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Putting a value on Military Retirement
Old 01-11-2021, 01:59 PM   #1
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Putting a value on Military Retirement

How are Military retirees calculating the value of their pension?

I am conservative so I am planning on a 3% safe withdrawal rate, so would you just find out pension amount is 3% of X?

Example:
$27,500 is 3% of $916,666.

So would I value it at $916666? Or am I missing something?

Thanks
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Old 01-11-2021, 02:15 PM   #2
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Quote:
Originally Posted by Fire26 View Post
How are Military retirees calculating the value of their pension?

I am conservative so I am planning on a 3% safe withdrawal rate, so would you just find out pension amount is 3% of X?

Example:
$27,500 is 3% of $916,666.

So would I value it at $916666? Or am I missing something?

Thanks
That's how I've been doing it all these years. I've modified it as I've gotten older 'cause I ain't got much longer to live.
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Old 01-11-2021, 02:19 PM   #3
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That's an interesting way of looking at it.

However, an accountant would say to look at it as the present value of an annuity. Pick the interest rate, the number of years, cash flow, plug in to the formula, and there's your value.

Using your numbers, for 30 years, with 2% interest rate (10-year treasury is currently at 1% and likely won't see 2% for a while), paying $27,500/year, I get $614k. Use the calculator at the following link and you can play with the parameters.

https://www.calculatorsoup.com/calcu...calculator.php
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Old 01-11-2021, 02:19 PM   #4
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I would look up the cost for a life annuity, with inflation protection, with the same monthly payment and use that value.

ETA: I see njhowie beat me to it.
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Old 01-11-2021, 02:35 PM   #5
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Originally Posted by njhowie View Post
That's an interesting way of looking at it.

... Using your numbers, for 30 years, with 2% interest rate (10-year treasury is currently at 1% and likely won't see 2% for a while), paying $27,500/year, I get $614k. Use the calculator at the following link and you can play with the parameters.

https://www.calculatorsoup.com/calcu...calculator.php
Is this better / more accurate than an Eq/FI AA * X% based on longevity?

The question is simply how much money would I need to have in order to cover me like this pension is covering me? That can be derived more than one way but I don't know if any one is actually better.
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Old 01-11-2021, 02:47 PM   #6
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I've never even attempted to calculate it, because I see no reason.

I look at what I plan to spend, then subtract what I get in military retirement pay (and also what I get in SS now). The remainder is what I'm going to withdraw from my portfolio. A simple (perhaps simple-minded) method.
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Old 01-11-2021, 03:00 PM   #7
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I see what your saying...but it is for life (starting at age 40 for me) and it also provides annual cost of living raises that pretty much keep up with inflation.

Hoping to get at least 35 years out of it!

Quote:
Originally Posted by njhowie View Post
That's an interesting way of looking at it.

However, an accountant would say to look at it as the present value of an annuity. Pick the interest rate, the number of years, cash flow, plug in to the formula, and there's your value.

Using your numbers, for 30 years, with 2% interest rate (10-year treasury is currently at 1% and likely won't see 2% for a while), paying $27,500/year, I get $614k. Use the calculator at the following link and you can play with the parameters.

https://www.calculatorsoup.com/calcu...calculator.php
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Old 01-11-2021, 03:00 PM   #8
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Agree... why would you need to value it? What is the purpose of doing it? Who will the value be reported to?

I have a defined benefit pension and I've never needed to value it.
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Old 01-11-2021, 03:14 PM   #9
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Need? No need.

Just trying to quantify it, see if it was worth it, use it to guide my kids decisions, my coworkers decisions (still a contractor for the military).

I guess for what I want the number for my original calculation meets the need...

Using the 3% SWR I want an $80k retirement.

I guess I could just as easily ignore the retirement and say I want $52,500 using the 3% rule, in the end the final numbers are the same.

