Commander / Lt Colonel Retirement Pay: Beware the High Cost of SBP!

O5 SBP mistake
by Scott R. Tucker // June 21 /

For many O5 retirees, the decision of whether or not to enroll in SBP can be a difficult one. On the one hand, it is a government-sponsored program that offers some security and peace of mind. On the other hand, it can be expensive and there are better alternatives available in the private sector.

In this excerpt from our Lieutenant Colonel Retired Pay & SBP Alternative Guide, we will explore the pros and cons of SBP and discuss some of the alternatives that are available to you.

A Quick Story About Your Lieutenant Colonel Retirement Pay

You are likely to have spent the last year concerned about your upcoming military retirement and were a little surprised to learn that your pension is worth a lot more than you realized.

As in millions of dollars worth of a future income stream, otherwise known in the financial world as an annuity. An insurance-based asset class.

You want to make sure your valuable pension is protected for your spouse and family if something happens to you, but the government survivor benefit plan is too costly, doesn’t offer much flexibility, and only pays a return on investment if just one of many possible outcomes occurs.

Those are not good odds.

And you were dismayed to learn of the high cost involved to protect your retirement pay. You did the quick math and realized you will likely need to pay close to $165,000K for the government survivor benefit plan without any guarantee of a return on that investment. And $2700 a month to your spouse if you do get hit by a bus, isn’t going to be that helpful.

Most of your colleagues that you’ve spoken to are going to go along with SBP. They pulled up their trusty spreadsheets and assumed a lot of variables to justify the need. Or they simply didn’t have time or the interest to look into it and preferred to accept the status quo of military pay and benefits that they’ve become accustomed to.

But for you… something just doesn’t feel right, does it? There is no way you would have found this white paper if it did.

Before we get into why the Military Pension Protection SystemTM is the better and more equitable approach, we need to point out that there are other mistakes that retiring lieutenant colonels make when trying to solve this problem with standard life insurance. It doesn’t work and will backfire likely at the moment you need it most.

The bottom line is this, the government is charging military families hundreds of dollars a month for a program that may not even be the best option for them. And standard life insurance advice is either too cheap, and meant to cover short-term problems, or too expensive and meant to create an estate plan you don’t need.

You will learn more about the problems with SBP, VGLI, Term & Whole Life insurance and then we will introduce the options that are now accessible to you only through US VetWealth.

I have worked closely with hundreds of military retirees for well over a decade helping them learn more about the proper value of their retirement pay. I have also found a pattern of missed opportunities that are made due to simple avoidable mistakes. We will start with a story about a Lt. Colonel who we helped make a few strategic adjustments that greatly enhanced his post-military time, talent, and treasure.

Case Study – Lt Colonel Pay After Military Service

Lt. Colonel Rick Howard is a newly pinned O-5 who plans on completing his next 3-year tour to lock in the O-5 HIGH-3 retirement pay rating, then he is dropping his papers to retire at 20 years. Statistically speaking, at 40 Rick is still young, and he is in decent shape even though he’s been stuck at in staff jobs. He’s married, and he has three children ranging in age from three to eight.

Conventional Financial Planning Doesn’t Solve This Problem

He has done all the “right things” when it comes to traditional financial planning. He had term life insurance and had “invested the rest” in mutual funds and TSP. He also had several whole life policies, because of all the paid-up additions. Although these policies were no longer doing very much for him; they weren’t providing him much in terms of death benefits or cash value growth.

Before Rick met us, because of his young family he was under the assumption he should take the SBP and VGLI, as this course had been recommended to him by multiple financial advisors he’s worked with in the past, some of who had zero knowledge of the armed forces benefits system and some who were retirees themselves.

While these “experts” only spoke about the worst-case scenario, Rick was more worried about not committing himself to pay at least $165,000 in premiums into these government plans without any potential for equity growth nor any guarantee of a paid benefit. He knows the more likely scenario is that he will be around for a long time with his family and would better use that money while living.

He came to us because he wanted a way to leverage that same $165,000 with an offensive strategy that offered income growth potential, but also helped pay for a low-cost defensive income protection plan just in case the highly unlikely premature death occurred.

An Early Death is Highly Unlikely and Easier to Defend

Rick wanted to have at least $2.0 million in a death benefit, which correlated to the full present value of his estimated Lt Colonel stipend.

The bulk of the death benefits ($1,500,000) we set up as a low-cost temporary foundational insurance plan with the opportunity to convert growing amounts of that money into offensive insurance as more funds become available.

We did this to keep Rick’s costs low, while he’s still young and healthy we were able to help him lock-in in a high permanent death benefit with a preferred rating that is guaranteed for his life, all while setting him up for the highest return on his investment.

Let’s Assume You’ll Live Long, So Go On Offense Too!

