Consider the following...................
So let's take an example of an E-7 with 20 years of service. He entered service in 1984, so he's under the High-3 plan. His average basic pay over the past three years is $3,342 per month, and 50 percent of that average equals a retirement pension of $1,671 per month, or $20,052 per year.
For an E-7 who has been in the military for 26 years, retirement is calculated under High 3. This calculation is 2.5 percent of basic pay for each of his 26 years of service, or 65 percent of his annual basic pay at the time of retirement. At current pay rates, he makes $3,855 per month, or $46,260 per year, so the pension for that E-7 retiring after 26 years of service is $30,069 per year.
Since most civilian workers today do not have pensions, they must save enough during their working years to give them a monthly income in retirement that will last their lifetime. Here's an idea of what you would have to do on your own to replace your military pension's value:
• You would have to calculate how much you would need to retire at age 65 or earlier and manage your retirement account so that it increased to this amount while you are on active duty.
• You would have to maintain your retirement kitty after you retire and invest it so that you have a monthly income.
Military pensions are guaranteed, but managing your money to create your own pension is not. Military pensions also are adjusted each year for inflation, although the adjustment is often less than the actual percentage increase in the Consumer Price Index.
So, going back to the E-7 with 20 years of service, what is his military pension of $20,052 per year really worth? Most experts agree that to ensure your retirement funds will last a lifetime, you cannot take out more than 4 percent of your capital each year. If you wish to increase your retirement income each year to keep up with inflation, a 3 percent withdrawal from capital each year is a more reasonable figure. To replace an annual pension of $20,052 based on a 3 percent withdrawal rate, you'd need $668,400 ($20,052 divided by 0.03 equals $668,400).
What is the possibility of accumulating $668,400 over 20 years on your present salary? Even if you assume you can take out 4 percent of your nest egg each year and not use up your money in your lifetime, you'd still need a nest egg of more than $500,000, without allowing for annual increases for inflation.
A pension of $30,069 per year would probably require $1,000,230 in retirement savings.
It is possible to purchase a retirement annuity for you and your spouse with your retirement nest egg. This would give you guaranteed income for life, but it would not increase each year to adjust for inflation. So in 36 years at 2 percent inflation, your money would be worth half as much and your lifestyle in retirement would decline.
Bottom line: A military pension is a very valuable benefit. If you had to save the money to provide your own pension, you would need at least $668,400 to create a pension of $20,055 per year adjusted for inflation. And the continued payment of the monthly pension would depend on the performance of your investments.