Of course as we age and medical problems kick in the value of Tri-Care my be the real win...and I won't even try and calculate that.
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Old 01-11-2021, 03:26 PM   #10
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The only time I had to consider the value of my DB pension was when I was making a choice been taking the commuted value or the annuity.
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Old 01-11-2021, 04:06 PM   #11
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I've never even attempted to calculate it, because I see no reason.

I look at what I plan to spend, then subtract what I get in military retirement pay (and also what I get in SS now). The remainder is what I'm going to withdraw from my portfolio. A simple (perhaps simple-minded) method.
This is how l looked at it once I decided to take a pension. Then, looking at other 'guaranteed' income like SS, I decided how much to withdraw based on using the various calculators.
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Old 01-11-2021, 05:07 PM   #12
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The value would be relevant to a servicemember deciding to leave service before 20 years active. It would tell them how much more they need to make as a civilian to have a comparable retirement.
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Old 01-11-2021, 06:24 PM   #13
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Originally Posted by njhowie View Post
... an accountant would say to look at it as the present value of an annuity. Pick the interest rate, the number of years, cash flow, plug in to the formula, and there's your value. ...
Excel XIRR function as I recall. I did it with my tiny megacorp pension and got something like $100K NPV. A military pension with a COLA will be worth a whole lot more.

I could see doing it to feed a net worth statement that might be needed when borrowing money for some reason. This is fresh in my mind because we now find ourselves borrowing a few hundred $K to build a new lake home, after which we will sell the lake home we now have. We could pay cash from the IRAs but then we'd end up with a pile of unneeded taxable money when we did the sale. So ... for the OP: You might be surprised sometime in the future with a need to borrow and a need to provide a net worth statement.
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Old 01-11-2021, 06:32 PM   #14
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Originally Posted by njhowie View Post
.... However, an accountant would say to look at it as the present value of an annuity. Pick the interest rate, the number of years, cash flow, plug in to the formula, and there's your value. ...
Actually the FV function.

Yes, you can use this approach to give you an indicative value... if you know when you will die you can calculate a much more precise value. Note... if the cash flows are inflation adjusted then use a real discount rate rather than a nominal discount rate.
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Old 01-11-2021, 06:34 PM   #15
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In real dollars, it's worth current annual pay * # years you expect to live.

$27,500 * 30 = $825,000. This works well because it is a COLA pension.

I always just used 25x my pension. 25x because that is inflation adjusted and I needed it to last 30 years.

$27,500 * 25 = $687,500 in today's dollars. Remember, the 4% rule inflates the withdrawal each year.
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Old 01-11-2021, 07:09 PM   #16
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For the basis of my Net Worth, I calculate my TRS (TX Education) pension based on me or my wife living to be 72 (we're both 52). It comes out to be roughly $800,000.
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Old 01-11-2021, 07:38 PM   #17
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Cola pension * life expectancy

example for a 52 male excellent health life exp is 50% chance to 98 ; 75% of living to 90.

$94k * 46 (98-52) = $4.3m
$94k * 38 (90-52) = $3.4m

https://www.blueprintincome.com/tool...g-will-i-live/

many different methods, but I like this one as you make an educated guess on how long you may draw from your pension
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Old 01-11-2021, 07:41 PM   #18
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I don't see the need for the valuation either.

Just subtract the pension from the spending and consider the balance.
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Old 01-12-2021, 06:48 AM   #19
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my military retirement....haha. what i value is my TRICARE, my ability to use all military facilities world wide, military welfare and recreation. it's hard to put a price tag on these.
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Old 01-12-2021, 07:58 AM   #20
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I am another one who sees no reason for calculating it. The problem is if you think the SWR is 1% or 5% you will get wildly different numbers for "value". Now add another unknown, when you will die. The bottom line for me is when I do eventually leave this earth, the value means nothing, regardless of whatever guestimates I made in the calculations.

I am a follower of subtracting a pension from expenses and then figure out what other money is needed to fill the gaps. This works out even better if that pension is COLA'd. And it is irrespective of any unknowable guestimates made in formulas. I figure the fewer guestimates made at the front end, the better.
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