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How solvent is the military pension?
Old 11-20-2014, 08:01 PM   #1
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How solvent is the military pension?

I'm coming up on 20 years of active duty service. I am currently an 05 and am on track to make O6. My plan is to serve 30 and walk away and not work again. I would be 52 years old. To accomplish this goal I would need to rely mostly on this pension rather than my current investments.

Is this risky?


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Old 11-20-2014, 08:08 PM   #2
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I'm coming up on 20 years of active duty service. I am currently an 05 and am on track to make O6. My plan is to serve 30 and walk away and not work again. I would be 52 years old. To accomplish this goal I would need to rely mostly on this pension rather than my current investments.

Is this risky?


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If this is risky, everything else is doomed.

Ha
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Old 11-20-2014, 08:17 PM   #3
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No doubt Nords will be along with detais, but IIRC by law the military pension fund is required to be fully funded at all times. I qualify for a(n infinitessimal) Fed pension and I consider it equal to a treasury bond. IOW, if I don't get paid the $20 a week I am owed in 20 years, we will all be eating rats and collecting rainwater for drinking. At that point, my stash of whiskey, shotshells and rice & beans will ensure I am King of the Dump.
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Old 11-20-2014, 08:17 PM   #4
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I'm sorry, I don't understand. What I am concerned about is the government taking away or reducing the pension. Last year they tried to reduce cost of living increases by sneaking the cut in another bill. I'm guessing it's only a matter of time until they try something like this again.


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Old 11-20-2014, 08:22 PM   #5
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My opinion:
There's no problem at all with the "solvency." The US government can make a nearly unlimited number of promises to pay a certain number of dollars, and fulfill those promises. But, it will require the government to "print money" and thus drive up inflation. Those purchasing US bonds would quickly demand higher interest rates in exchange for taking the increasingly worth--less dollars. You (and I), on the other hand, can't demand higher interest rates, and are subject to the mysteries of government calculated CPI.

The problem isn't the solvency, it is the political (and public) willingness to pay you the deferred compensation that you've already earned. Last year there was bipartisan budget agreement that broke that promise, it was later amended. (I recommend you read the thread at that link). Those same forces will be at work again later. I think there's a fair chance that, as the cuts come, military retirees might be looked at to "do their fair share".

Are you taking a risk? Sure. Everyone who retires under any plan, or using their own investments, is taking a risk. Having more resources (esp of different types) or being able to reduce spending in retirement, are both ways to reduce that risk.
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Old 11-20-2014, 08:25 PM   #6
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Are you taking a risk? Sure. Everyone who retires under any plan, or using their own investments, is taking a risk.

Indeed. Breathing is a risk. Have you read about what is floating around in that air stuff?
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Old 11-20-2014, 08:39 PM   #7
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Based on previous attempts to modify Federal retirement systems, both Military and Civil Service, new or modified systems, formulas, payouts, etc apply only to new entrants to those career systems. Current employees normally remain in the system that existed when they began their employment.

However, there are things the DoD or Congress can do that makes these retirement systems less financially favorable. For example, changing the COLA calculation to reduce that amount and/or adjusting medical coverage/premiums are just a couple of ways you can be affected. If your Military Pension is not currently taxed in your state that could change.

While the Military Pension is an excellent benefit, I recommend you augment it with all the tax-advantaged investment vehicles you have up to their maximum limit. TSP is an outstanding option and, in conjunction with your IRAs, could give you a sizable nest egg in the 10 years you have left prior to planned retirement age.

I have no idea whether your plan is risky or not as there's no info showing your forecast Pension Income and Spending or the size/composition of your retirement portfolio in the initial post. Best of luck.
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Old 11-20-2014, 09:44 PM   #8
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I'd say of all the pension in the US, I'd say the pension of retired military pension is the least likely to be cut significantly. There very well maybe attempt to make modest change things like health care or PX benefits. I would expect those to be primarily targeted at current servicemen and new recruit rather than retirees (although as SamClem pointed out that isn't always true.)

Still, historically failing to pay the guys, with guns, tanks, planes, and ships (and their good friends i.e. retirees) is an excellent way for politician to lose his jobs and often more...
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Old 11-21-2014, 05:10 AM   #9
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Originally Posted by BighousePT View Post
I'm sorry, I don't understand. What I am concerned about is the government taking away or reducing the pension. Last year they tried to reduce cost of living increases by sneaking the cut in another bill. I'm guessing it's only a matter of time until they try something like this again.


