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Military Retirees Surfing Together

Military
Pensions

Military Money Strategy does not provide personal investment advice and we are not acting in the capacity of qualified licensed investment advisors.

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Your Secret Weapon to FIRE

Active duty military pensions can be a powerful tool for achieving financial independence early in your life. Not only do they provide a steady stream of income as soon as you retire from active duty, but they also come with Cost Of Living Adjustments (COLA).

In addition, there are so many other benefits that active duty military retirees enjoy such as healthcare benefits for life at a dramatically reduced cost, access to base services, and Space-A travel. Also, depending on the state you live in, there are numerous state-level benefits that can be gathered. Example: in California, under CALVET, as long as you meet certain service-related criteria, your dependents could be eligible for free tuition at state schools; and you don't even have to be a retiree to access this one.

 

Achieving FIRE with military pensions requires strategic planning and dedication. Here are some tips to help make the most of this resource:

  • Understand Your Pension Plan – Make sure you thoroughly understand all aspects of the plan you're enrolled in before committing to it as part of your FIRE strategy. See below for the types of active duty military pension plans out there.

  • Start Early – If you want to maximize your pension benefits, it’s important to start planning as early as possible. Having savings and investments can be a critical bridge as you transition from, active duty to FIRE life. The earlier you begin saving, the more time your money has to grow before retirement.

  • Invest Wisely – Investing wisely is key for achieving FIRE with a military pension plan. Consider working with a financial advisor who can help you create a portfolio of investments that will meet your long-term goals.

  • Consider Survivor Benefits – Depending on the type of military pension you have, you may have access to survivor benefit plans that pass along any remaining pension payments after your death to your beneficiaries. For the examples of pensions listed below, we will not be factoring in the Survivor Benefit Plan, so please plan accordingly. Again, seek professional financial advice before choosing a plan.

  • Based On Rank - Your pension amount is a direct reflection on what rank you retire at. The higher the rank, the simpler it is to obtain financial independence. I know it sounds easier said than done, but taking the difficult tours, keeping out of trouble, studying for advancement exams, and reaching career related milestones/qualifications can exponentially increase your chances at promotion and ultimately boost your pension payout.

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The Changing Landscape of Pensions

Within the private sector, about 14% of employees are on some type of pension plan. In the 80's that number was closer to 60%. That number is much higher for state and local government workers (~86%). However, in the military, 100% of its active duty members are still on a pension plan! So why are pension plans dropping in the private sector?

Pensions are extremely difficult for companies to manage. Compared to offering 401k's/403b's and providing investment matches, pensions (AKA defined benefit plans) are complex and risky to manage. For example, if Random Corp promises their 10,000 employees that they will receive $4,500 per month, for life at the age of 60, then they are obligated to pay that amount - no more and no less. So when Random Corp puts that money away to pay their employees later, that corporation has to factor in inflation, longevity of their retirees, equity market conditions, interest rates, and many other changes that affect the plan. And, they have to pay professionals a lot of money to manage that money. And in some rare instances of default and/or mismanagement, employees can lose their promised benefits through no fault of their own.

 

As a result, companies have chosen to transition away from pensions due to all the added costs and hassle associated with them. Yet despite all this, the military still manages its pension system better than most - making it a powerful asset for those seeking to achieve FIRE.

 

Additionally, if you are lucky enough to score a pension in the private sector, chances are benefits won't start right away and you may have to wait until your sixties to receive benefits (not really FIRE). The military, however, provides its members immediate access to their pension once they retire. Ultimately, military pensions are a great way for individuals who want to FIRE early in their life to do so. With proper planning and dedication you can make the most of your pension benefits and use them as a powerful tool for achieving financial independence. Afterall, pensions were created to help individuals transition from working life to retirement - and that's exactly what FIRE is all about.

