The concept of a 'discount rate' is pretty straightforward. It relates to the relationship between the purchasing power of 'current' money and 'future' money. For example, in an environment with 10% inflation, $10 in year 0 (this year) would have the purchasing power of only around $9 in year 1 (next year), because the cost of items you can purchase increases 10% during the year. For example, this year's $10 lunch will cost $11 next year, so that $10 bill loses 10% of it's purchasing power after one year.  Your money 'doesn't go as far'; this is inflation's effect. Thankfully, its been a few decades since we've seen double-digit inflation; a 1-3% number has been more typical lately.

So discounting reflects this erosion of purchasing power inherent when we experience positive inflation (which is most of the time). Future cash flows (a series of future payments) can be adjusted to a current 'Net Present Value', or NPV. For instance, while ten $100 payments in a zero-inflation environment is worth $1K today, that same series of payments with 3% inflation would have an NPV of only $853.  At 10%, the NPV would drop to $614.   

Using the 3% example, a discount rate of 3% means a person should - according to the 3% inflation rate - be equally happy with either A) 10 yearly payments of $100 or B) an $853 lump sum today. Ask yourself that question; would you select "A" or "B"? Most people would select "B". Now ask yourself: "Why would I select B"?

Maybe you want control of the money now - you don't want to wait ten years to get that cash. Maybe you have a very good use for $850 immediately so you need the lump sum. Perhaps you don't trust that the future money will materialize. Regardless of the reason, most people simply value current money far more highly than future money. Some would even choose the $614 over the $1K spread over 10 years. A study shows a demonstrated preference of current money even at discount rates as high as 17%, or $465 NPV.

So what? Why care about valuing money now versus valuing it in the future?  It's important to understand this effect because this concept crops up in at least two places in the military retirement landscape.

The first place the treatment of future money appears is in the defined-benefit pension offered in the traditional military retirement. Each year, the retiree's cash flow is adjusted by the standard US inflation measure, the Consumer Price Index.  This preserves the purchasing power, yielding a perfectly predictable pension income. This CPI adjustment in effect reflects a discount rate of 0%.

The other, more-interesting place that the treatment of future money appears is in the 'lump sum' option in the Blended Retirement System (BRS). The lump sum feature of the BRS does not advertise a formula for determining the lump sum amount. Instead, it will likely be determined by the estimate of the newly retired member's personal discount rate.  In the early 1990's during the Clinton-era military drawdown, DoD discovered gained some interesting insight from the decisions made about the lump sum option:

The military draw down program of the early 1990's provides an opportunity to obtain estimates of personal discount rates based on large numbers of people making real choices involving large sums. The program offered over 65,000 separatees the choice between an annuity and a lump-sum payment. Despite break-even discount rates exceeding 17 percent, most of the separatees selected the lump sum-saving taxpayers $1.7 billion in separation costs. Estimates of discount rates range from 0 to over 30 percent and vary with education, age, race, sex, number of dependents, ability test score, and the size of payment.

This study shows a demonstrated preference for current money at discount rates higher than 17%, which would be a $465 NPV in the earlier example.  The "so what?" is this: If DoD knows that retirees prefer present money of discount rates upward of 17%, they will use that money to save taxpayers money by offering lump sums discounted at even higher rates. This is good news for taxpayers, but for the retiree it offers a far smaller lump sum.

So, what's your personal discount rate?

More (albeit non-scientific) discussion of personal discount rate is here:

https://rawinter.net/post/47585607928