The DoD is required by law (10 USC §1415) to use a government-set discount rate when presenting the lump sum election to servicemembers. This rate is updated annually and published each June, taking effect January 1 of the following year. The rate for 2026 is 6.46%, published June 2025 by the Deputy Assistant Secretary of Defense (Military Personnel Policy).
What discount rates actually mean
A discount rate answers the question: what is a dollar in the future worth in today's terms? A higher rate makes future pension payments look less valuable, which makes the lump sum look more attractive by comparison. A lower rate does the opposite.
The 10-year Treasury as a benchmark
The 10-year U.S. Treasury yield is the standard risk-free rate used in financial analysis. Your military pension is a government-backed, inflation-adjusted annuity — effectively as safe as a Treasury bond. Using the Treasury rate (~4.2% today) gives a more accurate apples-to-apples comparison of what your future pension stream is worth right now.
The hidden loan analogy. Taking the lump sum is mathematically equivalent to the DoD offering you a loan at the implied rate embedded in their calculation — you receive cash today and repay it through a reduced pension until age 67, at which point your pension returns to its full amount. At today's Treasury rates of ~4.2%, a discount rate of 6.46% represents a meaningful spread above what the market charges for risk-free money.
What rate should you use?
Veteran NorthStar defaults to the current 10-year Treasury yield (~4.2%) as the most defensible risk-free rate for valuing a government-backed pension. You can adjust it upward if you have other investments that reliably earn more — that rate represents your personal opportunity cost of receiving pension income rather than cash.
When might the lump sum make sense?
While the math generally favors the full pension, there are cases where taking the lump sum could be rational — specifically, when your personal cost of capital exceeds the implied rate in the DoD's calculation. For example:
- High-interest debt: If you carry debt at interest rates above the DoD discount rate — such as high-interest personal loans or business lines of credit — the lump sum could be worth using to eliminate that drag on your finances. Standard credit card debt often falls in this category, though paying down debt is generally wise regardless of retirement system choice.
- Verified high-return business opportunity: If you have a specific, well-underwritten business opportunity with a confidently expected return meaningfully above the implied rate, the lump sum could provide the capital to pursue it. This applies to genuine opportunities — not speculative ventures.
These are edge cases. For most servicemembers without high-interest debt or a concrete high-return opportunity, the math favors the full pension.
What about investing the lump sum in the stock market?
This is the most common rationalization for taking the lump sum, and it deserves a direct answer. Taking the lump sum and investing it in equities or speculative assets means converting a completely guaranteed, government-backed income stream into a risk-laden asset — in exchange for the possibility of a higher return. The implied rate embedded in the DoD's calculation is not a trivial hurdle. Compounding the challenge, the lump sum itself is taxable income in the year received — potentially at a high marginal rate — which means the net amount available to invest is meaningfully less than the gross figure, raising the required return on that investment just to break even. If institutional investors were offered a guaranteed 6.46% risk-free return on a 20-year government-backed annuity, demand would be substantial. Chasing an 8% return in equities or speculative assets to beat that rate means accepting meaningful downside risk in exchange for a modest potential upside. Most sound financial planning principles would argue against trading a guaranteed lifetime income stream for market risk, particularly in retirement when sequence-of-returns risk is at its highest.