Military pension and pay - how much is it past 20

[Average Joe]

I hope this is useful. It seems simple to me. So simple that I wouldn’t bother explaining it here except that no one I’ve explained it to understands it and all are sure that I must be not just wrong – but very wrong on this. So, maybe I’m missing something important – but here goes:
With a military, or similarly structured pension plan, after the point of retirement eligibility, calculating compensation for continued service requires taking pension into account, both what you can collect now, and the increase gained by serving longer instead. Either I, or many of my peers don’t understand this well. I’ve been retirement eligible for a while and in conversation about retirement with others who are close enough to be thinking about it, they are incredulous when I mention how much staying in is worth to me in terms of money. They often think only in terms of what their pension will be and how much their income will be when they add it to their salary for whatever their next job is. Some don’t seem to think about real retirement – just the next job. They don’t seem to know (and in some cases seem to want to remain unknowing) what effective compensation looks like once they are eligible for a pension. Some have asked me to explain my math and then they become irritated when my figures don’t match what their vague idea of what’s about right (and they don’t seem to have calculated their own figures by any method at all). They say I must be making some mistake. But they can’t find my mistake. Commonly they’ll object to my ignoring inflation, which should have little bearing on a COLA’d pension – the numbers will change in the future but the value will remain roughly same – so we can simply think in terms of today’s dollars and be on firm ground as far as understanding value. But I get the “Oh well you haven’t figured for inflation, that’s why this is all wrong and you numbers are way too high.” “OK how would I adjust this for inflation, and since it’s a COLA’d pension why would I need to in order to understand it?” “Oh well, it’s really complicated, and uh…. Oh look at the time, I have to get going, have to go do...” Or they’ll want to talk about 401K or stock options in some future job after retirement; very complicated and sophisticated sounding and relevant to measuring compensation for some other possible job, but totally irrelevant to how we measure our compensation for the job we’re doing now. Either I’m dumb and making a mistake or they are outsmarting themselves. I know well there are considerations other than financial for serving in and retiring from the military. But it’s nevertheless preferable to have a reasonably firm idea of how much money it’s worth – at least for comparison to other opportunities.
What follows is how I calculate effective compensation for further service past retirement eligibility with a military pension.

Assume at the start of the year total actual pay (including all allowances, special pays, etc) is $102,960. Assume also that at the start of the year you could begin collecting a pension of $42,756. Assume that with another year of service that pension will rise to $45,108.
Your effective compensation is actual pay minus the pension you could collect if you retired instead of serving another year, plus the lifetime value of the increase in future pension if you do serve another year. It’s that last figure that is slippery to quantify. No one knows exactly how long they’ll live to collect the larger pension. I used to use a spreadsheet that calculated its value based on life expectancy, into which I built a field where I could enter different life expectancies and see the values change – and demonstrate that if I expected to die in my 50’s I am not being paid much for my efforts, but if I expect to die in my 70’s and beyond, I am well paid.
But over the last year I’ve done it a different way, without using life expectancy. Calculate the value of the pension increase based on how much you’d have to invest to continue drawing that increase at the 4% SWR (or whatever SWR you think is more appropriate) for the rest of your life, regardless of how long you live. Applying this method to the example figures above effective compensation for the year would result in the following:
Actual compensation $102,960
Minus possible pension at start of year $42,756
Equals $60,204 real compensation
Plus the amount it would take invested to generate the pension increase of $2,352 every year for life – that is 2,352 divided by .04 (if we use the 4% SWR) or $58,800
$60,204 real compensation plus $58,800 “virtual compensation” (to generate the increase in pension) amounts to an effective compensation of $119,004.

