Military Folks: Pension and Tax Deferred

[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?
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?
3. Did you participate in TSP?

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!

 

[Rustic23]

OK,
You may find this information dated. i.e. I'm OLD!

1. Never found a real good way to calculate this. In my opinion, the military pension is just about the best the working stiff can get! Well until our illustrious government screws with it. It is hard to compare as it starts. For some that may be as young as 38! It has a COLA, and it comes with health care. Very few civil pensions can match this.

2. Not really. We left the service with about two years expenses in a taxable account. It went to pay for kids college. I remember figuring that I would need just about what I could make at McDonalds to live in the manor we were accustomed.

3. TSP did not exist. I had several civilian jobs after retiring and those added additional pensions, and savings.

I can not say we retired early, but we did retire when we wanted. I can also say we have absolutely no money worries now, and SS + Military pension + Tricare is the reason.

Our son is a Marine. He has saved and I believe maxed out TSP, and has regular savings. He has five years enlisted and twelve years officer. He figures he will retire about 47 years old and never have to work again. Again health care is a giant part of it, and having no kids helps.

 

[OAG]

OK,
You may find this information dated. i.e. I'm OLD!

I can also say we have absolutely no money worries now, and SS + Military pension + Tricare is the reason.

+1

I left (retired) from the Army after 21 years at age 38 in 1979. Had a few "jobs" afterwards but nothing one would call a "second career". DW was mostly a SAHM but did have a basically minimum wage job long enough to qualify for SS on her own. Very grateful to the military for the pension, VA disability and now SS and all of the education opportunities (HS & College), promotions and travel opportunities that were provided to this 9th grade dropout from the windy city.

OP on valuation I was told to take annual pension times 25 which was pretty accurate for me however; I now use 35 as the multiplier since that is how long I have been receiving it. No TSP. Savings mostly after taxes (65%), T-IRA (25%) and R-IRA (10%). Pension, VA & SS pays 2X basic expenses.

 

[friar1610]

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:

I'll take a stab....

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?

A military pension is worth a lot! At a minimum, it's worth the nominal 25x the annual pension amount using the classic 4% safe withdrawal rate. But because it's a sure thing (well, as relatively sure as anything the government does) and it's inflation adjusted, it's worth more. Also, with the military pension you don't have to worry about a precipitous drop in the value of your portfolio causing anxiety or a drop in your income for a year or more running. I would say it's probably worth 30x the amount of the pension but that's without a lot of sophisticated mathematical analysis.

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?

During the six years or so that I worked after retiring from the Navy, I put the max possible in 401K’s/403B’s. I had several different jobs during that six years, so I never got vested in any plan; therefore all I got to keep was what I put in. Even though “the max possible” sounds like a lot, I didn’t really accumulate that much since it was only six years worth of contributions. My wife didn’t start working until the kids were in high school and all of her earnings were saved for college tuition for the kids. When she worked after they had graduated, she contributed the max possible. Her salary was relatively low and she didn’t work that many years so her accumulation was relatively small. We have never tapped any of that money and won’t until we have to take RMD’s in a few more years. I would do it the same way if I had to do it over again.

3. Did you participate in TSP?

The TSP was not available to military back in my day. If it had been, I would have certainly used it. I had a GS-15 working for me in my last job who was quite a spendthrift and who became a good friend. I badgered him into starting to contribute to the TSP and also into increasing his contributions every time he got a raise. Every time I talk to him now (he’s retired) he thanks me for it.

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!

You sound like you are on the right track. Good luck and thank you for your service during this perilous time for so many service members.

Edit: Failed to mention:
1. Retired from the Navy in 1996; for good in 2003.
2. 28.5 years active duty.

 

[Greg V]

I have FERS and Military Annuities due to my career as a full time Reservist; receiving the Military part once I reached age 60. Therefore, TSP is an important part of my retirement portfolio…it is about 50/50 TSP and IRAs (Traditional and Roth).

Federal pensions are excellent as they, in the majority of cases, begin paying immediately, have at least some COLA and include health care options prior to getting Medicare at age 65. It’s hard to find a civilian program that competes.

You can calculate the present value of your annuity, but that number may not be of practical use since you plan to stay until you qualify for retirement. What matters is cash flow…income and expenses. Any pensions, Military and Social Security for example, reduce (maybe eliminate) the need for investment returns to generate income for the necessities of life after retirement. Investing in tax deferred vehicles will give you much more flexibility in deciding your future path…career changes, date of retirement, etc. TSP is an outstanding program with solid fund choices and unbeatably low expense ratios…though withdrawal options are currently a bit limited.

