personal finance
How to Easily Figure Out the Dollar Value of Staying In vs Getting Out of the Military
Here is a table from the 2019 Statistical Report on the Military Retirement System:
Just by looking at this table, you can very easily learn a few things including:
- The dollar value of staying in for 20+ years and receiving a retirement pension.
- The incremental value of staying on active duty for additional years once you are retirement eligible.
The Dollar Value of a Military Pension
Let’s say you are an O-4 who has the option of resigning/separating at the 12 year mark. You think if you stayed in until 20 years you could make O-5, but you’re not sure just how valuable that military pension really is. You can figure that out by looking at the table above, and you can see that a 20 year O-5 pension has a dollar value of $1,458,837. You can reduce this value by about 20% ($1,167,070) if your are in the Blended Retirement System and would only get 80% of the full pension. That is what you’d be giving up by getting out at the 12 year mark as an O-4 and not staying in long enough to get the pension.
The Value of Staying Additional Years Once You are Retirement Eligible
Let’s say you are a 20 year O-5 who is weighing an extra 4 year commitment, and you think you could make it to O-6 if you stayed until 24. What is the dollar value of sticking around when it comes to your retirement pension?
We already mentioned that a 20 year O-5 pension was worth $1,458,837. If you stayed in another 4 years and made O-6 the value of your pension would have increased by $526,879 to $1,985,716, an average of $131,720 per extra year you stuck it out.
The Bottom Line
There are a lot of factors to consider when you are making the decision to stay in or get out, but by looking at the table above you can pretty easily quantify dollars values associated with:
- Staying in for 20+ years and receiving a retirement pension.
- The incremental value of staying on active duty for additional years once you are retirement eligible.
Finance Friday Articles
Here are this week’s articles:
- 10 Financial Goals for 2021
- Best Investments for Doctors
- Do Nothing, Do Well
- Drawdowns & Melt-Ups: The Year That Was in the Markets
- Monitoring your risk level & rebalancing
- The 3 best ways to estimate your home value (aka: How I “lost” $1 million overnight)
- Track Your Financial Goals with These Four Measurements
- Updated Trinity Study for 2021 – More Withdrawal Rates!
- Updating My Favorite Performance Chart For 2020
- Why I’ve Changed My Mind on Bitcoin
Finance Friday Articles
Here are this week’s articles:
Finance Friday Articles – XMas Edition!
Here are this week’s articles:
- 6 tax-saving strategies for smart investors
- Investing in Stocks At All-Time Highs
- Investing Lessons from the CoronaBear
- Poisoned Just Enough: Why I’m so Optimistic About 2021
- Running Out of Time Before Running Out of Money
- SEP IRA vs Solo 401K
- The G Fund is Underperforming Inflation
- Time to Explore
- Top 10 Ways to Lower Your Taxes
- What If You Only Invested at Market Peaks?
Throwback Thursday Classic Post – Does the TSP G Fund Count as a Bond or Cash in my Asset Allocation?
A reader wrote in and asked the following question:
Hi there. I thoroughly enjoy your website! When determining what my current asset allocation is, should I consider the TSP’s G Fund as “cash” or as a bond fund? I have a Vanguard account, and their website shows you these great “pie charts” reflecting one’s asset allocation. But what’s the best way to think of the G Fund in this context? Thanks a lot!
The Answer – It’s a Bond Fund
I can see why people might consider the G Fund a cash equivalent in their asset allocation, but I think it is best considered a bond because it is not liquid and is paying intermediate-term interest rates.
What is a cash equivalent? Here’s what Investopedia says:
Cash equivalents are one of the three main asset classes, along with stocks and bonds. These securities have a low-risk, low-return profile and include U.S. government Treasury bills, bank certificates of deposit, bankers’ acceptances, corporate commercial paper and other money market instruments.
The G Fund invests in “a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP.” That makes it sound like a Treasury bill, which is listed as a cash equivalent above, but remember that the G Fund offers you a free lunch. It is a short term security but the interest rate it pays is:
based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. As a result, participants who invest in the G Fund are rewarded with a long-term rate on what is essentially a short-term security. Generally, long-term interest rates are higher than short-term rates.
In other words, it is really a hybrid between a short and long-term Treasury.
The other aspect of the G Fund that makes it a bond and not a cash equivalent is that it is not liquid. In other words, because it is in a retirement account you can’t sell it and use the proceeds to buy a car, deal with an emergency, or whatever else you need it for. Cash equivalents like CDs, money market accounts/funds, checking/savings accounts, or cold hard cash are all accessible and could be used for these purposes. Unless you are retirement age and withdrawing from your TSP account, the only way to get to the G Fund would be to take out a TSP loan, which I would not recommend.
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