Two recent events led to this post. First, this article about becoming a multimillionaire in the military appeared on military.com. Second, I was having a discussion with some other officers about this topic and they thought my opinion on the subject was different from what they had heard before. Because of this, we’re going to examine the value of a military pension.
How Much of a Pension Do You Get?
Let’s look at two likely scenarios for a physician. First, someone who stays in for 20 years and retires as an O-5. Second, someone who stays in for 30 years and retires as an O-6. Their pensions in today’s dollars based on this calculator would equal approximately:
20 year O-5 = $4,102.50/month or $49,230/year
30 year O-6 = $8,053.50/month or $96,642/year
Remember that your military pension payments are adjusted annually for inflation, a very valuable benefit.
How Much is This Worth?
The easiest way to answer this is to examine the pension and figure out how much money you’d need to have invested in order to pay yourself exactly the same amount of money inflation adjusted for the rest of your life. Unfortunately, this is not a simple issue.
Military.com Article “Can Military Service Make You a Millionaire?”
The aforementioned military.com article states, “The Defense Department puts the value of the monthly check of an O-6 retiring today with 30 years of service at $2.2 million…The DoD made a number of assumptions, but the idea was to put a price tag or value on the monthly military retirement check a military retiree will receive.” This article doesn’t go into the assumptions made, but let’s just take it at face value.
My MBA Finance Professor
In 2013 when I was taking my MBA, I asked my Finance professor this very question. I asked him how he would value a 21 year O-6 pension, another common circumstance for a physician. At the time this pension was approximately $53,400/year. Here is what he said:
“If you looked at this as an ‘endowment’ where one would not spend the principal, then take the annualized benefit $53,400 ($4,455 x 12) and divide by a long-term rate such as the 30 year T-Bond rate (3% in 2013) $1,782,000. In other words, if you had that $1,782,000 and put it all into 30 year T-Bonds at 3% you would get your $4,455/month. Of course, the issue is whether the 3% is a good number for the long-term. If, however, you were to look at this as an ‘annuity’ where you would spend down the principal until time of death, then you have all sorts of demographic stats issues (e.g., expected life after retirement, future interest rates, variability of the annuity investment, cost of living adjustments, etc.). In a nutshell, it can get quite complex. There are a number of websites available often through reputable firms such as Fidelity, Vanguard, etc., that you can perhaps access that have such calculations available already (instead of having to create your own model). You can plug in your what if’s and see what pops out.”
Using the 30 year T-bond (Treasury bond) rate from 3/18/16, which was 2.68%, here is the valuation with his methodology:
20 year O-5 = $49,230/2.68% = $1,836,940
30 year O-6 = $96,642/2.68% = $3,606,044
The problem with this analysis is that a regular 30 year T-bond is not inflation adjusted, so in my opinion you’d have to compare it to TIPS (Treasury Inflation Protected Securities). A recent yield on a 30 year TIPS bond is 1.12%, which would value the two pensions we’re considering at:
20 year O-5 = $49,230/1.12% = $4,395,536
30 year O-6 = $96,642/1.12% = $8,628,750
Keep in mind that the lower the Treasury bond yields go, the more valuable your pension is because you’d have to invest more money to get the same payout. Since today’s Treasury yields are at historic lows, these valuations are probably as high as they’ll ever get.
If you go to annuity websites and try to purchase an annuity for these two amounts, here is how much they would cost:
For a 20 year male O-5 who is 50 years old, lives in Virginia, and wants to earn $4,103/month or $49,236/year with a 2% annual income increase (equivalent to the inflation adjustment of your military pension) the pension would cost $1,322,826.
For a 30 year male O-6 who is 60 years old, lives in Virginia, and wants to earn $8,054/month or $96,648/year with a 2% annual income increase (equivalent to the inflation adjustment of your military pension) the pension would cost $2,103,257.
The 4% Rule
The 4% rule is a commonly accepted retirement “rule” that says you can take 4% out of your retirement nest egg every year, annually adjusted for inflation, and never run out of money. In other words, for every $40,000/year of income you need in retirement, you need to have $1 million saved for retirement. Whether the 4% rule is valid in today’s low yield environment has been debated, but let’s just assume it is still valid (because I think it is).