For the offensive portion of designing his strategy, we used the remaining $500,000 death benefit using the Private Pension System designed exclusively at US VetWealth.

The goal with this portion of the plan is to reposition his existing cash value whole life insurance and create a window to redirect future cashflow and assets that otherwise would have remained taxable and gone to pay for the survivor benefit plan, VGLI premiums, or any other life insurance that wasn’t designed for a high probability of a return on investment.

1035 exchange is a provision in the tax code that allows you, as a policyholder, to transfer funds from life insurance, endowment, or annuity to a new policy, without having to pay taxes.

Upgrade An Old Whole Life Insurance Policy You Don’t Want Anymore

Rick was able to jumpstart the index-interest credits due to the tax-free 1035 exchange provision to move $18,000 from an old whole life policy with only a $125,000 death benefit into the new $500,000 offensive plan, more than tripling his benefit immediately without requiring he put down any additional investment to start.

Rick also wanted to “pre-fund” a privatized and offensive retirement pay protection plan using the same amount he would otherwise have been required to pay into the survivor benefit plan.

Fund Early So That You Can Be Done Working Sooner

By funding it sooner, he’ll have more cash equity growing for him that he can access at any time for any reason In this case Rick has decided to contribute $16,500 per year ($1375/mn) to the new private pension account over the next 10 years. Which equals the same $165K he would have otherwise committed to paying for SBP.

Rick is 40 years old, so by the time he reaches 50, he will not need to put another dime into the plan to guarantee lifetime protection while also creating an account that is worth at least the same $165,000 (more with index interest credits) that would have been sunken cost into the government SBP.

This interest earned on his private pension account is linked to the performance of the market, but his money is never at risk of loss because it is also insured by the carrier. If he gets just a 6% rate of return on the $18,000 from the 1035 whole life exchange, and from the $16,500 he invested annually, his liquid (accessible) account would already be worth $117,000 in just five years, at age 45.

By the time he’s in his early-sixties, that $183,000 ($18K from old whole life + $1375/mn for 10 years) in new contributions growing at just 6% (without risk) will provide him with a cash value of about $445,000 from which he can then take about $40,000 in an annual, tax-free private income (in addition to his retirement plan and whatever other income he might be earning) that he can access anytime he wants to.

Rick’s military pension is roughly $58,000 a year. Since the $40,000 a year from his private pension insurance policy is tax-free, it doesn’t raise his tax bracket on his retired base pay nor must he pay any taxes on his private income.

All in all, by being relatively healthy and somewhat financially stable, not rich by any definition, Rick was able to use the private pension concept to redirect $165,000 of cost to SBP without a high probability of a return on investment into creating a tax-free and liquid asset worth three times that amount. That is nearly a $600,000 swing to his favor in just 20 years.

80% of Officers Miss this SBP Replacement Opportunity Completely

And he’s just one O-5 out of hundreds each year who have no idea they can do this. Imagine the potential wealth being squandered away from so many retired officers’ bank accounts and sent right back to the authorities.

What Rick realized that the other’s have not is that when it comes to HIS money and benefits, he needed to stop following orders, stop relying on the standard advice for the average military, and recognize he was going to become a post-military high-income earner and focus his efforts on becoming an Independent Income Investor who is focused on increasing his time, talent & treasure.

A Private Pension is a Better Way

At US VetWealth we believe that the idea that your money is YOUR MONEY is something that’s unfortunately lost on a lot of people. Uncle Sam believes that it has a claim on around 30-40% of that money or more.

Investment advisors6 and brokerage firms consider your money to be part of their assets under their management and the basis for which they charge fees to grow their own wealth.

The person that gets left behind in the traditional financial equation is the person out of whose bank account that money originates. Your money is and always should be considered to be yours to use however you like.

After 20 years of service or more as an officer, you have been excited to earn the benefits you’ve earned beyond your basic pay and additional benefits that make up your total compensation.

Thank you for reading our blog post on the high cost of SBP for lieutenant colonels, commanders, and their families. We hope that you will download our free guide to understanding your retirement options and schedule a free consultation with one of our experts to see if a private pension is a better approach for you.

Scott R. Tucker is an author, speaker and the founder of US VetWealth, a lifestyle and financial consulting brand that helps US Military Retirees achieve more autonomy and work/life balance. He likes to say, "I help the 1% who serve our country become the 1% who influence It." A West Point graduate, serial world traveler, military financial expert, and entrepreneur, Scott brings valuable experience and insight to those who have sacrificed so much in service to our country.

Military Retired Pay O5 guide

FREE GUIDE

Navigate Your Retirement Pay and Benefits

Read our case studies to learn how much retirement income you could reclaim from SBP and re-invest by privatizing your military pension. (Updated for 2023)