Summary

In this episode Amy and Mike discus the financial value of the Blended Retirement System (BRS) pension and how to determine how much more one would need to earn in a civilian job to equate to the value of the pension.

Takeaways

– Military members often consider separating at various points during their career
– Many don’t really know how much more they’d need to earn or how much their pension is worth – The financial value of the BRS pension can be approximated using a Single Premium Immediate Annuity (SPIA)
– Individuals considering separating from the military should consider numerous factors such as taxes, healthcare benefits, and quality of life calculations should be done based on individual circumstances and assumptions

Chapters

00:00 Valuing the BRS Pension
02:06 Considering Factors in the Retirement Decision
03:50 Using a SPIA to Approximate the Pension Value
08:19 Quotes for the SPIA
11:27 Calculating the Amount Needed to Replace the Pension
19:30 Considering VA Disability and Other Benefits
25:16 The Need for a Retirement Calculator

Operation Retirement Readiness: www.operationretirementreadiness.com

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Disclaimer: This podcast represents the views of the hosts and any guests. It is for informational purposes only and should not be considered tax, financial, or legal advice. All information is regarded to be from reliable sources. The hosts are not responsible for any losses, damages, or liabilities that may arise from the use of this podcast. This podcast is not intended to replace professional, individualized advice.

TRANSCRIPT

Mike (00:00)
We just completed our blended retirement system or BRS overview series and we got several questions about how do you value the, you know, how much that pension’s actually worth because a lot of people, you know, may consider separating and they’re trying to figure out, you know, what would I need to make on the outside to kind of be equivalent to the value of the pension.

Amy (00:20)
And there’s a ton of factors that go into this decision, but today we’ll break down the financial value of the BRS pension and show you how you can figure out how much more you would need to earn in a civilian job and save to equate to the BRS pension value.

whether to get out or stay in the military until retirement is a huge decision for you and your whole family. While I think people often think about how much more they can make on the outside, if they’re not really thinking about the value, the true value of the pension, they might think that the grass is greener on the other side when it’s really not.

Mike (01:34)
Yeah, I I had several sets of spreadsheets when I was mid -career and, you know, trying to figure out that it was based on the old retirement system. And I really hadn’t run the numbers on the new BRS until I got a couple of questions recently. So I was still surprised that even though you have a little bit lower repayment cap on the newer BRS pensions, that the values are still pretty high.

and how much you need to make on the outside could be significant if you’re in that mid -career phase.

Amy (02:04)
So just to recap, the BRS has a pension available for those who serve at least 20 years. We went through this the last couple of podcasts. Each year under the BRS, instead of earning 2 .5 % per year that you’re serving, you earn 2 % per year.

And that’s 2 % of your high three of base income. So at 20 years, you’d get 40 % and at 25 years, you’d get 50%. But BRS then in order to make up for that half percent differential, there’s a matching component to the Thrift Savings Plan as well as a mid -career bonus option.

Mike (02:47)
Great, thanks for recapping that. We think about the value of staying versus going. On the contribution side to TSP, that’s really not much of a factor in our calculations here. We’re mainly going to talk about the pension because most other companies on the outside also provide some type of match in a 401k. So again, to simplify this,

primarily going to be looking at the pension, which is the big piece. And it’s how do you replace that monthly check you’re going to get for the rest of your life. Also, it’s inflation adjusted, which is kind of a unique thing that even if you got a pension on the outside, a lot of times those are just a fixed amount that stays the same over your life or maybe has a small fixed COLA that it provides. So,

How do you think about valuing a pension?

Amy (03:43)
Yeah, so the biggest, you know, one of the biggest components of the value of your pension is, how long you live. But absent kind of knowing those things, we can make some assumptions and we can go out and use some products.

to kind of get an approximation of what your pension’s worth. And one of those products is called a single premium immediate annuity or a SPIA. This is where an insurance company takes a lump sum of money from you. So you pay them a lump sum of money and in return they provide you a contract that promises to pay a certain amount of money each month for the rest of your life. Now most SPIAs don’t have an inflation

connected component. But they might have something where you can get like a 2 or 3%. I’ve seen some as high as a 5 % increase annually, but you’ve got to pay for that.

