Introduction
I've noticed a lot of issues with how some tools estimate the overall value of the military pension. The most common method I've seen is to simply add up how much you would earn from the pension over your lifetime. (i.e. Life Expectancy (years) x Pension Annuity ($ per year) = Total Pension Value) According to this method, someone who retires as an O-5 at 42 and lives to 85 will have a pension "worth" $5,921,350 under Hi-3. (There's a reason why the official DoD retirement calculator uses this method.) By looking at this, the naive assumption is that you would need to save up almost $6 million by the time you're 42 in order to match the value of the military pension. A near impossible task, even if you never joined the military and started saving from 22 years old!
However, this method is extremely faulty. Of course, it would be completely true if you're planning to put all of your retirement savings under your mattress to earn a 0% return rate. But most people usually put their life savings in retirement accounts that gain value over time. If you consider this, the savings you would need to match the pension's value is greatly reduced. In fact, with a modest 3% return rate, the savings requirement for the previous scenario is cut to "only" $3 million.
This tool was designed to estimate how much in savings you would need to match an active-duty pension, rather than how much money you will earn from the pension. It does this by developing a retirement plan with the following requirements:
- Your initial withdrawals from savings must match what you would receive from an active-duty pension.
- The amount of your withdrawals will increase to match the cost-of-living adjustments (COLA) that the military pension gets.
- Your savings must last from your retirement age to your predicted life expectancy.
Disclaimer
I hope this tool can serve as a useful part of your retirement and career planning, however I must stress that these are estimates and I cannot make any guarantees about the accuracy of the results. It makes a lot of bold assumptions about the future of the stock market, cost-of-living, and inflation. While I certainly did not attempt to make the tool inaccurate, it unfortunately cannot predict the future with a measurable accuracy. I cannot guarantee that if the tool tells you save $XYZ every month that you will have $ABC by your retirement year, nor if it tells you to have $ABC in retirement savings that it will last you for the rest of your life. Regardless, I still hope that this does serve useful to you and helps you make a better informed decision about your career and future.
Scenarios
There are three scenarios this tool can consider:
- If you completely ETS from military service: This scenario estimates how much you will need to save, starting from your ETS date, in order to match the active-duty pension.
- If you ETS and transfer into the reserves: This scenario is very similar to the previous one. The primary difference is that it also considers the value of your reservist pension at 60 years old to reduce your withdrawal requirements.
- If you stay on active-duty until retirement: This scenario estimates the equivalent value of your potential active-duty pension, how much the government is currently "saving" for you each month, and how much the government has already "saved" for you. You can use this as a retention tool or to compare the values of retirement pensions between different timelines. (For example - Retire at 20 years or retire at 24 years) Also supports calculating early retirements under TERA.
If you wish to consider other scenarios, you also have the option to download Excel/CSV versions of the tables to perform additional calculations. The download buttons are at the bottom of the tables.
Assumptions
The calculator makes the following assumptions:
- Annual military pay raises and cost-of-living adjustments are equal to the inflation rate.
- You would have received BAH for wherever you chose to live.
- You will save the same amount of money per month.
- For reserves retirement, it assumes that you will earn 72 retirement points each year after you ETS from active-duty.
Outputs
The calculator will provide the following outputs:
- The estimated value for your potential active-duty pension.
- Savings needed to match that pension during retirement.
- How much you will need to save per month to match it by your retirement date.
- (Optional) The estimated value for a reserves pension at 60.