Everyone I know seems to want to imagine they are making much less than their actual pay once they pass 20 when from my perspective, if they’ve been promoted in the last three years, they are compensated by far more than their actual pay. If they are not in that high three period, their effective compensation does go down under actual pay, but not by nearly as much as they imagine. And if promotion is still in the cards for them, actual compensation averaged out over the time until retiring in the higher grade can be huge. No one seems to like my concept of virtual compensation or a virtual account that generates their COLA’d pension. Everyone seems to think my estimate of effective compensation is grossly inflated somehow. Maybe it’s beyond their usual frame of reference to imagine what they’d need to generate their pension themselves. I know my formula is far from perfect. The biggest weakness of this method, as I see it, is that you don’t actually own the “virtual principal” you use to calculate what it would take to generate your pension. There are also some pre and post retirement tax differential considerations. But this gets you in the ballpark of your effective compensation much more accurately than the old saw that says after 20 you’re working for half pay. If you can find the error everyone thinks I must be making, I’d like to know what it is.
I built a spreadsheet that calculates this in monthly increments over the next five years both with and without promotion. Over the past year I have the figures for how much I’d have had to invest each month to generate the pension increase that I earned that month. Since I’ve been finishing out the last of my first three years in grade, I like the numbers I’ve seen.

I like the future numbers too, but will stop thinking about them much further into the future. Unless the powers that be invoke some extraordinary exception to deny my application for retirement, I’m done before the year is out. My spreadsheet has been useful to compare current compensation to jobs offered. But now it’s irrelevant to me. Non-financial considerations have precipitated my decision to retire and rendered my favorite spreadsheet nothing more than a measure of spilt milk. After the dust has settled, I’ll delete the calculations that run beyond the retirement date I’ve requested – and forget about what I’m giving up. What I’m gaining is more valuable to me.

So here’s a formula that may be useful to someone in a situation similar to my previous one: effective compensation = pay – pension possible now + (pension increase/.04). If you’re not yet past 20 but getting close, calculate it over your remaining time until 20, use your whole annual pension at 20 as the pension increase figure – you’ll see that staying the course may be worth a good bit.

 

[RetireEarly50s]

Average Joe, I understand your assesment and agree with it. I only have 11 years in but use the calculators quite often and staying in past 20 and especially if chance for promotion it is very beneficial to stay after 20. I plan on doing 26-30 (if I can handle it) and then fully retiring. I also talk with people and they say the same (after 20 only working for half pay) they never really look at it or take the time to figure it out because they are always planning for their next career. Most people in the military do not realize how easily they could ER with a Cola'd pension free medical care and investments.

 

[RP]

Joe,

thanks for a very illuminating and thought provoking post. As a military/federal annuitant with over 38 years combined service I feel qualified to say this ... the military for years has done a very bad thing to both officers and enlisted ... they promote continuous propaganda that tells members how poor they are.

No one denies our military deserves their compensation and indeed perhaps a lot more. But telling people over and over that they are poor and second class citizens is disingenuous, at best. At worst is the mind set it engenders that leads a man or woman who is doing a good job into the trap of being unhappy, even ashamed of their compensation ... instead of teaching them to look at the compensation with a realistic eye to see it for what it truly is.

One of my interests in life is writing and researching on the subject of military compensation, sadly mostly in support of lawyers working with military folks getting divorced. There is a defined and generally accepted actuarial method of determining the Net present Value (NPV) of a pension today or a future pension that will become part of a divorce settlement. Some of the figures and methods I have seen used are mind boggling in their simplicity and ignorance of true values. In fact, one of my frequent clients is a semi-retired attorney/retired O-6 JAG whose main area of practice is defending other lawyers in the midst of malpractice litigation, typically involving the significant undervaluing of military and civil service pensions.

Again, the military is not over-compensated (in my view, at least) but most members, former members and most of the legal profession have been taught to seriously undervalue the compensation that is in place.

 

[OAG]

Examples of "how poor they are" as described in the and by the military higher ups?