Mike (04:43)
The other thing we really don’t know is what your pay is going to be exactly when you retire. It’s inflation adjusted. We can really use today’s pay table and then make some additional assumptions and calculations. So we’re going to start by looking at the pay table for people who would be retiring this year. So we’ll look at an E7 retiring with 20 years, an E9 with 25 years, an O5

20 years and an 06 with 25 years of service at their retirement dates. So an E7 with 20 years will get about $27 ,000 per year in retirement benefits. For the E9, that goes up to about $38 ,000. An 05 at 20 years would get $52 ,000 per year. And an 06 at 25 years would get about $62 ,000.

Now that we know how much we’ll get, we can see how much that would cost to buy a SPIA, as Amy talked about, that pays that amount. And there’s one other critical data point that we need, Amy, for

Amy (05:47)
Yeah, and that’s your age because insurance companies are basically they use tables to determine what your life expectancy is, meaning how much they think they’re going to have to pay out over your lifetime. So.

We’ll have to make some assumptions about how old you are when you’re retiring. So let’s just assume that the E7 is 40, the E9 and 05 are 45, and the 06 is 50, just to keep the numbers nice and round. The other assumption that we’ll need to use is that payments are going to be adjusted with a 3 % COLA each year. That’s about what it is these days. That may not always work out, but it’s close.

if you go out and you grab quotes for a SPIA based on the information that we just talked about, what do the quotes look like?

Mike (06:42)
Yeah, so the quotes, again, with the COLA that Amy talked about, the approximate cost for those would be for the E7, it’d be about $800 ,000. For the E9, about $1 million. The 05, $1 .4 million. And for the 06, $1 .5 million.

Now, what I’d say about these is they’re very sensitive to interest rates and the COLA assumptions. You could easily see these, you know, values change by probably 25 % or more up or down, you know, depending on those factors. And then, again, age also, you know, affects that. And then the other thing is

know, ratings of the insurance agencies that you’re using. again, these are are ballpark numbers on what you can probably expect if again, you’re retiring today and had to try to buy a pension that would meet those same numbers.

Amy (07:46)
Yeah. And I mean, let’s just talk a little bit about the interest rates. We’re, you know, in what feels like a high interest rate environment because, know, for the last decade, so the 2010s, we had very low interest rates for a long period of time. So a lot of people are feeling like we’re, you know, way off the reservation with today’s interest rates. And that’s kind of not true. We’re more in the normal realm of interest rates now. Having said that, when interest rates are

It typically means that inflation is a little bit higher.

And if your annuity is pegged to say that 3 % that we’re using, but inflation is higher than that, then you’re losing purchasing power. depending on how things are going, the annuity is about the best approximation that we can get for a simple comparison or a simple explanation of what your pension is worth. But like Mike said, you know, just know these are not exact numbers. But let’s just take the numbers as they are.

These numbers are in today’s dollars. So, you know, even though we were talking about people retiring today Let’s rewind the clock. You are say let’s just for the sake of argument say you’re at year 10 or you know 12 or you know, maybe you’re at year five That means that you know, you have a certain number of years to Be able to save the amount of money that you would need in order to purchase one of these

to replace your pension if you were going to leave and go to the private sector. And so what we have to figure out is how much would you need to save between now and the time when you would be retiring so that you could kind of replace the pension that you’re choosing to leave behind. So Mike, you want to walk us through how to think about that?

Mike (09:41)
Yeah, so for this, just pick the lieutenant colonel, say they got 10 years left and are wondering, should they stay? We said we’ve assessed that it’s going to be about one point four million dollars that they’d need at retirement, you know, in today’s dollars to buy that SPIA. We need to increase that over time by the amount of inflation that will occur over the 10 years while he’s still in. So some of the assumptions.

Basically, that money, the extra money you’re going to get is going to go into an investment, 7 % return on that investment, and then we’re going to stick with the 3 % inflation over that time. Also, part of the assumption is that you’re going to be getting probably about cost of living adjustments each year in your job. So you’ll continue to increase that investment every year for

there’s 10 years at the same 3 % rate. So running those numbers, you would need to start investing about $110 ,000 if you had 10 years left before you retire to make sure you had that money over the next 10 years to buy the annuity.