Having a plan for you spouse (and children) should you die first is vitally important since the pension is yours, not theirs. The military pension has a Survivors Benefit Plan that pays your spouse up to 50% of your pension, but results in a smaller monthly payment while you’re living. You can search this site, and many others, and review plenty of discussions whether SBP, Insurance/Annuity Products or other strategies are the best way to handle the issue. This decision is fundamental to building your financial plan.

I thoroughly enjoyed my military career and wish you the same good fortune.

 

[samclem]

I retired from the USAF in 2004 after 21 years, have been w*rking part time since then.

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'd go along with Friar's estimate--approx 30X the annual amount of the retirement pay. The size of the needed nest egg always seemed a huge number and not nearly as meaningful as the expected amount of annual income it would throw off, so I'd go the other way when thinking about this: Of your anticipated annual spending amount in retirement, what portion is covered by your military retirement pay? The difference is what you'll need to cover with savings.

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?

When I retired from the military, we had about an even split between regular after-tax savings and Roth IRA money. Since then, I've set up a solo 401K and have put a lot of our earnings into that, so now it is about 40% of our total savings. This mix is going to work out pretty well, but there's the potential that we might get in trouble down the road when we are forced (by the RMD rules) to withdraw money from this 401K and that this will force us into paying taxes at a higher rate. This is something I did not think about when on active duty. I wouldn;t have done much different, but if I stop w*rking I will definitely do Roth conversions to get more money out of the 401Ks and into my Roth IRA before Social security kicks in. If this isn't all very familiar to you, I'd recommend you noodle it out with a spreadsheet and see what I mean. Remember--the money in your IRAs is accessible before you turn 59 1/2: You can use the 72(t) rules to get some of it, and you can convert other amounts to a Roth IRA.

3. Did you participate in TSP?

Only a little. I opened an account before I retired, there's a tiny bit in there. Its a good program, and I think almost every military member should open an account before they retire just to have the option to later roll funds from a crappy company 401K into the much lower cost options in the TSP. The TSP's low costs and the availability of the unique G-Fund are big pluses.
The TSP's weak spot is the limited distribution options--there's just not much flexibility there. But, if the distribution options get to be too much, a participant can always roll the money into their IRA.

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!

Welcome. As you probably know, the rule of thumb is that you should contribute to a "conventional" TSP (or IRA) account if you are in a higher tax bracket now than you will be in when you withdraw the money. If you are in a lower bracket now, it makes more sense to contribute to a ROTH TSP (or Roth IRA). But, if you expect to be in the 15% bracket, there's a lot to be said for "regular" after tax accounts, and I'd fund those, too. Having a mix lets you manage things later to minimize taxes.

 

[dtbach]

I did 11 active and 11 reserves. Just started getting the pension 2 years ago at 60. As others have said its a fantastic pension coming with not just a COLA but also medical. I'd say 30X is about right.

Didn't have TSP in my day, but in my civilian jobs I maxed out on 401K and converted to IRA after. Also in last 10 years, also contributed the max to ROTH's for both wive and I (we just transferred 6K each from our taxable accounts).

I retired at 58 and the first 2 years were tight but once the military pension kicked in, we have been on easy street.

 

[ggbutcher]

I retired in '97 at 20. I took my current stipend, projected it back to '97 with a 2% annual decrement (too lazy to go find old pay stubs), and ciphered it out to require a ~$760,000 sum required at retirement to pay out until age 95. Seems a bit low...

 

[Nords]

Good questions!

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?

One way is to consider a federal pension in terms of the income from I bonds. I'm earning $3507/month after 12 years of retirement, and I bonds are currently earning 1.94%: $3507 x 12 / .0194 = $2.17M.
“Present value” estimate of a military pension – Military Guide

That should also factor into your asset allocation:
Asset allocation considerations for a military pension (part 3 of 3) – Military Guide

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?

No, we overshot the mark. We saved more in taxable accounts (the TSP was not available during most of our careers) and the taxable accounts compounded way faster than our IRAs or TSPs. However it's better to try to max out the TSP earlier in your career (because you can't catch up on missed contribution opportunities) and it's easier to adjust toward taxable accounts later in your career.