 

[JDARNELL]

Hey Average Joe,

Sounds like your logic makes sense. I too have created spreadsheets to model the value of a military pension. If you want to share your spreadsheet I would be interested in taking a look. You are welcome to see the one I use if you want. It is very interesting when you tie the added amount to a SWR rate but until you mentioned it I really did not tie the implied benefit to the complete package. At this point I use to identify how close to 20 I will want to leave. If I were to get promoted again I would have about 18 months of averaging the new rate into the high three calculation. So staying a little longer makes a huge difference if this scenario plays out. We will see what happens.

I hear the working for ½ pay argument all the time. I recently set down and figured out what my net would be in today’s $$ if I retired at 20 and the current rank. Definitely not ½ if what I get now but if I can restructure a few things it would account for 65% of what I would like us to have each month net. A lot of lost tax advantage when retirement occurs. Just think about BAH, BAS, and in my case paying state taxes. Plus now having to pay tax on vehicles.

Recently I have been really thinking about what I like and don’t like about military service. I made a list and believe I can mitigate many of these things. Most of the don’t likes are trivial and are more emotional than anything. In my case being a way from my family 50% of the time the past 20 months is a big negative. I am with them a lot but it takes a lot coordination. Don’t get me wrong this is manageable for now so more of an irritant than a hard complaint. Of course when I fly 24 segments in a month it does get to me. If I can get this solved I think I may stay a little longer than 20. At the end of the day if things are going well and I can spend time with my family during the school breaks etc I will probably hang around. If not I guess I value being home more than staying. That’s a $150k plus decision in pv/fv for just a little amount of time. I find that non financial things mean a lot to me. But walking through the options is a good drill. If I step back and look at the desire to RE vs working a little more, I will probably be FI but keep on working doing something at least part time for a period of time. I am sure this will be a MC-MB decision. Nords and Samclem help me with my thought process on this from time to time.

Someone mentioned about our medical coverage. I am very grateful for the medical coverage we have. In the last 8 months, our family has had medical bills of over $250K and Tricare has covered it all. Because of the last few months, I am considering not touching the portfolio when I retire from the AF and maybe working part time to make up the difference of what we would like to have each month. I have been looking at becoming a reservist as an option. Fairly good return for effort but nothing near staying a little longer on AD before punching and having the pension covering more of the desire monthly net.

I am happy with the compensation I receive from Uncle Sam. Sure, I would like more but we live very well. I remember in 2001 and 2002 I was teaching at night at a local college part time. So many folks had lost jobs and were coming back to school. I was making more than I ever had and life was very good. I might have felt a little guilty. There is no doubt that having a military pension will make life a little better later on.


Tomcat98

 

[Nords]

Geez, Joe, with that spreadsheet if you were in the Navy you'd be a fellow nuke. No wonder nobody wants to talk pensions with you!

I’m done before the year is out. My spreadsheet has been useful to compare current compensation to jobs offered. But now it’s irrelevant to me. Non-financial considerations have precipitated my decision to retire and rendered my favorite spreadsheet nothing more than a measure of spilt milk. After the dust has settled, I’ll delete the calculations that run beyond the retirement date I’ve requested – and forget about what I’m giving up. What I’m gaining is more valuable to me.

What I'm hearing is "stay in as long as you're having fun, and get out when the fun stops". It's great if that carries a pension with it, but even getting to the 20 may have a higher psychic/physical cost than the financial reward.

When you cross about 14 years of service, especially if you promote to E-7 or O-5 around that time, the assignment officers have you right where they want you. All those nasty tours start cropping up as "payback" for your chance at leadership or command. I've heard submarine assignment officers proclaim in public that they save their worst billets for the O-5s who aren't pushing as hard as they can for O-6. I can appreciate the attitude but I'd hate to be one of the guys who rubbed the AO the wrong way.

