BEYOND FACE VALUE: A SIMULATION AND EVALUATION OF USING THE BRS LUMP SUM TO BUY A HOME

Abstract

In this project, we examine the potential net value to service members using the Blended Retirement System’s (BRS) lump-sum option to buy a home. The lump-sum option is a highly controversial element of the new BRS. Due to the relatively high discount rate used to determine the value of a retiree’s lump-sum payment, most financial analysts warn against electing the lump-sum option because doing so significantly decreases the net value of one’s retirement benefits over time. While that statement is usually true, the value of the lump-sum option to an individual service member depends on what they do with the money once they elect the lump-sum option. There are no prior studies that compare the normal annuity with potential outcomes of using the lump-sum, presumably because of the immense number of variables and unknowns inherent in attempting to do so. In this light, this project builds a decision-supporting financial model that can be used by service members to compare the value of a normal annuity with the value of using the lump-sum option to purchase a home. The model built here can be informative to service members as they approach retirement and have to decide for themselves whether the lump-sum is the more enticing retention tool.