It's also easier to tap the tax-deferred funds (including the TSP) than most people realize:
Early Withdrawals From Your TSP and IRA After The Military – Military Guide

3. Did you participate in TSP?

As much as we could. I only had five months of contributions before I retired. My spouse contributed 92% of her Reserve drill pay (DFAS reserves 7.45% for FICA) which gave her drill-weekend paychecks of $1.02.

Again, the TSP has the world's lowest expense ratios and biggest passive index funds. Every year that the contributions are not maxed out is a lost opportunity.

 

[Huston55]

You're getting a lot of confirmatory answers, which is a good thing.

My situation is probably most similar to Bach's. I did 6yrs active and 17 yrs Reserve in the Air Force. I just semi-FIREd and will begin collecting my AF pension in two years. I'm eligible for Tricare but, am fortunate enough to have better choices until I'm 60, then I'll switch.

I concur with the quick 30xAnnual Income method for calculating the NPV of a pension, and Nords' links give you several more nuanced ways to calculate it.

I just barely made the TSP cutoff so, I have a minuscule account. But, it provides a TSP investment vehicle if I'd I ever want to use it. Had TSP been available throughout my career, I'd hope I would have maxed it out. My rough calculation shows I could have retired ~1-2 yrs earlier with the additional TSP deposits.

Instead of TSP, we were maxing out our 401ks. Then, especially later in our careers, shoving a lot of money into taxable accounts; just like the pattern described below by Nords. I suggest you consider maxing out TSP and all other deferred accounts, then start socking away taxable money as soon as you can; thinking of annual deferred contribution limits as an annual opportunity that's missed if not used is a great way to approach it.

I did 11 active and 11 reserves. Just started getting the pension 2 years ago at 60. As others have said its a fantastic pension coming with not just a COLA but also medical. I'd say 30X is about right.

Didn't have TSP in my day, but in my civilian jobs I maxed out on 401K and converted to IRA after. Also in last 10 years, also contributed the max to ROTH's for both wive and I (we just transferred 6K each from our taxable accounts).

I retired at 58 and the first 2 years were tight but once the military pension kicked in, we have been on easy street.

Good questions!

No, we overshot the mark. We saved more in taxable accounts (the TSP was not available during most of our careers) and the taxable accounts compounded way faster than our IRAs or TSPs. However it's better to try to max out the TSP earlier in your career (because you can't catch up on missed contribution opportunities) and it's easier to adjust toward taxable accounts later in your career.

It's also easier to tap the tax-deferred funds (including the TSP) than most people realize:
Early Withdrawals From Your TSP and IRA After The Military – Military Guide


As much as we could. I only had five months of contributions before I retired. My spouse contributed 92% of her Reserve drill pay (DFAS reserves 7.45% for FICA) which gave her drill-weekend paychecks of $1.02.

Again, the TSP has the world's lowest expense ratios and biggest passive index funds. Every year that the contributions are not maxed out is a lost opportunity.

 

[DFA]

Never calculated the worth of pensions, it would make my brain hurt, since we have 2 military pensions, a FERS pension, and 2 VA disability payments. All COLA adjusted and the 2 VA disability payments are tax free. I just put them in the mix as after tax money. Then you have to add in SRS and 9/11 GI bill stipend. Then there is the non-monetary value of 9/11 GI bill tuition payment, TriCare, VA medical, and Federal employee health care plans. And another thing that I would have to consider is SS (COLA adjusted too)which we are taking at 62 because of varying longevity in both families, my head is starting to hurt just thinking about the math). so I just put the money in the mix and pay the bills as needed.

We are not using the SBP, but have the VGLI and SGLI, and dependent insurance that should off set loss of pension if either one dies. This reminds me we need to update wills and put together life decisions soon too

As for tax-deferred savings verse post tax savings we realized that we were trapping money in tax-deferred accounts (that we are going to have a hard time converting to ROTH anyway) since I retired 6 months ago @55 and DW will retire in 15 months @ 54 when she has her time in and has finished school using State TA (saving 9/11 GI bill benefits for later use). So since I am retired I stopped contributing and DW has now cut back TSP to 5% to get the match (no need to not take free money). This plan has reduce our current draw from saving accounts to almost zero. I also do a little PT w*rk (about 10/month) for old boss until end of this year which helps too.

TSP, was not available for me I retired in 1996 from USAF active duty, but DW used it for max contribution until this year.