If you divide the annual military pension by 4% it would give you the size of the nest egg you’d need to withdraw that amount:
20 year O-5 = $49,230/4% = $1,230,750
30 year O-6 = $96,642/4% = $2,416,050
Keep in mind that your government pension is guaranteed by the federal government but the assets used in the typical application of the 4% rule, like your retirement accounts and other assets, are not, making your pension a much safer bet that is probably worth more than the numbers above.
There is some value in the military pension that people tend to underestimate. First, it is guaranteed by the US government, which makes it “risk free”. The only option discussed above that would offer this same value is the valuation comparing the pension to Treasuries. Even an annuity from an insurance company is not risk free because insurance companies do go out of business. (I will admit, though, that this is a rare event, and you could diversity by purchasing annuities from multiple companies, so an annuity can be pretty close to “risk free”.)
Second, you can’t screw it up. Investors are their own worst enemy. They buy high, sell low, trade too frequently, don’t save enough, over estimate how high their returns will be, pay excessive investment fees, and other errors that can very easily screw up your well planned retirement. You can not screw up your military pension.
Fourth, and this benefit is HUGE for me. I see my military pension as equivalent to a massive pile of TIPS. This allows me to take much more risk with the remainder of my investment portfolio and net worth. How much risk? Overall my asset allocation is 90% in stocks, which is a lot more risk than most people would recommend at my age of 40. Because of my pension, though, I don’t think I’m taking too much risk.
The Bottom Line
As you can see, a military pension is risk free, inflation adjusted, and can be quite valuable. Can you make more money as a civilian, save well, and accumulate even more than this? Yes, but this is all determined by your civilian salary, discipline as an investor, and rate of return on your investments, which no one knows since they can’t predict the future. A military pension is a very valuable and underappreciate financial asset that is probably worth somewhere between $1,200,000 and $2,500,000, depending on how long you stay in and what rank you achieve. If you try to match the risk with Treasury bonds at today’s rates, it is worth a lot more.
- There is a new body composition assessment (BCA) procedure, which consists of a three-step process.
- The first measurement uses the current height/weight tables.
- If an individual fails to meet those standards, a single-site abdominal circumference measurement will be conducted.
- The final opportunity for Sailors to pass the BCA will be a test using the previous system of neck and waist measurements to calculate body fat percentages.
- Sailors will pass the BCA by meeting the Depart of Defense maximum allowable body fat limit of less than or equal to 26 percent for males or 36 percent for females.
- If you are medically cleared to take the physical readiness test (PRT) you must participate in the test regardless of your BCA results.
- You will face separation from the Navy if you fail two PFAs in a three-year period.
- Commanding Officers are now empowered to conduct BCA spot check programs to ensure Sailors are staying within standards. This moves the Navy beyond a two-test-a-year system by giving commands the ability to identify Sailors in need of additional support without subjecting them to administrative punishments that result from an actual BCA/PRT failure.
Additional info can be found at this 21st Century Sailor site.
Here is the position description/announcement. If you’re interested, contact your Specialty Leader or Detailer:
This position, Deputy Director, M7 reports to Director, Total Force, Bureau of Medicine and Surgery (BUMED). We value and create an environment where quality is maximized through excellence in patient care, graduation education, research, and professional development. We optimize patient access to care that is timely and comprehensive. We maximize enterprise and individual productivity while improving data quality.
The Incumbent serves as Deputy Director, Education and Training, responsible for Education and Training policy, resourcing and oversight at the enterprise level. Incumbent must have excellent speaking and writing skills, collaborative nature, ability to represent Navy Medicine Education and Training with authority in multi-agency settings and must be skilled in leading a high-functioning team.
- Senior Education and Training advisor to Director, Total Force.
- Pre-briefs for Surgeon General and Deputy Surgeon General in preparation for high-level meetings/congressional testimony.
- Sets M7 strategic goals in alignment with SGs priorities.
- Educates stakeholders in the development of education and training requirements development and validation.
- Represents Navy Medicine on tri-Service/multi-agency committees and working groups, most notably the Defense Health Agency Education and Training Shared Service Working Group.
- Coordinates and approves responses to RFIs and taskers.
- Ensures M7 collaboration and communication across BUMED codes.
- Ensures close communication and collaboration with NMETC.
