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Old 06-25-2014, 01:54 PM   #21
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Nash-I think you've answered a different question than was asked by moneymaker. ~$5.2M is the amount of $ you'd "collect" in retirement pay over ~40 yrs of retirement. But, it's not 'the value of investments required to replace' the monthly retirement income. That number is closer to $1M, based on a quote for an immediate annuity.
Actually, no. I answered the second part in the post as well when I said it'd take an additional $2MM in savings between 42 and 60 to close the gap between an AD O5 retirement and a Reserve O5 retirement. What I should really say is that he'd have to generate an additional $2MM in INCOME to replace it, so I see what you're saying there.

Using a quick annuity calculator, the SAVINGS equivalent (assuming my 6% planning number over 18 years) would actually be ~$1.3MM to close that income gap. Not as bad, but still a hole to fill.

I specifically mentioned that the $5.2MM was the calculated FV of O5 pension based on the assumptions listed (including COLA). In that regard, I did answer a different question, but figured the information was germane to his post.

I don't know how you came up with $1M, but that number seems low considering as an O5 in 2020 you start with ~$52,000 annual gross income from retirement pay. He'd be retiring as an O5 in 2024, where the starting gross pay based on 2.5% CPI COLA between now and then would be ~$58,000. That's where it starts...

The annuity you cited obviously doesn't pay COLA, hence it is far too low. Consider that 18 years down the road at age 60, he's trying to replace more than $7500/month, not $4800/month (based on 2.5% CPI). So, you're going to need an annuity much larger than $1MM to make up for that, and it only gets worse with time and inflation.
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Old 06-25-2014, 01:56 PM   #22
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I'm one of the guys who won't start getting it (military pension) until 60. On the up side, that's only a little more than 3 years away.
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Old 06-25-2014, 02:06 PM   #23
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I don't know how you came up with $1M, but that number seems low considering as an O5 in 2020 you start with ~$52,000 annual gross income from retirement pay. He'd be retiring as an O5 in 2024, where the starting gross pay based on 2.5% CPI COLA between now and then would be ~$58,000. That's where it starts...
.
O-5 as of today would get about 41k pension (Pretty good deal IMO). I think it would be very easy to construct inexpensive equity portfolio (index Funds) from 2 Million dollars which will pay 41k in dividends and grow dividends FASTER then inflation rate.
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Old 06-25-2014, 02:21 PM   #24
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O-5 as of today would get about 41k pension (Pretty good deal IMO). I think it would be very easy to construct inexpensive equity portfolio (index Funds) from 2 Million dollars which will pay 41k in dividends and grow dividends FASTER then inflation rate.
Sure.

Except that getting that $2MM isn't "easy." (BTW, the pension in 2014 for O5 is $45k/yr).

Except that that $2MM is in addition to whatever retirement savings you would need to supplement the pension income.

Except that that $2MM is subject to market risk, sequence of return risk, inflation risk, and others, whereas the pension is not influenced by any of them, most significantly inflation. A 50% drop in the market in year 1 pretty much throws your assumptions out the window.

All I know is that my number for FI by 2020 is $1.45MM. If I get out today, and stay in the reserves for a pension at 60, that number is over $3MM in order to be FI by 2020.

That would be impossible for me, short of doubling our income in the next six years, and even then it'd be close. I could absolutely get there before 60, but by age 42? No way.

There's more to life than money, but nothing about replacing a High-3 pension should be construed as "easy." Weighing life vs. much easier FI is what it's about.
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Old 06-25-2014, 02:30 PM   #25
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Sure.

Except that getting that $2MM isn't "easy." (BTW, the pension in 2014 for O5 is $45k/yr).

Except that that $2MM is in addition to whatever retirement savings you would need to supplement the pension income.

Except that that $2MM is subject to market risk, sequence of return risk, inflation risk, and others, whereas the pension is not influenced by any of them, most significantly inflation. A 50% drop in the market in year 1 pretty much throws your assumptions out the window.

All I know is that my number for FI by 2020 is $1.45MM. If I get out today, and stay in the reserves for a pension at 60, that number is over $3MM in order to be FI by 2020.

That would be impossible for me, short of doubling our income in the next six years, and even then it'd be close. I could absolutely get there before 60, but by age 42? No way.

There's more to life than money, but nothing about replacing a High-3 pension should be construed as "easy." Weighing life vs. much easier FI is what it's about.
Well I consider such 2 million dollar portfolio safer then 41k pension. And it is worth 2 million at age 42 and also 2 million at age 90. Historically simple S&P 500 grows earnings/dividends faster than inflation rate.

Also you pay no federal taxes on 41k of long term dividends while pension is taxed as income. So for that tax break you buy yourself Obamacare.

BTW when markets drop 20% dividends don't drop 20% just as when market goes up 20% dividends don't jump 20% up.

So you ask how much would you need.... I say 0-5 pension after 20 years of service at youthful age of lets say 40 is worth no more then 2 Million at current market conditions. That is 45-50 times its annual payout.
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Old 06-25-2014, 02:40 PM   #26
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Well I consider such 2 million dollar portfolio safer then 41k pension. And it is worth 2 million at age 42 and also 2 million at age 90. Historically simple S&P 500 grows earnings/dividends faster than inflation rate.