Retro Calculator

Types of Military Pensions

There are currently a couple of active duty military pension plans out there and depending on when you joined the armed forces, your plan will differ. If you joined on, or before 31 December 2017, you'll be on what's commonly referred as High-36 or Redux (unless you've opted into the BRS). If you joined on or after 01 January 2018, you'll be on the Blended Retirement System (BRS). Barring medical retirement, service members have to serve at least 20-years under each program to be entitled to the pension portion.

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High-36

You'll often hear the High-36 military pension plan referred to by a few names: High-3 (years), High-36 (months), Redux (Option), and Legacy (not to be confused with Final Pay). If you joined the military prior to January 1st, 2006 and after September 1980 you're on the High-3 plan. If you joined on, or after January 1st, 2006 and before January 1st, 2018, you were given a choice to keep the High 3 or opt into BRS. I mentioned Redux and I will cover that more below.

How to Calculate High-36

High-36 retirement pay is calculated using a pretty simple formula. First, a percentage of base pay is determined which multiples years served by 2.5%. If a member has served 20-years, his or hers base pay percentage would be 50%, or 2.5% X 20-years. If they served 25-years, it would be 62.5%. 30-years would yield 75%.

 

Next, the base pay calculation is factored as the name suggests. It takes the highest 3-years, or 36-months, of base pay a member has earned in their career. Keep in mind, this is based on consecutive years, not calendar years. This will vary per member and each situation is unique. But for example, if an E8 with 28-years of service is retiring and they were an E8 for exactly two years prior to retirement, their calculation of base pay would look like the following (base pay per 2023 pay chart):

 

Service Year 25-26: E7 with over 24-years of service: $5,782.50

Service Year 26-27: E8 with over 26-years of service: $6,930.90

Service Year 27-28: E8 with over 26-years of service: $6,930.90

 

Base Pay Factor: ($5,782.50 + $6,930.90 + $6,930.90) ÷ 3 = $6,548.10

 

Their base pay percentage would be 70%, or 28-years X 2.5%.

 

They could expect a pre-tax pension amount of $4,583.67 per month, or $55,004 annual (COLA adjusted) for the rest of their life. But let's say that they got promoted to E9 and did an additional two years in that paygrade. They would be at a base pay percentage of 75% and their annual pre-tax pension would be $69,522.

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BRS

BRS, or Blended Retirement System was put into effect in January 2018. This system differs from High-36 in that in lieu of getting a smaller base pay percentage (2.0% for each year), service members get a match to their Thrift Savings Plan (TSP). In fact, all service members enrolled in BRS receive an automatic contribution of 1% of their basic pay after their 60-day service mark. Between the service member's 2nd service year and 26th year, they will also be entitled to a matching contribution of an additional 4%.

How to Calculate the Blended Retirement System

Much like High-36, the pension portion of BRS uses a calculation of years served and highest average 36-month base pay. In our example of calculating High-36, we said that after 20-years, a member would get 50%, based on a factor of 2.5% per year. Under BRS, because now there is a TSP contribution and match, that factor drops to 2.0%. So now a person serving 20-years would be entitled to 40% of the average of their highest 36-months of basic pay.

 

For example, an O5 is retiring after 21-years of active service and they were an O5 for the past 4-years, their active duty military pension would be calculated as follows:

 

Service Year 18-19: O5 with over 18-years of service: $10,265.40

Service Year 19-20: O5 with over 18-years of service: $10,265.40

Service Year 20-21: O5 with over 20-years of service: $10,544.70

 

Base Pay Factor: ($10,265.40 + $10,265.40 + $10,544.70) ÷ 3 = $10,358.50

 

Their base pay percentage would be 42%, or 21-years X 2.0%.

 

They could expect a pre-tax pension amount of $4,350.57 per month, or $52,207 annual (COLA adjusted) for the rest of their life. This is a lot lower than what's granted under High-36; however, there is still the benefit of the TSP contribution and match included in the BRS.

Matching Contributions

If you are currently serving between your second and twenty-sixth year of service, you have the opportunity to receive a match of up to 5% on your contributions. The first 1% is automatically given, but if you choose to contribute an additional percentage of your base pay, the government will match that contribution, for a total match of up to 4%. This means you could receive a total match of 5% (1% automatic + 4% matched). The amount you choose to contribute is ultimately up to you and your personal financial situation. It is always advisable to consult a Certified Financial Planner or Advisor before making any investment decisions.

