Military Folks: Pension and Tax Deferred

[Nords]

Quote:

Originally Posted by moneymaker THank you all very much. I've come to the conclusion that at this point in my career, it's very much worth staying in until atleast 20 for the active duty pension. Just pinned on MAJ 6 months ago, so the pay isn't too bad either

Two comments.

Now that you're getting some serious paychecks, the key is to keep saving and investing the majority of that promotion pay (and subsequent raises). Sure, have a party with that first big paycheck and expand your lifestyle a little bit, but try to save at least 80%. Make sure you're maximizing the Roth TSP contributions and your Roth IRAs, and then put more in taxable accounts.

If you do that for the next five years then you'll be much closer to financial independence, and you won't feel locked in to staying until 20. You'll be able to contemplate TERA, or leaving active duty for the Reserves/Guard (and a later pension), and cutting back to a civilian bridge career (full-time or even part-time).

The difference is at least $250K:
Saving base pay and promotion raises - Military Guide

Which brings me to my second point: take your career one service obligation at a time, and don't risk your mental/emotional/psychological health by grimly clenching your jaw to hang on for 20.

[mickeyd]

After 22 years of active/reserve service in the Army I began receiving a monthly income stream from the Army when I reached age 60, about 10 years ago. They say that the military retirement is not a pension. It is reduced pay for reduced work.

After a recent agent orange claim approval the VA has added to that income stream with a tax free monthly chunk. My Army pay however, was reduced by that amount. Tax-free income is a lot better than taxable income.

All of that stuff added to SS and other civilian pensions pay for most of our ongoing monthly expenses and then some.

[Van-Guard23]

Quote:

Originally Posted by moneymaker Hi all, I'd like to get a forum going of all military folks currently receiving a pension. A few questions that I have for you: 1. How much do you find your pension being worth as compared to someone without a pension? For instance, potentially how much extra would you have had to accumulate to replace it?

I have only been retired from the Army just under a year and Retired Early so I can't provide comparative analysis for this...but trust that Nords' response is spot on

Quote:

Originally Posted by moneymaker 2. If you stashed away a lot in tax deferred accounts, did you find that you may have done things differently, (aka, saved more in taxable to cover the gap) since most of you retired many years before age 59 1/2? OR was it a good balance between your pension able to cover all your expenses and "make up" the gap until age 59 1/2?

My wife (still on Active Duty) and I have combined Traditional TSP making up about 33% of our liquid assets, with Roth IRA and Roth TSP making up about 19% of our liquid assets, with the rest in taxable investment accounts and fixed income/CDs. We wanted to make sure we maximize contributions to tax advantaged accounts, both traditional and Roth (which we did), before contributing to our taxable investments. Plan during early retirement is to slowly and methodically roll Traditional TSP (and Roth TSP which is still subject to RMD) to Roth IRA (up to our marginal tax rates) to sidestep the RMDs. Although we might have to temper this somewhat as Roth IRAs as not covered by ERISA (Employee Retirement Income Security Act).

Quote:

Originally Posted by moneymaker 3. Did you participate in TSP?

YES. As soon as DoD started offering TSP back in FY 2002, my wife and I both contributed and have contributed the maximum amount since we opened our TSP accounts. Best move, since IRAs can only get you so far due to relatively modest contribution limits...and the TSP's very low fees can't be beat.

Quote:

Originally Posted by moneymaker I'm active with 10 years in and am planning on staying until my 20. I currently max TSP (tax deferred right now although I did the ROTH last year for it). Just trying to get some of your keen insight!

Congratulations...you are ahead of the ballgame!

[moneymaker]

Thank you all for the excellent advice.

We have changed from the Roth option TSP back to traditional trying to minimize our taxable income since both my wife and I are both working now. I believe I'll be in a much lower bracket later on in life and would rather pay the taxes on the TSP investments then. Am I making a mistake by saving now and paying later (Trad TSP vs. Roth)?

[samclem]

Quote:

Originally Posted by moneymaker Am I making a mistake by saving now and paying later (Trad TSP vs. Roth)?

You really have to sit down and do the calculations in detail to know. Make estimates of the growth of your TSP, IRA, Roth IRA, and "non-retirement" accounts, see what tax bracket you'll be in and how the various types of returns will be taxed (e.g.there's no tax on capital gains or dividends if you are int he 15% bracket). Look at the RMDs from your traditional IRAs and 401Ks--every bit of those will be taxed as regular income. Remember that some amount of you social security checks will be treated as taxable income. Finally, one gotcha: take a look at the situation if you or your spouse are having to file as a single taxpayer. The person might very well be in a higher tax bracket with loss of a lot of deductions--in which case having the money in a Roth-type account would be good.
There are a lot of tax law changes and investment return unknowables that will certainly require you to stay flexible, but if you think through the issues yourself you'll understand the factors and be able to respond.
As a >general< rule, it can be a good idea to have a mix of different tax treatment types (Roths, traditional 401K/IRA, and "regular" nonretirement account investments). This can allow you to respond a bit better if the rules change.

