Military Folks: Pension and Tax Deferred

[nash031]

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.

 

[eta2020]

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.

 

[nash031]

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...

 

[eta2020]

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

 

[nash031]

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.

 

[samclem]

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 . . .

 

[eta2020]

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.

 

[nash031]

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.

 

[NanoSour]

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.

 

[nash031]

I generally ignore SS in my planning...

 

[imoldernu]

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.

 

[nash031]

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.

 

[eta2020]

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

 

[razztazz]

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.

 

[Gunny]

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!

 

[Nords]

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]

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

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).

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.

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]

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]

[FONT=&quot]Crunching very basic numbers.
E-7 retires. 2014 pay chart says active base pay was $4343/month. [/FONT]
[FONT=&quot]Pay Tables[/FONT]
[FONT=&quot]If the E-7 qualifies for a 50% pension, the monthly amount would be $2,161.[/FONT]
[FONT=&quot]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.[/FONT]
[FONT=&quot]An alternative annuity examination could be the federal Thrift Savings Plan (TSP). On a retiree & spouse annuity plan, if[/FONT][FONT=&quot] 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. [/FONT]
[FONT=&quot]Under this federal program, the retired E-7 would have needed to put around $548,000 into purchasing an annuity.[/FONT]

 

[Neecy]

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]

[FONT=&quot]Crunching very basic numbers.
E-7 retires. 2014 pay chart says active base pay was $4343/month. [/FONT]
[FONT=&quot]Pay Tables[/FONT]
[FONT=&quot]If the E-7 qualifies for a 50% pension, the monthly amount would be $2,161.[/FONT]
[FONT=&quot]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.[/FONT]
[FONT=&quot]An alternative annuity examination could be the federal Thrift Savings Plan (TSP). On a retiree & spouse annuity plan, if[/FONT][FONT=&quot] 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. [/FONT]
[FONT=&quot]Under this federal program, the retired E-7 would have needed to put around $548,000 into purchasing an annuity.[/FONT]

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]

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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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.