 

 

You should also know that there are strict withdrawal rules for pulling money out of your TSP. There are typically penalties and tax consequences if you make a withdrawal before the age 59 1/2. That said, this must be factored into your FIRE plan. If you plan on attaining early retirement right after service, you may have to wait some years before you can touch those TSP funds. Again, speak to a CFP/A beforehand, but you may need another savings and/or investment account outside of a TSP to cover expenses over your pension amount before you reach the age of 59 1/2.

Compass

REDUX

Redux, also known as Career Status Bonus (CSB), was an option granted to those on the High-36 retirement system. Essentially, if opted, Redux would grant a $30,000 bonus at a servicemember's 15-year mark and an agreement would be made at that time to serve up to 20-years.

But There's a Catch

If the CSB was elected, a servicemember's retirement calculation would be reduced at 20-years from 50% of base pay to 40% of base pay. Also, those who elect to take Redux/CSB also get 1% point less in COLA annually. This reduction can be made up if that person opted to serve for 30-years as the multiplier on Redux goes from 2% to 3.5% between years 20-30 for those who opted in. So whether you took the CSB or not, you would still be entitled to 75% of your base pay after 30-years of service.

 

Additionally, when that servicemember reached the age of 62, two adjustments would take place. The first would be that their multiplier would reset back to what it was if they didn't take the CSB. For example, if Mary elected the CSB and retired after 20-years, she would have a 40% multiplier; at age 62, her multiplier would bump back up to 50%. The second adjustment is a one-time COLA adjustment as if they were receiving their regular retirement pay without the Redux.

 

At the moment, this option in not available to those on BRS and it is no longer available to those still on High-36.

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COLA

COLA, or Cost Of Living Allowance, provides an annual increase to one's pension based off the Consumer Price Index (CPI). This is an automatic adjustment that buffer's our pensions' buying power against inflation. In an environment of high-inflation, COLA on the military pension is a huge advantage compared to other pensions that do not adjust with the cost of living. However, even small advances in inflation can lead to a massive erosion of buying power in the long-term.

Military Pension Flow Chart

Flow chart showing what pension system a US military service member is on

Download and print a PDF of this chart:

Inflationary Woes

If you look between 2003 and 2022, you can really see how inflation makes the cost of everyday items skyrocket. During this 20-year period, the price of a gallon of milk increased by 48%, going from $2.76 to $4.09. Similarly, a pound of coffee jumped by a staggering 102%, rising from $2.92 to $5.89. An even more alarming increase, however, was seen in the price of gasoline, which surged by an overwhelming 125%, soaring from $1.56 to $3.5 per gallon. While we can go on and on with real estate/rental costs, childcare, college tuition, etc.., these three simple figures reveal the significant impact of inflation on our daily lives. (Source: usinflationcalculator.com).

Historical Military Retiree COLA Adjustments

COLA is based off the change in the Consumer Price Index (CPI) between 3rd quarter of the current year and 3rd quarter of the previous year. The CPI tracks the average price changes of consumer goods and services over time for urban consumers. More can be learned at the U.S. Bureau Of Labor Statistics CPI page.

Planning to achieve FIRE on a military pension without COLA would be difficult at best. These COLA increases ensure military retirees can keep up with the ever-increasing costs for goods and services. If a military retiree was receiving $4,000 monthly on their pension in 2002, due to the COLA adjustments over two decades, their monthly would be $6,171 in 2022 (54% increase). In 2023, that monthly pension would be $6,708 (a 68% increase over the 2002 amount). And the best part, if the CPI ends up being negative, COLA will never go below 0%.

Historical COLA data can be found at the DOD's Military Compensation Page here.