Also you pay no federal taxes on 41k of long term dividends while pension is taxed as income. So for that tax break you buy yourself Obamacare.

BTW when markets drop 20% dividends don't drop 20% just as when market goes up 20% dividends don't jump 20% up.

So you ask how much would you need.... I say 0-5 pension after 20 years of service at youthful age of lets say 40 is worth no more then 2 Million at current market conditions. That is 45-50 times its annual payout.
Then when the decision is yours, you can get out and figure out how to make that additional $2MM. That's the biggest hole in your plan. I have significant savings already. To close the gap, I (and anyone considering getting out vs. staying in) need to save $2MM more by age 42. Even over a ten or fifteen year period, that is not "easy."

You are also forgetting that the $45k payout annually is in the first year. As I've said at least twice in this thread, it's inflation adjusted. By 2020 it's $52k. By 2024 it's $54k. By 2042, it's more than $90k... (assumes 2.5% CPI)...

I have a lot of other issues with your assumptions and statements above, but I'll just leave it alone.

Edit: I am by no means saying a decision to stay or go is a no-brainer. The only way it's a no-brainer is from a purely financial standpoint, and even then it's not depending on pay grade and earnings potential outside. That said, to make it financially smart, it'd have to be a hell of a well-paying job with excellent benefits.
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Old 06-25-2014, 03:09 PM   #27
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Then when the decision is yours, you can get out and figure out how to make that additional $2MM. That's the biggest hole in your plan. I have significant savings already. To close the gap, I (and anyone considering getting out vs. staying in) need to save $2MM more by age 42. Even over a ten or fifteen year period, that is not "easy."

You are also forgetting that the $45k payout annually is in the first year. As I've said at least twice in this thread, it's inflation adjusted. By 2020 it's $52k. By 2024 it's $54k. By 2042, it's more than $90k... (assumes 2.5% CPI)...

I have a lot of other issues with your assumptions and statements above, but I'll just leave it alone.

Edit: I am by no means saying a decision to stay or go is a no-brainer. The only way it's a no-brainer is from a purely financial standpoint, and even then it's not depending on pay grade and earnings potential outside. That said, to make it financially smart, it'd have to be a hell of a well-paying job with excellent benefits.
Earnings grow and with them dividends grow. This is what provides inflation protection and this is exactly why over a long period equities do very well. In fact earnings grow faster then CPI.

S&P 500 Earnings by Year

I agree with you that you would need superb job to build 2 million dollar portfolio by 42. That is exactly why I wrote that O-5 pension for young guy is a great deal.

You asked what it is worth and I disagree with you and Houston on that. It is worth IMO much more then Houston thinks and much less then you think.
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Old 06-25-2014, 03:17 PM   #28
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I agree with you that you would need superb job to build 2 million dollar portfolio by 42. That is exactly why I wrote that O-5 pension for young guy is a great deal.

You asked what it is worth and I disagree with you and Houston on that. It is worth IMO much more then Houston thinks and much less then you think.
No problem with the last part.

Problem with the first part continues to be that it's not just $2MM. It's $2MM additional...
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Old 06-25-2014, 03:32 PM   #29
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No problem with the last part.

Problem with the first part continues to be that it's not just $2MM. It's $2MM additional...
We should start new thread "Can I generate 40k inflation protected income from 2 million dollar equity portfolio" or something along those lines and see what others think
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Old 06-25-2014, 03:59 PM   #30
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I think you're missing my point. $2MM only works if all you need is that $45k pension. If I need to cover $100k in expenses every year, there's still that other $55k to cover. In my case, I cover that with my savings. In order to cover the entire $100k with savings, I need that additional $2MM.

I understand completely what you're saying about an equity portfolio. I've been glossing over that point because that's not the point I have issue with. The point is that you're hand-waving away this $2MM as if anyone can get it, first, and then ignoring the point above where it's not JUST $2MM, it's $2MM in addition to whatever else you need to cover expenses in retirement.

Instead of "only" needing $1.5MM, I'd need $3.5MM (by your numbers)... and I'd need to save that over the course of 20 years starting at age 22. Now, you can probably start drawing down on that $2MM to cover whatever you need above the $45k, and maybe you'd make it on just the $2MM, but entering a potential 50-year retirement with $2MM requires relatively low spending. Certainly not impossible, just not what I'm talking about, either.

Maybe my example helps:

I expect to spend ~$110k/yr in retirement.
I expect a $52k/yr pension, COLAed.
I need to cover $58k out of investments, etc.

Based on FIREcalc and my assumptions, my "number" is about $1.5M by 2020.