[unno2002]

Crunching very basic numbers.
E-7 retires. 2014 pay chart says active base pay was $4343/month.
Pay Tables
If the E-7 qualifies for a 50% pension, the monthly amount would be $2,161.
An example of a rental home we have, bought in 2013 for $77,500, rented for $805/month, after expenses putting in our pocket (ignoring tax write off's) a consistent $583/month. For an E-7 to fully replace the pension would be 3.7 (4) such units fully occupied. $310,000.
An alternative annuity examination could be the federal Thrift Savings Plan (TSP). On a retiree & spouse annuity plan, if at my retirement I had chosen that option, and allocated $77,500 to it, TSP would only have offered a FIXED annuity of $306 per month. No inflation adjustment.
Under this federal program, the retired E-7 would have needed to put around $548,000 into purchasing an annuity.

[Neecy]

Quote:

Originally Posted by gunnychapman 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!

Buying back your military time does not help you reach you MRA sooner. The MRA is based on "actual" service not bought back service. I found the information from OPM but I copied the paragraph below from an unofficial site:

From this website: http://www.federalretirement.net/militarybuyback.htm:
When you make a military deposit your military service time will be added to your federal service when calculating your retirement annuity. It does not count towards the minimum time needed for retirement. In other words, if you hire into the federal service at age 58, your must work at least 5 years to age 63 to be eligible to collect an annuity - not counting military buyback time. Review FERS retirement eligibility requirements first. In the situation mentioned above, if you purchased back 4 years of military time you would be able to retire at age 63 with 9 years towards retirement. Instead of receiving an annuity calculated at 5 % of your average high three salary at age 63 after working 5 years it would increase to 9% of your high three average salary.

[Huston55]

Quote:

Originally Posted by unno2002 Crunching very basic numbers. E-7 retires. 2014 pay chart says active base pay was $4343/month. Pay Tables If the E-7 qualifies for a 50% pension, the monthly amount would be $2,161. An example of a rental home we have, bought in 2013 for $77,500, rented for $805/month, after expenses putting in our pocket (ignoring tax write off's) a consistent $583/month. For an E-7 to fully replace the pension would be 3.7 (4) such units fully occupied. $310,000. An alternative annuity examination could be the federal Thrift Savings Plan (TSP). On a retiree & spouse annuity plan, if at my retirement I had chosen that option, and allocated $77,500 to it, TSP would only have offered a FIXED annuity of $306 per month. No inflation adjustment. Under this federal program, the retired E-7 would have needed to put around $548,000 into purchasing an annuity.

Good examples for comparisons but, some important differences:

1. The rental income solution is riskier than a military retirement so, a risk adjusted return would be a more accurate comparison, and would make the rentals less attractive.
2. As you point out, the annuity quote is not COLAd so the amount needed to equate to military pension is even more than $548k.



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[Gunny]

Buying back your military time does not help you reach you MRA sooner. The MRA is based on "actual" service not bought back service. I found the information from OPM but I copied the paragraph below from an unofficial site:





From this website: http://www.federalretirement.net/militarybuyback.htm:


When you make a military deposit your military service time will be added to your federal service when calculating your retirement annuity. It does not count towards the minimum time needed for retirement. In other words, if you hire into the federal service at age 58, your must work at least 5 years to age 63 to be eligible to collect an annuity - not counting military buyback time. Review FERS retirement eligibility requirements first. In the situation mentioned above, if you purchased back 4 years of military time you would be able to retire at age 63 with 9 years towards retirement. Instead of receiving an annuity calculated at 5 % of your average high three salary at age 63 after working 5 years it would increase to 9% of your high three average salary.

Buying back your military time does not help you reach you MRA sooner. The MRA is based on "actual" service not bought back service. I found the information from OPM but I copied the paragraph below from an unofficial site:


I copied this from the same web site...


Another issue that comes up frequently is how your military time can be used for retirement eligibility requirements. You need a minimum of 5 years of civilian service time to be eligible for a civilian retirement annuity. However, after the 5 years is met, military service is creditable towards years of service for all the other voluntary retirement eligibility requirements: MRA +10; MRA +30; 60 years old with 20 years of service; and even the VERA requirements – age 50 with 20 years of service or any age with 25 years of service. Review all eligibility requirements for FERS and CSRS retirement.