Year
Increase
2023
8.70%
2022
5.90%
2021
1.30%
2020
1.60%
2019
2.80%
2018
2.00%
2017
0.30%
2016
0.00%
2015
1.70%
2014
1.50%
2013
1.70%
2012
3.60%
2011
0.00%
2010
0.00%
2009
5.80%
2008
2.30%
2007
3.30%
2006
4.10%
2005
2.70%
2004
2.10%
2003
1.40%

Some Things Stay the Same

While your initial thoughts may be that COLA merely preserves your buying power, it can also make you a bit more wealthy in the process. If you learn to live frugally and only use a portion of your pension on everyday living expenses, your pension leftovers will grow with COLA. Additionally, one of our largest expenses is typically fixed - and that would be a fixed-rate mortgage. Let's say you borrowed $500,000 for your house on a 30-year fixed rate mortgage of 3.5%, your payment in month one would be $2,245.22 and your payment in month 120 (10-years later) would be $2,245.22. To put that in perspective, let's say your monthly pension payment in year-1 of retirement is $4,500. Your mortgage would take 49.9% of your pension. If inflation continues and COLA averages 3% over the next 10-years, now your monthly pension is $6,047 and your fixed rate mortgage is still $2,245.22, and now only take 37% of your pension.

Image by Mackenzie Marco

Value of A Pension

Consider pensions not just as income, but as a vital part of your overall asset portfolio. To make more informed decisions about your future, it's crucial to determine the actual value of these pensions. This is especially important when deciding whether to serve for 20 years or more. By evaluating the potential retirement benefits from your next employer, you can compare them to what the military offers and make an informed choice. Will you make $2-$3 million in 401k matches?

What Determines the Value of a Pension

There are a few components that determine the overall value of a pension and what you can expect to get out of it over a lifetime. They are rank, time, COLA/Inflation, retirement system, and life expectancy.

  • Highest rank obtained and what factors into your high-36 calculation. Obviously the higher rank held will contribute more to the value of the pension.

  • Years served will determine how much for that base pay calculation you'll get. Remember it's 2.5% for every year served under High-36 and 2.0% for every year served under BRS.

  • Cost of Living Allowances are determined by the CPI/inflation as described above. These annual adjustments play a large role in what you can expect back over a lifetime. 

  • As seen in the retirement system definitions and explanations above, the type of retirement system a service member is on plays a large part of what the overall pension value will be.

  • Life expectancy plays a significant role. If you retire at age 40 and live till 90, your total lifetime pension value can be a lot more than someone's who has retired at age 50 and lives to age 80. However, the 50-year old retiree may be at a higher rank and their annual pension may be higher.

Compass

Examples of Pension Payouts

We'll take a look at a couple of examples below on pension payouts and what you can expect annually and over a lifetime based on rank, years served, inflation, military retirement type, and life expectancy.

Retired O5 Pension Example on High-36

Tim served for 25-years. He enlisted at the age of 18, completed his bachelor's degree while on active duty, earned a commission through OCS, and achieved the rank of O5 at his 21-year mark. He was 43-years old when he retired.

Based on being an O5 for his entire high-36 calculation and going off the 2023 pay chart, his base pay High-36 would be as follows: 

  • Year 1: O5 at 21-years - $10,544.70 per month

  • Year 2: O5 at 22-years - $10,861.80 per month

  • Year 3: O5 at 23-years - $10,861.80 per month

  • High-36 Average Pay: $10,756.10 per month

Since Tim served 25-years and he is on the High-36 system, he will earn 2.5% points for every year served. In his case, he will get 62.5% (25 years X 2.5% = 62.5%). This would be $6,722.56 per month, or $80,670.75 annually on year 1 of his retirement.

I said year one in the last part as CPI/inflation plays a role and the higher it is, the larger COLA we can expect. Let's say that after the first year of Tim's retirement he gets a 3.5% COLA adjustment. Now his monthly pay increases to $6,957.85 per month, or $83,494.23 annually. If that 3.5% COLA averages for the next 10-years, on year 11 of his retirement, he can expect $9,482 per month, or $113,794 annually.

