Episode 22 Value of Your Pension

Today we talk about what is government or military pension really worth. If you earn a military or federal government pension, you will receive a pension for the rest of your life, you can’t outlive it. You also get a cost-of-living allowance (COLA) based on inflation. A downside of the pension is that once you retire, that payment is set. You can’t increase it and only lasts for your life. Or if you participate in the Survivor Benefit Plan and die your spouse will receive up to 55% of your monthly pension for the rest of their life. Then that’s it. In contrast, investments like TSP can increase their value if you take on more risk. You may still have money left over in your TSP when you die they could pass on as an inheritance or gift to charity. But if you take less risk, like put money in the TSP G fund, your investments won’t keep up with inflation and you may run out of money before you run out of life.

What’s a pension really worth? One way of looking at it is to calculate its present value. The calculations are bit complicated, but generally the present value of your pension is the lump sum amount of money you need if you retired today, invested that lump sum at a certain interest rate, then drew out and spent the amount of your yearly pension, for set number of years.

If you are military E7 with over 20 years of service, or a GS 8/9, your annual pay is about $59,000. The service member serves 20 years and retires at 42 getting 50% of base pay in retirement, of just under $30,000 and can expect to live another 40 years. The present value of their retirement pay is over $750,000. The federal FERS GS 8/9 employee retiring at 57 with 30 years of service would have a yearly retirement pay of almost $20,000 and live another 26 years. The present value of their retirement pay is almost $380,000.

For Officer 05 retiring at 42 with 20 years of service, their yearly retirement pay would be $57,000. The present value of that is almost $1.5 million. For FERS GS 13/14, retiring at 42 with 30 years of service to about $730,000, with 40 years of service almost $975,000. As you decide whether to stay or whether to go this can give you a hard dollar figure to help you decide if it’s worth it for you to stay.

The military BRS and federal employees FERS retirement systems are based on a triad of the traditional pension we been talking about, Social Security, and the Thrift Savings Plan. I like to look at these planning for retiremen by, dividing your expenses in retirement in two NEEDS and WANTS. Needs would include food, housing, healthcare, taxes, transportation, etc. Estimate each of these costs for total dollar figure. Ideally your pension and eventually Social Security will cover those needs. This is your safety net. What if those needs are more than your pension? Consider ways to reduce those expenses. For everything else, your wants, you could cover these with your investments like TSP. If you take some risk (volatility) your investments can grow faster than inflation so buying power increases. This provides flexibility and maybe a nicer lifestyle. In years where there value is dropping, don’t draw from it or don’t draws much. Spend a little bit less on the wants, knowing your needs are covered by your pension and Social Security. Then when things bounce back you can go back to spending more on your wants again.

One area to look as you get closer to retiring is you may have a gap in “guaranteed” income between t receiving your pension and drawing Social Security. Also keep in mind some expenses like healthcare tend to rise faster than inflation. Over time your pension may not cover all your needs. This is where Social Security might help with some of those expenses. If you have any questions or are curious what the present value of your particular pension would be, just reach out to me at Katie that’s [email protected]