear of the helpful investment "advisors" and insurance salesmen. But the investing stuff has been my job and interest, not hers. So, "probably" wasn't quite what I wanted IRT her baseline income. Plus, we always viewed our USAF pay as "ours," and I view the "deferred compensation" of the pension the same way. After crunching the numbers and quickly seeing that the "savings" of buying commercial insurance was not close to being a match for SBP in our case, we signed up. It's another way of diversifying, we don't miss the $$ each month, and I know she'll be set if I shove off early. Having the premiums stop at age 70 was icing on the cake (hey, we'll get a raise at age 70! Longevity insurance! )
Every situation is different, but this is best for us from a financial standpoint. And from a "peace of mind" standpoint.

 

[friar1610]

Retired (since 1996) Navy CAPT here.

My wife did not have a long work history (was a SAHM until kids were in HS and then had her job interrupted for a few years thanks to a Navy transfer). Result was that she did not have that many years to sock away retirement money nor to accrue SS credits. So, I thought long and hard about SBP. Ended up taking it a level that would replace about 1/3 of my pension (rather than the max 55%). In retrospect, I wish I had taken it at the max level (although she will still be OK assuming the actuaries are right and I go first.) I did not buy any insurance in lieu of SBP because I was assuming the combination of SBP, SS and money already invested would take care of her. It's a good thing I didn't die right away because my assumptions on appreciation of/withdrawal rates from the investments were overly optimistic. But time has taken care of that.

One thing that always stuck with me from my retirement seminar... One of the speakers was the president of Navy Mutual Aid Association, a retired RADM. In his pitch he strongly encouraged everyone to take SBP at the max rather than trying to use insurance to fill the gap. This was telling since NMAA is essentially a non-profit insurance company and he could have used the talk to encourage people to buy NMAA insurance instead. He had taken SBP at the max for his wife.

This was the hardest decision I had to make relative to retirement. In retrospect, I made a satisfactory one but not as good as I could have. Your family decision is different so YMMV. Best of luck and Go Navy!