Spouse had an AO's unrefusable offer when she crossed 16 years of service. The negotiations dragged on until about the early 17th year and she submitted her resignation just before he could have issued two-year unaccompanied orders. She separated 21 days short of 18 years. It was a pretty scary financial decision at the time (a loss of $750K-$1M in pension) but when we found ourselves discussing the quality of the family counseling & psychiatric care at our new duty station, we knew what the right decision was. She's never regretted her resignation for a minute, and she plans to leverage a subsequent Reserve promotion (that never would have happened on active duty) to earn more $$ in Reserve retired pay than she ever would have earned from an active-duty pension. I figure it gives her a reason to live to her high 80s!

Whether the decision is emotional or based on your spreadsheet, you will know when it's time to go.

 

[haha]

So here’s a formula that may be useful to someone in a situation similar to my previous one: effective compensation = pay – pension possible now + (pension increase/.04). If you’re not yet past 20 but getting close, calculate it over your remaining time until 20, use your whole annual pension at 20 as the pension increase figure – you’ll see that staying the course may be worth a good bit.

This seems like a pretty good way to view it. I have 2 questions/comments-is the annual pension increment do you use the single annuity or 100% joint and survivor? Because the SWR based factor obviously doesn't care if you are alive or not- it's perpetual or nearly so. A check might be to substitute for the SWR based factor the cost of an annuity that matches the characteristics of the military annuity that you are electing.

Ha

 

[unclemick]

Geez, Joe, with that spreadsheet if you were in the Navy you'd be a fellow nuke. No wonder nobody wants to talk pensions with you!
What I'm hearing is "stay in as long as you're having fun, and get out when the fun stops". It's great if that carries a pension with it, but even getting to the 20 may have a higher psychic/physical cost than the financial reward.

When you cross about 14 years of service, especially if you promote to E-7 or O-5 around that time, the assignment officers have you right where they want you. All those nasty tours start cropping up as "payback" for your chance at leadership or command.

Just got my weekly poop from sister. Oldest nephew(Navy Choppers) may go from cushy CA to medical evac in Iraq. The Black sheep - aka the Jarhead back from his third tour of beautiful you know where - has been sent to an unnamed destination for posibily three months - or so. As officers they must be in the fun zone - Nords is talking about - 14 yrs handgrenade wise.

heh heh heh

 

[Fireup2020]

Nice comment Nords -

I had to field a number of 'WTF are you doing?!!!! ' calls from master chiefs I had never met across the country when I pulled my chief package because I had decided to get out a few months later (and I was up in the running)

No regrets - and I'm wrapping it up in the reserve. $$$ sure is nice, but I am more important to me than my USN career. Glad to hear your wife is/was in the same boat

Not every decision we make is the "best" one on paper. 8)

 

[donheff]

So here’s a formula that may be useful to someone in a situation similar to my previous one: effective compensation = pay – pension possible now + (pension increase/.04). If you’re not yet past 20 but getting close, calculate it over your remaining time until 20, use your whole annual pension at 20 as the pension increase figure – you’ll see that staying the course may be worth a good bit.

Pretty good formula. Civilian Feds often forget about the NPV of the increasing pension as well. They always talk about the "fact" that they could leave and work elswewhere replacing their current income while drawing the pension. That is potentially true - they might even make more - but, then, they might not do as well. It gets down to what Nords said, stay if you enjoy what you are doing, leave if it is toxic or you are just plain ready.

One minor nit to consider if you are on the fence. The COLAd pension always goes up to match CPI, salaries don't. In the past two years since I retired my actual pension has gone up relatively faster than my potential pension would have increased. I still would be earning a substantially more if I had waited, but I would have to ratchet back the difference a bit.

 

[Nords]

I had to field a number of 'WTF are you doing?!!!! ' calls from master chiefs I had never met across the country when I pulled my chief package because I had decided to get out a few months later (and I was up in the running)

I can't even begin to describe the hailstorm of "advice" calls & e-mails she got during the resignation process. It was one heck of an education in "you just don't understand", both financially & professionally, and quite effective at telling your friends from your co-workers.

