How much is a military pension worth?

[Chip Stacker]

My plan is to FIRE in 2025 at the ripe age of 39 when i finish my 20 years in the military. I have a rental house in a location where i never plan to return to, and i've been pretty good with my money in regards to TSP(401K), Roth IRA, and taxable investments (~$250K). My semi-retirement will likely consist of plenty of outdoor activities and road trips, but i'll most likely fill some time with renovation/construction work as a side hustle.

Before taxes, my pension will pay around $30K/yr and adjust with inflation. my question is this: can i apply the 4% rule to calculate the value of my military pension? if so, $30K x 25 = $750K.

Thanks in advance for any comments on the topic.

[josh4trunks]

I have had similar thought experiments as well. Here are some points to use towards valuing the pension more or less than 25 x year pay.

+ I believe the 4% Safe Withdrawal Rate has a percent chance of running out, with a certain margin of error. I am not sure if pension plans are usually more or less conservative, but government backed ones can always take more from future workers / tax payers so I don't see it failing without systematic failure.

- Your dependents/family keep your asset balance when you pass away. This is a huge deal if you care about them.

- You are forced to get distributed this money every year, lowering flexibility in planning around things like SS / FASFA benefits.

[CorpRaider]

Actuary on Fire has a couple of posts about valuing annuity/defined benefit plans.  Best ones I've seen on the interwebs.  Should come up for you with some quick google-fu. 

[Kierun]

Nords did a post on this topic a few years back.  https://the-military-guide.com/present-value-estimate-of-a-military-pension/

[YoungInvestor]

A proper estimation would need to include other risk factors about yourself, as well as what happens when you die (goes to dependant, ends right away, etc.) and inflation adjustments.

My gut feeling is that it is more valuable than 25x expenses. It would almost certainly be more expensive than that to purchase. I studied actuarial science but have since moved around a bit, plus I never worked on pensions or life insurance, so I might be wrong.

For your calculations, I would just subtract 30k from your yearly expenses and accumulate 25x that much in your investments.

[aboatguy]

Don't forget to factor in Tri-Care and  "Tri-Care for Life"
Mike 

[Travis]

A proper estimation would need to include other risk factors about yourself, as well as what happens when you die (goes to dependant, ends right away, etc.) and inflation adjustments.

My gut feeling is that it is more valuable than 25x expenses. It would almost certainly be more expensive than that to purchase. I studied actuarial science but have since moved around a bit, plus I never worked on pensions or life insurance, so I might be wrong.

For your calculations, I would just subtract 30k from your yearly expenses and accumulate 25x that much in your investments.

There's risk in a pension in that it ends with your death; however, there is no risk of it losing value while you're alive.  That's a guaranteed income that won't go away if/when the stock market takes a big hit again.  An insurance policy worth the difference between your investments and your pension should mitigate the risk if your family ever had to do without it.

[ThaiSmile]

My plan is to FIRE in 2025 at the ripe age of 39 when i finish my 20 years in the military.

Before taxes, my pension will pay around $30K/yr and adjust with inflation. my question is this: can i apply the 4% rule to calculate the value of my military pension? if so, $30K x 25 = $750K.

My wife and I have inflation-adjusted annuities that will kick-in. I used FIRECalc and used the "Other Income/Spending" tab to plug in the values of the annuities and ticked the inflation-adjusted tick box. Then I used FIRECalc to compute for the nest egg that I would need for my desired spending levels. I think things like pensions/annuities should be calculated separately as they are not really part of the investment portfolio that is assumed to be invested to support a 4% WD rate. That 750k is not going to be cash that is available to you on retirement date to invest in 75/25 AA.

From my calculations, an inflation-adjusted pension/annuity makes a big difference in FIRECalc, especially if you are looking at longer horizons. Good luck.

[Socmonkey]

As for military pensions being passed on to your spouse or child upon your death, it will cost you 6.5% of your monthly pension and the beneficiary will get 55% of your monthly pension amount.

Not accounting for investing the premium instead, it breaks even at around a rate of 7 months of payments for every 5 years you paid in.

Another major benefit is the Tricare that aboatguy mentioned. That medical insurance covers a family for just $578.16 per year with small copays and a (worst case) catastrophic cap of no more than $3,000.

[Nords]

Nords did a post on this topic a few years back.  https://the-military-guide.com/present-value-estimate-of-a-military-pension/

Thanks, Kierun!

Before taxes, my pension will pay around $30K/yr and adjust with inflation. my question is this: can i apply the 4% rule to calculate the value of my military pension? if so, $30K x 25 = $750K.

Thanks in advance for any comments on the topic.

Chip Stacker, converting a pension into lifetime value is meaningless for the 4% SWR.

Instead you could subtract the pension from your projected expenses.  Then you only need to build up an investment portfolio to cover your net expenses.

Incidentally that also handles the issue about the lifetime value of Tricare-- it's either the monthly premiums of Tricare Prime or the annual catastrophic cap on Tricare Select.

The only time that I see people caring about the lifetime value of the pension is for an asset-allocation decision.  Then you could view an inflation-adjusted federal pension as (roughly) the income thrown off by a portfolio of I bonds or TIPs, or the price of buying the equivalent SPIA.  In any of those cases it justifies having an investment portfolio that's very high in equities.  In our case our investment portfolio is >95% equities.

[px4shooter]

I am in a similar situation trying to determine the value of the pension for FIRE.

It is a set amount, in the beginning. Then there is a cost of living at year 5. Then every 2 years receives another cost of living increase.

The 4% withdrawal idea is tough for me to compare it to. What I looked at instead is the pension as a job. You get your monthly income and no concern about market activity. I am not sure if that is the best way, but it sure makes it easy for me!

[gaja]

I don't have a military, but a state pension. The exact amount depends on a lot of variables. It starts at $15 000/year, but my pension will probably be at least $28k.

I use Nord's method to calculate: How much we need to live, minus what the pension will provide. The rest has to be covered by savings. In the time periode from ER to when the pension kicks in, 100 % of living costs have to be covered by savings.

[px4shooter]

I don't have a military, but a state pension. The exact amount depends on a lot of variables. It starts at $15 000/year, but my pension will probably be at least $28k.

I use Nord's method to calculate: How much we need to live, minus what the pension will provide. The rest has to be covered by savings. In the time periode from ER to when the pension kicks in, 100 % of living costs have to be covered by savings.

If I live like I should, I will have left over funds from the pension. I am trying to determine future expenses and get a baseline of surplus funds each month. I am hoping to keep dropping monthly surpluses into savings, but I am not totally convinces the rate of inflation and cost of living won't creep way past what the pension is going to provide.

I calculate my current expenditures. Kids and a business interfere with creating a realistic cost analysis, as both have expenditures that should go away. Or the kids will keep on sucking from my pocketbook! I know the future is unpredictable, so I want some financial cushion.