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Yes I would be worried about a military pension. [mod edit]

20 years ago teachers were considered underpaid and their promise of a pension was a great carrot to go into the profession.

The military will have to face the pension reduction music just like Detroit and all the other government groups that will be WAY underfunded.
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Old 11-21-2014, 05:59 AM   #10
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Your base pension will be safe. The COA and medical benefits will always be vulnerable, as will commissary and exchange benefits. One key factor for,you is to control your expenses so your basic pension will cover your needs. Things are more expensive on the outside and the portion of your allowances that are not taxable go away. Your entire retirement paycheck will be taxable by the Feds and some states unlike today. You still have time to beef up your savings and investments so you're not totally reliant on the pension and will have some inflation protection. You might consider meeting with a financial planner. USAA will work with you for free if you have accounts with them.
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Old 11-21-2014, 06:13 AM   #11
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Every country differs, but in Belgium they did the following:
  • Increased taxes on higher pensions
  • Slow the build-up of new rights
  • Fiddle around with the COLA index


All in all I think already retired people are losing about 5% - 10% of their payouts. The young ones lose significantly more - 20% or so.



So I wouldn't bet it on it 100%. Probably as much as any other government pension.
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Old 11-21-2014, 06:46 AM   #12
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Folks, there is no need to include any partisan politics in this discussion.
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Old 11-21-2014, 06:50 AM   #13
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As sure a bet as there is IMO.
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Old 11-21-2014, 06:55 AM   #14
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Quote:
Originally Posted by BighousePT View Post
I'm coming up on 20 years of active duty service. I am currently an 05 and am on track to make O6. My plan is to serve 30 and walk away and not work again. I would be 52 years old. To accomplish this goal I would need to rely mostly on this pension rather than my current investments.
The bolded sentence sounds like "I have settled into a lifestyle where my spending eats up most of what I earn, and I plan to continue this way."

As others have said, you need to get a serious handle on your expenses, no matter what it takes, and beef up your savings and investments. Your military retired pay will be as safe as anything on the planet, but whether it will meet your needs is an entirely different question.
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Old 11-21-2014, 07:16 AM   #15
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I agree with those who've posted that military pensions will remain 'solvent'; in other words, they will exist throught the period in which you need them. (I certainly hope so because, I'm supposed to start getting one next year. )

However, I think it's prudent to count on and plan for some sort of 'value erosion' through the methods already discussed. If you're worried about that, you should calculate what you think it might reasonably be and discount your pension when you use retirement calculators. If that 'value erosion' doesn't happen, you've got a little windfall. BTW, this is what a lot of members here do with their SS, based on their age and risk tolerance.
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Old 11-21-2014, 07:40 AM   #16
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Well, if you are on track to make "Bird" you undoubtedly have higher-level friends and contacts who rub shoulders with the even more highly-placed. They can probably tell you more than we can. Not being flippant or dismissive - just encouraging you to use your work "network." Your nearest E-9 probably has some good advice, too.

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Originally Posted by BighousePT View Post
I'm coming up on 20 years of active duty service. I am currently an 05 and am on track to make O6. My plan is to serve 30 and walk away and not work again. I would be 52 years old. To accomplish this goal I would need to rely mostly on this pension rather than my current investments.

Is this risky?


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Old 11-21-2014, 07:41 AM   #17
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When you make full Colonel, you should get a pay raise of approximately $14580 per year in base pay alone. Do not spend it! If you save it in an IRA/401k instead, you could have over $211,000 by the time you retire (at 8% return). This likely would generate an additional $8440 per year in retirement income and give you about a 10% margin over and above your military retirement pay.
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Old 11-21-2014, 08:37 AM   #18
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Quote:
Originally Posted by BighousePT View Post
I'm sorry, I don't understand. What I am concerned about is the government taking away or reducing the pension. Last year they tried to reduce cost of living increases by sneaking the cut in another bill. I'm guessing it's only a matter of time until they try something like this again.

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I think your base pension will be good. Once you are retired it is hard to for the government to change that. While you are still in the service? Well, the rules could change.

COLA, it'll change. No politics about it. A revised annual COLA has support from both political parties. I am a retired Fed (FERS) and my COLA is already reduced but look at it this way, an annual smaller COLA is better than no COLA. I find that my reduced COLA covers most of the higher expenses I face each year. I just adjust spending habits.