Five years later, now that many of the antagonists have moved on and shipmates are starting to talk about it, we're hearing that the detailer's office got a lot of "You pinheads better not #%^ around with this one, she's serious" phone calls from other senior officers. From their perspective it degenerated into a personality conflict & a precedent so they couldn't back down.

I know that no one was more surprised than the detailer when she resigned, and again a few months later when she actually used her personal-property shipment entitlement on her separation orders to move our stuff five miles up the road to our "dream house".

Another effect of the resignation is that the gloves came off and we found out what was really on their minds. Resignation was the best move she ever made. Staying on active duty... resistance would have been futile and she would've been assimilated. The Reserves have treated her far better.

You may have made a smart move pulling your package. A shipmate of mine was picked up on his 11th board last summer-- three weeks into his terminal leave. He quit his Primerica job to come back to the command (where he'd already completed his retirement checkout) and got started on his chargebook. Today his daughter's still at our local high school (staying with her mother) while he's fixing torpedoes in Guam for the next couple years.

It gives me some time to deprogram him from Primerica. And who knows, the Navy might realize a bit earlier that he's promotion material.

No regrets - and I'm wrapping it up in the reserve. $$$ sure is nice, but I am more important to me than my USN career. Glad to hear your wife is/was in the same boat
Not every decision we make is the "best" one on paper. 8)

The second-best decision she made after resigning was her life membership in the Naval Reserve Association (the "other NRA"). They've taught us everything we know, especially the financial aspects of the retirement system.

One minor nit to consider if you are on the fence. The COLAd pension always goes up to match CPI, salaries don't. In the past two years since I retired my actual pension has gone up relatively faster than my potential pension would have increased. I still would be earning a substantially more if I had waited, but I would have to ratchet back the difference a bit.

It's still a political decision, but I think that military wages are finally tied to the ECI (with the usual "targeted increases").

However the unintended consequence has been that for the last two years my retirement COLA has exceeded my spouse's pay raise. Not exactly the incentive that Congress or the retention people had in mind, and probably an anomaly...

 

[macdaddy]

This is an interesting discussion to me because my dad was in the Navy for 34 years. He thought about retiring along the way but never could pull the trigger. At the end he stayed in because he was in command positions that he really enjoyed and that also allowed him to make a difference. I'm not sure when exactly it is, but at some point the military starts to treat you and your family very well (expensive houses to stay in, drivers, and live in aides). I know you are always accountable to someone else, but it seemed that as XO/CO, he was in charge of his own show and could have fun with the job...

 

[Bimmerbill]

I've been in the National Guard my entire military career (and adult life) so I don't know the ins and outs of the active side.

But I've found that if you are willing to resign and walk it is an effective way to manage your military career. I did so once, after I told the higher ups that I was in charge of my military career, not them.

I retire 01JUN07 with 22 years. Now I just have to wait until age 60 to collect. Good thing is my retirement will be based off of the payscales in 2027 so I will get COLAs from now till then.

Now I just gotta live to 60 to start collecting!

 

[Tekward]

Sounds familiar Fireup and Nords. I got out at the eight year point - turning down Chief (ETC - nuke). People couldn't understand it.

No regrets 22 years later. I worked in civilian nuke pwer for 16 years and took advantage of the stable lifestye to finish grad school (Go WolfPack).

I joined the Navy Reserves in 1987 and was selected for LDO in 1989. I'm still drilling and I've gone a lot farther then if I had stayed active duty.

The interesting thing is that I had to make the same decision in 2001 to leave nuke power when I was being treated like I was an indentured servant (blocked promotion because my NRC license was too important to the plant). I surprised them and left for Pharma. Again - people couldn't understand it.

The life lesson is LBYM and invest in yourself. It keeps your options open. I was able to change careers in spite of the 1/3rd cut in pay.

Your money or your life....

Not FIRE yet but it's on the planning horizon - 5/1/2013. I know it sounds like a long time from now, but I smile when I write it....