Military Retirement

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Jetengines99
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Military Retirement

Post by Jetengines99 »

How can I quantify my military retirement in my total portfolio? Should I consider it towards the bond allocation since it’s a no risk monthly guaranteed amount?

Also how much value do I assign it towards my total net worth?

Thanks for any inputs!
RedDog
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Re: Military Retirement

Post by RedDog »

I account for my military pension as a very secure income stream versus an asset.
123
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Re: Military Retirement

Post by 123 »

You could calculate the net present value of the pension to the extent you are vested and have earned it (what would the value of the pension be based on your current period of service to date). If you have not yet attained the necessary age to receive that calculated amount you would need to discount it by the time period till you are potentially eligible for the first payment (i.e. minimum age). Potentially you would want to recalculate it every few years.
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delamer
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Re: Military Retirement

Post by delamer »

I wouldn’t count it to your bond allocation. You can’t rebalance your asset allocation using your pension.

You could choose to be more aggressive with your stock allocation, due to having the pension. But it really depends on how much of your expenses are covered by the pension. If it’s 100%, then you can be aggressive. If it’s 50%, then a more balanced allocation is called for.
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simplextableau
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Re: Military Retirement

Post by simplextableau »

RedDog wrote: Tue Oct 26, 2021 8:15 pm I account for my military pension as a very secure income stream versus an asset.
This makes the most sense. I would exclude it completely from the portfolio but reduce your expected expenses in retirement by the amount of the pension.
Shorty
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Re: Military Retirement

Post by Shorty »

I think the most straightforward consideration is on a cash flow basis. That's really what retirees try to estimate with NW calculations and SWR (with a lot of assumptions). For example, your estimated expense is $8k/mo in todays dollars, pension is $4k/mo in after-tax inflation adjusted dollars, then you'll need to cover the remaining $4k/mo. Using 4%/25X, that's $1.2M to cover. Similarly, I'd simplistically estimate the pension value at about that - I think a little higher for the "guarantee", especially in times of low interest rates and/or high inflation. Also benes such as medical, which can get absurd for early retirees.

I see it as a way to "afford" to take on more risk...but a very similar argument might be that you can "afford" to not have to take on much risk.

I've seen more sophisticated academic paper with mortuary tables and annuity comparisons. To me the "NW" value is interesting as an order of magnitude only estimate when deciding significance of "working 1 more year"... You're not going to be able to sell it or trade it. It's wild to see a point where working for a year or two at $300k wouldn't move the cash flow needle much. Not dissimilar for traditional near retirees with a ~$4M nest egg. Moves toward a point where passive portfolio growth is more significant than contributions.

Don't forget VA disability comp esp if >50%.
Shorty
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Re: Military Retirement

Post by Shorty »

You nailed the answer while I was typing a long, convoluted response.
simplextableau wrote: Tue Oct 26, 2021 9:06 pm
RedDog wrote: Tue Oct 26, 2021 8:15 pm I account for my military pension as a very secure income stream versus an asset.
This makes the most sense. I would exclude it completely from the portfolio but reduce your expected expenses in retirement by the amount of the pension.
placeholder
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Re: Military Retirement

Post by placeholder »

When I was employed I never included the accumulating pension benefit nor social security basically nothing that can't be rebalanced belonged in my asset allocation and now I'm drawing the pension so I just consider it income and still not part of the allocation.
Topic Author
Jetengines99
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Re: Military Retirement

Post by Jetengines99 »

Shorty wrote: Tue Oct 26, 2021 9:35 pm I think the most straightforward consideration is on a cash flow basis. That's really what retirees try to estimate with NW calculations and SWR (with a lot of assumptions). For example, your estimated expense is $8k/mo in todays dollars, pension is $4k/mo in after-tax inflation adjusted dollars, then you'll need to cover the remaining $4k/mo. Using 4%/25X, that's $1.2M to cover. Similarly, I'd simplistically estimate the pension value at about that - I think a little higher for the "guarantee", especially in times of low interest rates and/or high inflation. Also benes such as medical, which can get absurd for early retirees.

I see it as a way to "afford" to take on more risk...but a very similar argument might be that you can "afford" to not have to take on much risk.

I've seen more sophisticated academic paper with mortuary tables and annuity comparisons. To me the "NW" value is interesting as an order of magnitude only estimate when deciding significance of "working 1 more year"... You're not going to be able to sell it or trade it. It's wild to see a point where working for a year or two at $300k wouldn't move the cash flow needle much. Not dissimilar for traditional near retirees with a ~$4M nest egg. Moves toward a point where passive portfolio growth is more significant than contributions.