For this example, let's say Tim lives to the age of 85 (for this model, Tim passes away right after turning 85). Since he was 43-years old at retirement, he will collect a pension for 42-years. Using an average COLA figure of 2.5%, Tim can expect to receive a total of $5,876,041 over the course of those 42-years. 

Year
Monthly Payment
Annual Payment
Age
Year 1
$6,722.56
$80,670.75
43
Year 2
$6,890.63
$82,687.52
44
Year 3
$7,062.89
$84,754.71
45
Year 4
$7,239.46
$86,873.57
46
Year 5
$7,420.45
$89,045.41
47
Year 6
$7,605.96
$91,271.55
48
Year 7
$7,796.11
$93,553.34
49
Year 8
$7,991.01
$95,892.17
50
Year 9
$8,190.79
$98,289.48
51
Year 10
$8,395.56
$100,746.71
52
Year 11
$8,605.45
$103,265.38
53
Year 12
$8,820.58
$105,847.01
54
Year 13
$9,041.10
$108,493.19
55
Year 14
$9,267.13
$111,205.52
56
Year 15
$9,498.80
$113,985.66
57
Year 16
$9,736.27
$116,835.30
58
Year 17
$9,979.68
$119,756.18
59
Year 18
$10,229.17
$122,750.09
60
Year 19
$10,484.90
$125,818.84
61
Year 20
$10,747.03
$128,964.31
62
Year 21
$11,015.70
$132,188.42
63
Year 22
$11,291.09
$135,493.13
64
Year 23
$11,573.37
$138,880.46
65
Year 24
$11,862.71
$142,352.47
66
Year 25
$12,159.27
$145,911.28
67
Year 26
$12,463.26
$149,559.06
68
Year 27
$12,774.84
$153,298.04
69
Year 28
$13,094.21
$157,130.49
70
Year 29
$13,421.56
$161,058.75
71
Year 30
$13,757.10
$165,085.22
72
Year 31
$14,101.03
$169,212.35
73
Year 32
$14,453.55
$173,442.66
74
Year 33
$14,814.89
$177,778.72
75
Year 34
$15,185.27
$182,223.19
76
Year 35
$15,564.90
$186,778.77
77
Year 36
$15,954.02
$191,448.24
78
Year 37
$16,352.87
$196,234.45
79
Year 38
$16,761.69
$201,140.31
80
Year 39
$17,180.73
$206,168.82
81
Year 40
$17,610.25
$211,323.04
82
Year 41
$18,050.51
$216,606.11
83
Year 42
$18,501.77
$222,021.27
84
An example chart of a high-3 or 36 military pension

Retired E8 Pension Example on BRS

Jane served for 22-years. She enlisted at the age of 20, and achieved the rank of E8 at her 20-year mark. She was 42-years old when she retired.

Based on being an E8 for two years and an E7 for one year and going off the 2023 pay chart, her base pay BRS would be as follows: 

  • Year 1: E7 at 19-years - $5,413.50 per month

  • Year 2: E8 at 20-years - $6,130.20 per month

  • Year 3: E8 at 21-years - $6,130.20 per month

  • High-36 Average Pay: $5,891.30 per month

Since Jane served 22-years and she is on the BRS system, she will earn 2.0% points for every year served. In her case, she will get 44% (22 years X 2.0% = 44.0%). This would be $2,945.65 per month, or $35,347.80 annually on year 1 of her retirement.

Let's say that after the first year of Jane's retirement she gets a 4% COLA adjustment. Now her monthly pay increases to $3,063.48 per month, or $36,761.71 annually. If that 4% COLA averages for the next 10-years, on year 11 of her retirement, she can expect $4,360 per month, or $52,323 annually.

For this example, let's say Jane lives to the age of 90 (for this model, Jane passes away shortly after turning 90). Since she was 42-years old at retirement, she will collect a pension for 48-years. Using an average COLA figure of 2.5%, Jane can expect to receive a total of $3,211,686 over the course of those 48-years. 