If I needed to cover that $110k/yr entirely out of savings, my number would be significantly higher, at least $2.75MM if I simply use a 4% WR, which is usually considered safe for 30 years... we're talking 40 or 50... so 3.5% is $3.2MM, 3% is $3.7MM... etc.
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Old 06-25-2014, 04:30 PM   #31
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I say 0-5 pension after 20 years of service at youthful age of lets say 40 . . . .
Finished college in two years? Skipped two grades in elementary school? Enlisted at 20, Mustang, made it to O-5 and achieved 3 years TIG as an O-5 in the available time after at least one enlistment contract? Just sharpshooting here . . .
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Old 06-25-2014, 04:58 PM   #32
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I think you're missing my point. $2MM only works if all you need is that $45k pension. If I need to cover $100k in expenses every year, there's still that other $55k to cover. In my case, I cover that with my savings. In order to cover the entire $100k with savings, I need that additional $2MM.

I understand completely what you're saying about an equity portfolio. I've been glossing over that point because that's not the point I have issue with. The point is that you're hand-waving away this $2MM as if anyone can get it, first, and then ignoring the point above where it's not JUST $2MM, it's $2MM in addition to whatever else you need to cover expenses in retirement.

Instead of "only" needing $1.5MM, I'd need $3.5MM (by your numbers)... and I'd need to save that over the course of 20 years starting at age 22. Now, you can probably start drawing down on that $2MM to cover whatever you need above the $45k, and maybe you'd make it on just the $2MM, but entering a potential 50-year retirement with $2MM requires relatively low spending. Certainly not impossible, just not what I'm talking about, either.

Maybe my example helps:

I expect to spend ~$110k/yr in retirement.
I expect a $52k/yr pension, COLAed.
I need to cover $58k out of investments, etc.

Based on FIREcalc and my assumptions, my "number" is about $1.5M by 2020.

If I needed to cover that $110k/yr entirely out of savings, my number would be significantly higher, at least $2.75MM if I simply use a 4% WR, which is usually considered safe for 30 years... we're talking 40 or 50... so 3.5% is $3.2MM, 3% is $3.7MM... etc.

Correct if you want 110k dividend income stream you would need at least 4 million in equities (by my calculation) Or your pension plus 2 Million.

In your case you could stay 5-10 more years and retire with 62.5% or 75% base pay plus it would give you extra time to accumulate more money.
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Old 06-25-2014, 05:45 PM   #33
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Correct if you want 110k dividend income stream you would need at least 4 million in equities (by my calculation) Or your pension plus 2 Million.
This has been my entire point all along... For most folks, saving that $4 million by 42 is unlikely if not impossible. Saving $2 million by 42 is pretty damn hard, and unlikely for most... Sticking for 20 opens doors to FI - or an increased standard of living - that wouldn't be otherwise available to most folks... but again, that's hardly the only consideration.
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Old 06-25-2014, 07:12 PM   #34
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Doesn't social security factor in to this conversation? Seems you don't need to replace the entire income stream via a portfolio since SS will kick in between 62 and 70. For a high earner this could be a significant amount.
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Old 06-25-2014, 08:22 PM   #35
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I generally ignore SS in my planning...
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Old 06-25-2014, 08:36 PM   #36
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Yeah... just disregard SS... as I posted a while back, we've only collected something over $350,000 from SS since taking it early it at age 62...
A mere pittance.
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Old 06-25-2014, 11:10 PM   #37
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Yeah... just disregard SS... as I posted a while back, we've only collected something over $350,000 from SS since taking it early it at age 62...
A mere pittance.

All due respect, most failure modes in FIREcalc occur before I hit 62. My hard spot is getting from 42 to 59.5. So, I view it as a nice to have! Perhaps when /if I revise plans, dates, etc., SS will be factored in.
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Old 06-26-2014, 04:47 AM   #38
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Yeah... just disregard SS... as I posted a while back, we've only collected something over $350,000 from SS since taking it early it at age 62...
A mere pittance.
Well I count SS in because I plan to retire at 55. If I was planning to retire at 42 I would ignore it and create portfolio that can survive without SS.

It it much more difficult to FIRE at 42 then 55
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Old 06-26-2014, 09:43 AM   #39
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Well I count SS in because I plan to retire at 55. If I was planning to retire at 42 I would ignore it and create portfolio that can survive without SS.

It it much more difficult to FIRE at 42 then 55
That's how I handled it. I never counted social security in any of my projections... until recently. I quit at 38 but I turn 57 in a few weeks so it seems more logical to include it since not as much has changed wrt SS as I thought it was going to.
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Old 06-27-2014, 10:05 AM   #40
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Are you planning on a FERS career after retirement

OP, can't really add anything to whats been said so far, but I have some advice if you are looking at beginning a FERS career after your military retirement. If you are enlisted, even if you retire from service, buy back your military time. I retired from the Marines at age 38 as an E7 and immediately took a FERS job. I bought back my military time for around $12k which lowered my minimum retirement age to 56 with 38 years total service. This makes my FERS pension larger at 56 than not buying in and combining the two pensions at 62, the minimum retirement age if I hadn't of bought in. I still get my military pension until I retire from FERS. This will allow me to FIRE at 56. I do max out my FERS TSP and Roth IRAs for both myself and DW. OP, invest as much as you possibly can, stay out of debt, and you can build enough wealth to FIRE. Good luck!
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