 

[Eagle43]

21 years USAF, then 22 years megacorp. The military pension is cola adjusted, megacorp's is not. Without the military pension and especially Tricare, I would not have retired when I did. We took SBP, and the premiums stopped at age 70. In the 32+ years of retirement, the military pension has more than doubled. Like Rustic 23 and others, tsp did not exist when I retired. I'm old also. DW and I both get SS now. And, of course, I got into megacorp's 401k which is now my IRA. Anyway, the military pension is certainly worth 25 times, if not more.

Sent from my AT100 using Early Retirement Forum mobile app

 

[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

 

[dtbach]

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

An excellent decision. Congrats on your advancement!

 

[nash031]

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?
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?
3. Did you participate in TSP?

I'm not receiving a pension, but I've done a lot of calculations and thought about this a lot over the last year. About me for disclosure: 14.5 years in, selected for O5.

On to answers:

1. In my case, the future value of an O5 pension starting in 2020 and running for my expected retirement duration, including an assumed +2.5% annual COLA adjustment (this estimate is lower than CPI historical average), came out to ~$5.2M. I ran the numbers if I got out at 15 years, stayed in the reserves and accepted a reserve pension at 60 instead of an AD pension at 42ish. I calculated that I would need to save more than $2M additional (as in above and beyond my regular savings) over than 18 year period to close the value gap.

2. There are a lot of options out there to close the gap. The simplest is to have adequate taxable savings, however if you are dual-income it may be hard to max out two 401k-type accounts and two IRAs and still save significantly in taxable. There are options, however, to bridge the gap with less than adequate taxable accounts: specifically, Roth contribution withdrawals and 72t withdrawals from IRAs. I have no experience with either personally, and my present plan is to use taxable savings to bridge the gap from retirement to 59.5. In addition, DW will likely keep working, and I haven't decided if I will seek employment after military retirement or not. Both of those possibilities will obviously buy down my time between XX and 59.5.

IMO, it is of most benefit to max out your Roth accounts (tax-free growth) and TSP (unique funds, low ERs) for those unique benefits. Then, if your SO has a 401k/403b, you can weigh maxing that against enough taxable savings based on fund availability and your need to defer taxes. Ideally, you have enough to max all four (or two) accounts and still save enough to taxable.

3. I max out TSP every year and have for a decade. I use a traditional account because DW and I need the tax benefit now to keep us out of the next higher tax bracket. (We both use Roth IRAs.) I use TSP for my bond allocation (currently target 15% of portfolio), focusing roughly 2/3s of that allocation on the G fund, with the other 1/3 in F. I'm not chasing return with my bond allocation, just managing risk. G is perfect for that.

 

[Huston55]

I'm not receiving a pension, but I've done a lot of calculations and thought about this a lot over the last year. About me for disclosure: 14.5 years in, selected for O5.

On to answers:

1. In my case, the future value of an O5 pension starting in 2020 and running for my expected retirement duration, including an assumed +2.5% annual COLA adjustment (this estimate is lower than CPI historical average), came out to ~$5.2M. I ran the numbers if I got out at 15 years, stayed in the reserves and accepted a reserve pension at 60 instead of an AD pension at 42ish. I calculated that I would need to save more than $2M additional (as in above and beyond my regular savings) over than 18 year period to close the value gap.

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.

 

[ggbutcher]

It's really hard to replace ~20 years of half your base pay (assuming 'retirement' at 40, real retirement at 60) just for waking up each morning. I watched AF software guys in the '90s do the numbers; some jumped, but a lot didn't because you had to significantly increase your income to make up the diff.

IMHO a very good decision.

 

[samclem]

That number is closer to $1M, based on a quote for an immediate annuity.

Is that an inflation-adjusted immediate annuity? It would be interesting to know what an inflation-adjusted immediate annuity initially paying, say, $36k per year to a 42 YO would cost (adjusted to actual CPI, no cap).

 

[braumeister]

I seriously doubt you can find one, so I think the actual cost is simply allowing yourself to be shot at for 20 years.

 

[eta2020]

I would say Military pension it is worth even more than 30 times it's annual payout of you are 38 year old guy getting it. It is worth much less if you start getting it at 60. It is not worth all that much once you are 80.
That is why COLA lifetime annuity for someone who wants to buy it at 38 will cost arm and leg while it will be bargain for 80 year old guy

So if you are for example O-5 retired at 42 from active duty without any health issues....you had lucked out.

 

[nash031]

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.

 

[martyb]

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.

 

[eta2020]

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.

 

[nash031]

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.

 

[eta2020]

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.