- Leads a small, highly-functioning team.
- Personally prepares briefs, presentations and point papers.
- Knowledge and Experience with Navy Medicine education and training organizations and systems.
- Experience working in a tri-Service/multi-agency environment.
- Must be able to recognize and communicate long-term consequences of decisions.
- Must be able to think strategically and globally.
- Must be able to maximize interoperability while maintaining Navy equities.
- Must have excellent verbal and written communication skills.
- Must have the ability to work collaboratively in a team environment.
- Previous BUMED and policy development experience.
Billet Title: Career Planner, Office of the Medical Corps Chief, BUMED
Location: Navy Bureau of Medicine and Surgery, Defense Health Headquarters, Falls Church, VA
Corps: Medical Corps
Tour Length: 36 months (beginning summer 2016)
Mission: Mentor and guide all USN Medical corps officers providing leadership development support and guidance. Integral to selecting and maintaining a competent and professional Medical Corps which is valued by the organization and meets the needs of the mission and the strategic goals of jointness, readiness and value.
Functions: Mentors and provides leadership development opportunities for Medical Corps Officers. Serve as president of the Professional Review Board, responsible for accessions of MC officers, via FAP/TMS/DA pathways. Responsible for reviewing litigation reports quality assurance reports in determination of NPDB reporting. Plans and coordinates the annual USN MC Specialty leader business meeting and the annual GME intern road show. Corps Chief Office liaison to all USN MC Specialty Leaders. Subject matter expert on accession issues pertinent to MC Officers. Serves as member of multiple councils and boards including Medical Education Planning Council and HPSP selection boards. Provides regular AMDOC and ODS briefings relative to the Medical Corps.
Command Relations: Ability to communicate effectively to a 1 or 2 Star Admiral on a regular basis.
Experience Required: Highly recommended to have:
Knowledge of Department of Defense, Navy, Navy Medical Corps policies and instructions and policies of other Federal entities as needed. Experience with recruitment, retention, and public speaking. Networking skills, written and oral communication skills.
Other: Time available to perform clinical work at multiple MTFs in the National Capital Region. Time available to travel for CME. TAD travel possible throughout the year for Medical Corps Chief related events.
POC: Contact your Detailer or Specialty Leader if interested.
NOTE: CV, BIO, and Letter of Intent needed for application.
Although personal finance is a hobby of mine, I’m nowhere near an expert when it comes to student loans because I never had them. That said, I know there are a lot of Navy physicians who do have them and might want to refinance. Anyone who does have loans should check out the White Coat Investor because it is probably the best resource on the web for information on dealing with student loans (and other financial topics). Here is his latest post:
Recently there have been some high level discussions in the Senate Armed Services Committee, including our top Navy admirals, about reforming the Military Health System (MHS).
Here is a transcript of the congressional testimony of Dr. Jonathan Woodson, the Assistant Secretary of Defense for Health Affairs, and VADM Raquel Bono, Director, Defense Health Agency. In addition, here is an article that summarizes their testimony. The Navy Surgeon General, VADM C. Forrest Faison III, also provided testimony that can be read here. My summary of important points includes:
- The overarching strategy for the MHS is what they call the “Quadruple Aim.” This is to ensure readiness, improve health, improve healthcare, and lower cost.
- There is talk of military providers obtain admitting privileges at nearby civilian institutions. We could then provide a wider range of care for military beneficiaries and improve our clinical skills maintenance. In addition, here is an article that discusses allowing civilian trauma cases at more military hospitals.
- The MHS will provide a robust clinical experience to preserve skills and competencies by moving more workload in-house, growing our patient enrollment, rebalancing staff and investing in our graduate training programs.
- The MHS is extending hours to evenings and weekends in a number of military treatment facilities (MTFs).
- The MHS is encouraging the use of telehealth and smart phone applications.
- The Department of Defense (DoD) is implementing a pilot program that allows patients to access urgent care centers without requiring a preauthorization.
- DoD with reduce TRICARE regions from three to two, eliminating unnecessary administrative overhead for both the government and contractors.
- 2016 is the first phase of deployment of the new Electronic Health Record in the Pacific Northwest.
- The MHS will encourage beneficiaries to use MTFs by eliminating administrative burdens that impair access to care.