Don't forget VA disability comp esp if >50%.
Thanks! Great perspective. I was trying to justify my 90/10 allocation with my pension for a while as I’m about 4 years out from retirement.
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BolderBoy
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Re: Military Retirement

Post by BolderBoy »

simplextableau wrote: Tue Oct 26, 2021 9:06 pm
RedDog wrote: Tue Oct 26, 2021 8:15 pm I account for my military pension as a very secure income stream versus an asset.
This makes the most sense. I would exclude it completely from the portfolio but reduce your expected expenses in retirement by the amount of the pension.
+1. This is the answer.
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Shambolic37
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Re: Military Retirement

Post by Shambolic37 »

Shorty wrote: Tue Oct 26, 2021 9:35 pm
I've seen more sophisticated academic paper with mortuary tables and annuity comparisons. To me the "NW" value is interesting as an order of magnitude only estimate when deciding significance of "working 1 more year"... You're not going to be able to sell it or trade it. It's wild to see a point where working for a year or two at $300k wouldn't move the cash flow needle much. Not dissimilar for traditional near retirees with a ~$4M nest egg. Moves toward a point where passive portfolio growth is more significant than contributions.

Don't forget VA disability comp esp if >50%.
This second part is very important, and maybe a more useful reason to try to quantify the value of a military retirement. I'm assuming by the "4 years out" that you have 16 years in. Not sure if you will have the option to stay past 20, but if that is an option then valuing the increase in your retirement is an important part of the stay-in vs. get out financial decision (aside from the job satisfaction from serving your country). You will need to weigh the 2.5% per year increase in your pension along with the full salary, vs how much you would make in a civilian job after you retire. Depending on your retirement rank, that extra 2.5%, valued over the rest of your life, is a substantial amount that could outweigh other factors. Or in other words, how long will you have to work at a civilian job after you retire to make up for the 2.5% increase in your pension by staying in another year?
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krafty81
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Re: Military Retirement

Post by krafty81 »

34 years AD then retired. I am able to be more aggressive with my portfolio because close to 100% of my living expenses can be covered by retirement. Also the value of medical coverage for life is significant. I have kept my TSP because I like the investment options and low fees. One mistake I made was doing my allowed one time pull of money out of TSP at retirement. Thought I would need that to increase my downpayment on new house. Ended up not needing it but had to pay taxes on what I took out.
AB609
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Re: Military Retirement

Post by AB609 »

BolderBoy wrote: Wed Oct 27, 2021 10:02 am
simplextableau wrote: Tue Oct 26, 2021 9:06 pm
RedDog wrote: Tue Oct 26, 2021 8:15 pm I account for my military pension as a very secure income stream versus an asset.
This makes the most sense. I would exclude it completely from the portfolio but reduce your expected expenses in retirement by the amount of the pension.
+1. This is the answer.
+2. As a mental exercise, you can see what an annuity would cost to provide a similar income stream and use that to ballpark part of the value of your retirement.
Topic Author
Jetengines99
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Re: Military Retirement

Post by Jetengines99 »

Shambolic37 wrote: Wed Oct 27, 2021 10:52 am
Shorty wrote: Tue Oct 26, 2021 9:35 pm
I've seen more sophisticated academic paper with mortuary tables and annuity comparisons. To me the "NW" value is interesting as an order of magnitude only estimate when deciding significance of "working 1 more year"... You're not going to be able to sell it or trade it. It's wild to see a point where working for a year or two at $300k wouldn't move the cash flow needle much. Not dissimilar for traditional near retirees with a ~$4M nest egg. Moves toward a point where passive portfolio growth is more significant than contributions.

Don't forget VA disability comp esp if >50%.
This second part is very important, and maybe a more useful reason to try to quantify the value of a military retirement. I'm assuming by the "4 years out" that you have 16 years in. Not sure if you will have the option to stay past 20, but if that is an option then valuing the increase in your retirement is an important part of the stay-in vs. get out financial decision (aside from the job satisfaction from serving your country). You will need to weigh the 2.5% per year increase in your pension along with the full salary, vs how much you would make in a civilian job after you retire. Depending on your retirement rank, that extra 2.5%, valued over the rest of your life, is a substantial amount that could outweigh other factors. Or in other words, how long will you have to work at a civilian job after you retire to make up for the 2.5% increase in your pension by staying in another year?
I’m already retired out of military. I’m thinking maybe 4 more years to retire from all work. I’m just looking for inputs if my 90/10 allocation is too aggressive while I’m currently collecting my military pension and less than 5 years til full retirement?
MHA556
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Re: Military Retirement

Post by MHA556 »

If your pension covers 100% of your expected expenses, then I personally think your 90/10 is fine.