Year
Monthly Payment
Annual Payment
Age
Year 1
$2,945.65
$35,347.80
42
Year 2
$3,019.29
$36,231.50
43
Year 3
$3,094.77
$37,137.28
44
Year 4
$3,172.14
$38,065.71
45
Year 5
$3,251.45
$39,017.36
46
Year 6
$3,332.73
$39,992.79
47
Year 7
$3,416.05
$40,992.61
48
Year 8
$3,501.45
$42,017.43
49
Year 9
$3,588.99
$43,067.86
50
Year 10
$3,678.71
$44,144.56
51
Year 11
$3,770.68
$45,248.17
52
Year 12
$3,864.95
$46,379.38
53
Year 13
$3,961.57
$47,538.86
54
Year 14
$4,060.61
$48,727.33
55
Year 15
$4,162.13
$49,945.52
56
Year 16
$4,266.18
$51,194.15
57
Year 17
$4,372.83
$52,474.01
58
Year 18
$4,482.15
$53,785.86
59
Year 19
$4,594.21
$55,130.50
60
Year 20
$4,709.06
$56,508.77
61
Year 21
$4,826.79
$57,921.49
62
Year 22
$4,947.46
$59,369.52
63
Year 23
$5,071.15
$60,853.76
64
Year 24
$5,197.93
$62,375.11
65
Year 25
$5,327.87
$63,934.48
66
Year 26
$5,461.07
$65,532.85
67
Year 27
$5,597.60
$67,171.17
68
Year 28
$5,737.54
$68,850.45
69
Year 29
$5,880.98
$70,571.71
70
Year 30
$6,028.00
$72,336.00
71
Year 31
$6,178.70
$74,144.40
72
Year 32
$6,333.17
$75,998.01
73
Year 33
$6,491.50
$77,897.96
74
Year 34
$6,653.78
$79,845.41
75
Year 35
$6,820.13
$81,841.54
76
Year 36
$6,990.63
$83,887.58
77
Year 37
$7,165.40
$85,984.77
78
Year 38
$7,344.53
$88,134.39
79
Year 39
$7,528.15
$90,337.75
80
Year 40
$7,716.35
$92,596.19
81
Year 41
$7,909.26
$94,911.10
82
Year 42
$8,106.99
$97,283.88
83
Year 43
$8,309.66
$99,715.97
84
Year 44
$8,517.41
$102,208.87
85
Year 45
$8,730.34
$104,764.10
86
Year 46
$8,948.60
$107,383.20
87
Year 47
$9,172.31
$110,067.78
88
Year 48
$9,401.62
$112,819.47
89
A Blended Retirement System or BRS military pension chart example

Download the Pension Calculator

Easily figure out your monthly and annual pre-tax pension payouts with our Excel based calculators. Switch between the tabs for High-36 and BRS.

Working with Financial Documents

How to Put a Dollar Value on Your Pension Today

We now know what our pensions will be worth over a lifetime, but let's say your trying to determine what your pension is worth in today's dollars but not sure where to start. Below, we'll cover a couple of ways to put a value on what a military pension is worth. This is beneficial if you're trying to decide if a career in the military is worth it and if you can achieve a better retirement in the private sector. It's also helpful when determining your overall portfolio and what other risk you want/need to take on.

It should be stated upfront that there is no 100% correct, accurate way to assign a dollar value as every calculation makes assumptions on future inflation and other rates. However, these calculations should give you a good starting point and reference value.

 

We must reiterate that you should always seek professional advice from a certified financial planner when making these important decisions

Using the Risk Free Rate of Return

A risk free rate of return would be the return on investment of something without risk. There are a few different investment vehicles used for this rate and in our calculation, we are going to use the yield on the United States Government 3-month Treasury Bill (T-Bill).

 

At time of writing, that yield was 5.59%, but since we are dealing with many years in our calculation, we are going to use an average of the last 32-years which was 2.62%. Additionally, a higher T-Bill rate typically is indicative of higher inflation which would translate to higher COLA adjustments; and since we're using an average COLA rate, using today's high yield rate would skew our averages. So for sake of looking at this long-term, we'll stick with the average yield of the T-Bill.