VA health benefits, I can see them changing in the future for retired military. I'd expect co-pays, deductibles or some type of premium to say the least, worse case, I see the VA downsized and most vet's getting into the FEHB or some kind of ACA program. But again, you'll pay more but you'd still have health care. Something is better than nothing.

I suspect in the future as America has to face budget shortfalls, rising deficits, an ageing population, etc., military and federal pension programs and entitlements will take a hit.

There is this in the Constitution,

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

What does it mean regarding current Federal and Military Pensions? Our (Military and Feds) retirements are part of the public debt. Remember, Congress has already spent the money and issued IOU's, last I saw it's over 1 trillion dollars of the National Debt of 17 trillion is owed to us, another 3 trillion is Social Security money.

To me it means the Government has to pay us (and debt payments) first before they pay any other government bill.
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Old 11-21-2014, 10:02 AM   #19
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We have done what you are planning to do. It will be 18 months at the end of next week since we retired. I understand your concerns, we had much of the same ones, particularly DW, who is fearful that the benefits that we rely upon will be diluted in the future. I scoffed at this at first, but after last year's retiree pay COLA challenge, I'm not so sure. There are no guarantees, but we have no regrets taking the plunge.

We have done what we can to mitigate the risk and what we've done falls in line with much of the advice given on this thread. We have socked away funds in TIRAs, Roths, TSP, and taxable accounts to cover the unknown and big emergencies. At O6, we were able to save about half of my pay every month so the funds increased rapidly after that point. I didn't stay to 30 as I didn't want to live on the East Coast anymore, but financially, it wasn't necessary to stay and it gave us the freedom to leave the Service and be grateful for the memories and opportunities that Service life had provided.

Our lifestyle fits easily within the retired pay, but keeping your cash flow positive and expenses low is key. Here in Colorado, it's easy. If you retire in the D.C. area or a higher cost of living area it could be a challenge.
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Old 11-21-2014, 10:14 AM   #20
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Quote:
Originally Posted by BighousePT View Post
I'm coming up on 20 years of active duty service. I am currently an 05 and am on track to make O6. My plan is to serve 30 and walk away and not work again. I would be 52 years old. To accomplish this goal I would need to rely mostly on this pension rather than my current investments.

Is this risky?
Sir - I'm 15 years active duty, planning to serve to my 20 and then out. I am saving to live about half off of pension and half off of savings (interest and dividends generated therein).

I agree that the recent budget approved by Congress and subsequent repeal of the COLA modification gave me real pause. For me, that COLA adjustment would've cost $120,000 over the course of 20 years. There were political reasons I was very upset with Paul Ryan's thoughts on why this was justified, but I won't go into that here.

That said, most politicians and a lot of high military brass agree that military personnel costs are too high and need to be modified. It is my opinion that this means the days of the traditional defined benefit pension are numbered. The civilian force has seen dramatic changes to their pension plans, but they are still quite rewarding.

I believe the likely path for our pension will be that you and I will be fine, and even those serving beyond their first term whenever they decide to make the change will also be grandfathered in with the traditional defined benefit plan. I believe they will change it to a defined contribution system, probably modeled around TSP, which will allow those serving less than 20 to take something of a retirement benefit. I think they will lock in health care for life at 20 to keep that milestone active.

So, all that said, my thought going into a similar retirement plan is that the pension itself is safe. It might get modified, but I don't think that even the COLA adjustment would've been that big a deal, especially considering it reset at age 62 to what you would've been getting all along. Thus, I think our pensions are safe. I think we are going to pay a little bit more for Tricare very soon, so that will affect our spending levels, and should be planned for accordingly.

I also agree with the previous poster who expressed concern over your spending levels. Remember that you won't get 75% of your take home after 30. You're getting 75% of base pay (no BAH, BAS, bonus or special pays). If you have no savings, as you implied in the original post, I believe you are going to be hard-pressed to enjoy your life strictly on your pension. I'd estimate you'll be getting between $80-90K (today's dollars), but if you're truly not saving anything right now, you're spending at least 50% more than that amount.

Perhaps you've been throwing that extra money at a mortgage and your housing costs will be very low in retirement, making that 80-90K doable. It's impossible for us to know how risky your plan is without knowing what your expenses are.

*I* would not be comfortable with only that one income stream (until SS), and have planned accordingly. What you are comfortable with is entirely up to you.
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