Apparently, the example you gave above concerns a military buy back but the individual did not have the required five years of civil service to be eligible for a FERS retirement.


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[Neecy]

Quote:

Originally Posted by gunnychapman Buying back your military time does not help you reach you MRA sooner. The MRA is based on "actual" service not bought back service. I found the information from OPM but I copied the paragraph below from an unofficial site: From this website: http://www.federalretirement.net/militarybuyback.htm: When you make a military deposit your military service time will be added to your federal service when calculating your retirement annuity. It does not count towards the minimum time needed for retirement. In other words, if you hire into the federal service at age 58, your must work at least 5 years to age 63 to be eligible to collect an annuity - not counting military buyback time. Review FERS retirement eligibility requirements first. In the situation mentioned above, if you purchased back 4 years of military time you would be able to retire at age 63 with 9 years towards retirement. Instead of receiving an annuity calculated at 5 % of your average high three salary at age 63 after working 5 years it would increase to 9% of your high three average salary. Buying back your military time does not help you reach you MRA sooner. The MRA is based on "actual" service not bought back service. I found the information from OPM but I copied the paragraph below from an unofficial site: I copied this from the same web site... Another issue that comes up frequently is how your military time can be used for retirement eligibility requirements. You need a minimum of 5 years of civilian service time to be eligible for a civilian retirement annuity. However, after the 5 years is met, military service is creditable towards years of service for all the other voluntary retirement eligibility requirements: MRA +10; MRA +30; 60 years old with 20 years of service; and even the VERA requirements – age 50 with 20 years of service or any age with 25 years of service. Review all eligibility requirements for FERS and CSRS retirement. Apparently, the example you gave above concerns a military buy back but the individual did not have the required five years of civil service to be eligible for a FERS retirement. Sent from my iPad using Early Retirement Forum

Good point! I was thinking about the special retirement supplement which is based on actual service.
From Fed Times Ask the Experts blog:
While you’ll be eligible for the special retirement supplement when you reach your MRA, it will be based solely on your years of actual FERS employment. Active-duty service for which you’ve made a deposit will not be included in that computation.

I did several ballpark estimates thinking after buying my time (14 years and 9 months), I would be able to retire at 57 (MRA). I can, but only will get a SRS for my 15 years and not 29 years. So, for me, it is better to wait until I reached 60 and get a full benefit. I will also get my Reserve pension, but the government will recoup up to 40% of my pay until my severance is repaid.

[Greg V]

While the "real" method for calculating the FERS Annuity Supplement is pretty complex, the following formula will get you pretty close. For purposes of this stipend, a "full career" is considered to be 40 years. So:

(Actual FERS time/40) X (SS annuity at age 62) = FERS Annuity Supplement

In my case, the result was within $10 of the official, OPM calculated, amount. Hope this helps with your planning.

[Neecy]

Quote:

Originally Posted by Greg V While the "real" method for calculating the FERS Annuity Supplement is pretty complex, the following formula will get you pretty close. For purposes of this stipend, a "full career" is considered to be 40 years. So: (Actual FERS time/40) X (SS annuity at age 62) = FERS Annuity Supplement In my case, the result was within $10 of the official, OPM calculated, amount. Hope this helps with your planning.

Thanks! On second thought, staying until 62 will increase my pension by nearly $15,000 a year.

[Greg V]

BTW, I'm in the recoupment situation as well.

DFAS is required to give you the numbers with 90 days notice before actually reducing your military retirement check. That allows a person with a hardship to request a smaller than 40% reduction.

In my case, I just got a revised RAS with the reduction...no proposed numbers, etc in advance...and called DFAS. I wanted to be sure our amounts agreed, not change the percentage. They realized I did not get the required 90 days notice and pushed back the beginning of recoupment by 3 months.

Just info from my experience in case you have something similar happen.

[Neecy]

Quote:

Originally Posted by Greg V BTW, I'm in the recoupment situation as well. DFAS is required to give you the numbers with 90 days notice before actually reducing your military retirement check. That allows a person with a hardship to request a smaller than 40% reduction. In my case, I just got a revised RAS with the reduction...no proposed numbers, etc in advance...and called DFAS. I wanted to be sure our amounts agreed, not change the percentage. They realized I did not get the required 90 days notice and pushed back the beginning of recoupment by 3 months. Just info from my experience in case you have something similar happen.

OK, thanks!