 

Let's go back to Tim's retirement as an example (O5 at 25 years on High-36). We said that over his lifetime, he could expect a total payout of $5,876,041, cumulatively over 42-years. The Present Value would take the risk free rate of return and tell us the amount of money Tim would need today to earn that amount over 42-years.

The present value calculation is as follows:

Present value formula for calulating a military pension

Using our estimation of Tim's total pension value, we would calculate a present value of $1.983M. This is saying that Tim would need a portfolio of almost $2M investing in 3-month T-Bills to achieve the annual payouts listed above in the example section.

An example calculation of finding the present value of a military pension

While one of the most conservative valuation models, this value uses the assumptions that the risk free rate of the 3-month T-Bill will not fluctuate wildly from the 32-year average and COLA will remain in close proximity to the risk free rate.

Using the 4% Rule

The 4 percent withdrawal rule is a popular guideline used in retirement planning and investing. It suggests that individuals should withdraw no more than 4 percent from their investment portfolio each year during retirement to ensure their savings last for retirement.

The concept behind the 4 percent withdrawal rule is based on the idea of balancing investment returns with withdrawals to maintain a steady income stream during retirement. The rule assumes that individuals can withdraw 4 percent from their investments annually without depleting their savings too quickly, as long as they have a well-diversified portfolio.

 

Let's continue to use Tim's retirement so we can compare apples to apples. Expecting $5,876,041 over his lifetime of collecting the pension for 42-years, we can use the same present value calculation as above. This is slightly less than our risk free rate and comes out to be worth just over $1.13M. However, if Tim were to have a portfolio of $1.13M, he would have to take on a lot more investment risk than holding a basket of 3-month T-Bills. Additionally, this assumes that the market gives steady returns (hardly ever happens) and does not account for larger downturns in the stock market.

Going With The TIPS

Treasury Inflation Protected Securities, or TIPS, are bonds issued by the US Government that are pegged to the Consumer Price Index (CPI); just like a military pension. It is for this reason, and because they are backed by the US Government (also like a military pension), I like using this valuation method the best. However, as you'll see below, using TIPS for our present value calculation is going to drastically inflate the value of our pension in dollars.

Unlike regular bonds/notes/bills issued by the Treasury, TIPS are only offered in 5, 10, and 30-year durations. For this present value calculation, I like to stick with the 10-year TIPS rate. For the 20 periods issued since 2014, these bonds have averaged a yield of 0.45%. 

Just like the last two examples, we're going to apply the present value formula to derive a dollar value for Tim's pension. Using our average yield of 0.45%, we arrive at a value of $4.87M for Tim's pension. Meaning Tim would need a portfolio of almost $5M in TIPS to get the same return as his military pension over his lifetime.

How These Assets Differ

At the end of the day, a military pension is an amazing asset to have in your portfolio. However, it should be noted that while it is helpful to assign a dollar value to pensions, it is not always 100% accurate as the CPI, yields, and markets fluctuate all the time. Additionally, barring and Survivor Benefit Plan, these pensions unfortunately go away when we die. Additionally, you can not take a lump sum of your pension's value to invest into another asset, or for expenses. And you can't (nor should you) borrow against your pension.

Young boy holding up an American Flag

You've Earned It

A military pension is an amazing asset and well deserved after 20-plus years of service to your country. As written, there are very few companies that still offer pensions and even fewer that allow payments for those less than 60-years of age; even employer matched 401ks come with penalties if you make a withdrawal under the age of 59 1/2.

 

There are several factors that can affect the value of your military pension, including rank, length of service, and retirement plan option chosen. It's essential to understand these factors in order to make an informed decision about your pension. It's important to know the value of your pension prior to deciding to separate from service before retirement eligibility.  

 

It is crucial to emphasize the importance of consulting a certified financial planner for expert advice when facing significant financial decisions.

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