Very similar to my plan. It is easy to be aggressive with a good pension (or 2 when my wife retires). But keep that 10% for rebalancing, that is a major lesson I have learned here on this forum. Nothing like being able to buy stocks when they are cheap.

If your pension doesn’t cover 100%, then figure out how much you need and take that into account.
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calmaniac
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Re: Military Retirement

Post by calmaniac »

Retired O-6 here. Agree with comments on cash flow. People get fixated on "my number", but what is important is cash flow in retirement. That's what you live on and have to make work.

I was 100/0 until about 1-2 years before I left active duty at age 57. I'm now working in the private sector, but have moved to 70/30 commensurate with my age (early sixties), amount of safe income and assets, and risk tolerance. Agree with your comment that having a federally-backed COLA-adjusted pension allows you to take more equity risk in your asset allocation. As much as I hate having that much in bonds (30% seems like a lot to me) I want to be conservative and not get too cute. We are overfunded, so no need to take risk. You may want to rethink that 90/10, depending on your age, assets, and whether you continue to work.

One regret, I wish I had taken Roth conversions while I was active duty. My federal income tax bracket is much higher now than when I was active duty. We could have done a bunch of Roth conversions with a much lower tax hit than I will have now. You may want to consider.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
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Nords
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Re: Military Retirement

Post by Nords »

Jetengines99 wrote: Wed Oct 27, 2021 6:43 pmI’m already retired out of military. I’m thinking maybe 4 more years to retire from all work. I’m just looking for inputs if my 90/10 allocation is too aggressive while I’m currently collecting my military pension and less than 5 years til full retirement?
The technical answer is that DoD pays part of your pension out of the interest from Treasuries which they had to accrue for decades before they knew you'd be a military retiree. The DoD actuaries figure out these details so that your pension is fully funded before you retire.
https://comptroller.defense.gov/Portals/45/Documents/afr/fy2020/DoD_Components/2020_AFR_MRF.pdf
Here's part of the discussion on page 18:
"The Fund receives investment income from a variety of U.S. Treasury-based instruments such as bills, notes, bonds, overnight investment certificates, and zero coupon bonds. U.S. Treasury bills are short-term securities with maturities of less than one year issued at a discount. U.S. Treasury notes are intermediate securities with maturities of one to ten years. U.S. Treasury bonds are long-term debt instruments with maturities of greater than ten years. Overnight certificates are interest-based market securities purchased from the U.S. Treasury maturing the next business day and accrue interest based on the Federal Reserve Bank of New York survey of Reserve repurchase agreement rates. U.S. Treasury zero-coupon bonds are fixed-principal bonds having maturities of at least five years and are purchased at a discount.
The Fund also invests in TIPS. TIPS are fixed-rate instruments designed to protect against inflation, with the principal amount indexed to the CPI by adjusting the CPI at issuance to the current CPI. As inflation increases, so does the principal amount."

Financially, you have an income stream from a government's inflation-adjusted annuity. The rest of your income streams (and savings/investments) only have to cover your remaining expenses.

About the only place you can find an inflation-adjusted annuity anymore is Social Security and a few other govt pensions, although some commercial annuities include annual (fixed) increases of 1%-2%. Since you're not going to need to buy any more annuities, you don't have to care about how much it's worth. You could pick a reasonable average long-term interest rate (1.5%-2%?) to calculate the value of your equivalent bond portion of your portfolio.

From an asset-allocation perspective, you could consider your pension the equivalent of the income from a portfolio of I bonds or TIPS. That's a flawed analogy because both of those securities mature and your pension doesn't have a known maturity date, but the comparison is good enough for asset allocation. Because you have a very secure bond income, you could afford to invest the rest of your portfolio aggressively in equities. You'd still have to be comfortable with volatility but that's more about sleeping well at night.

When my spouse and I were on active duty, we invested in an asset allocation of 100% equities. In retirement (with military pensions) we've backed off to >95% equities. We keep enough cash around to pay the bills for a month or two but the rest is in the VTI ETF.

90/10 for the rest of your portfolio sounds fine.
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Fishing50
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Re: Military Retirement

Post by Fishing50 »

90/10 seems reasonable with pension providing most of your required income.
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