Again, $110 ,000 for that 05 that’s considering retiring. Amy, are your thoughts on that? Surprise?

Amy (11:04)
Yeah, mean a little bit. Obviously I do this. I run into clients that are thinking about going to the private sector. They want to see a comparison. So a little bit surprised at how big the number is, but not completely surprised. But this is, you know, I see different situations. But I’m guessing our listeners might be pretty shocked and might be wondering where they’re going to find $110 ,000.

Now, if you’re pretty early in your career, you’ve got more time to save. So if you, you know, for example, if this person was at year six of service, they would have longer time. So 14 years to save up money so that they would only quote, only need to save about $70 ,000 per year. And that’s just, you know, it’s still a lot of money. So when you’re thinking about leaving and going and getting a bigger salary, you

to know that that salary has to be substantially bigger and you have to save it in order to make the pension replacement work.

Mike (12:11)
Yeah, and that’s a great point. You actually need to save it. again, the time factor is huge. The more time you have, of course, the more time you’re going to have for it to grow. So that’s really the key to this. So the other thing we need to talk about really is taxes. And there are really several things to consider.

The first factor that will actually increase these numbers is the fact that you have some additional tax advantages as a military member because you don’t pay taxes on your housing allowance or your subsistence allowance. So if you get out, of your tax, all of your income is going to be taxable.

So that could actually drive some of these numbers even higher from 110 to maybe 115 ,000 a year additional that you’d need to make.

Amy (13:06)
Yeah, that’s a really great point. mean, and we see this time after time when you leave the military and you get another job, we often see people jumping tax brackets. And this could happen even if you don’t have a pension. So if we assume, if we’re assuming that you’re gonna invest $95 ,000 a year, you’re saving $95 ,000 a year.

Mike (13:06)
So.

Amy (13:29)
Most of that has to be after tax money because you’re not you’re not going to be able to put enough into a tax advantage to count like your 401k or your IRA you’re gonna have to put a lot of it in a taxable account so it’s after tax money and Really what that means is that your salary might need to be you know $120 ,000 more than your military salary

So that after you get done paying taxes, you still have that $95 ,000 a year to invest. That’s a lot of extra money.

Mike (14:02)
Another big thing is all of this is just to stay even with your current military benefits. It’s not to, you know, an increase in lifestyle and things like that. It’s just to basically stay where you are if you, you know, stay for those next 10 years. The other big value that we have in the military is healthcare. And it’s a little hard to come up with a number on this because

Most private companies, bigger firms offer some flavor of healthcare. Now you’re probably going to be paying part of the premium and that can vary widely. And then if you get a more like a contractor job or you start your own business where those aren’t going to be provided for you, then you’re significant…

tens of thousands of dollars a year that you’re probably paying for you and your family for those. So the other piece where the tricare really comes into play is if you want to retire early. So everybody will get on Medicare at 65, but if you say you want to retire in your early 60s, there’s a few years there where if you get out and work for a civilian company,

you’re going to need to be paying either on the health care exchanges or finding some other coverage for you or maybe your spouse is still working and can use that. But if you both want to fully retire in your early 60s, the health care benefit that you get from retiring is huge.

Amy (15:35)
Yeah, and just to try, you know, tag on to that. So, you know, when you do get to be 65, so, you know, if you leave the military and you’re not under Tricare for life when you’re 65, so Medicare has picked up, you know, you’ve got part A, part B, part D, there’s premiums for two of those parts that are based on your income. In addition, because those things don’t cover everything, A, B, and D, they don’t cover everything.

So a lot of people add an additional sort of either a supplement or Medicare Advantage plan. Those premiums can be upwards of thousand bucks a month. For TRICARE for Life, you’re only going to pay Medicare Part A, which is generally free for most people.

and then Medicare Part B. You don’t need to pay for another supplement or a Medicare Advantage plan. So that is a huge deal. And then the other factor is VA disability. So, you know,

In my experience, most retirees are going to qualify for some level of disability after 20 years in the military. just beats up our bodies. So you can also qualify if you separate earlier, but there’s a better chance, you know, there’s a good chance that if you’re serving for a longer period of time, you’re older, there’s a good chance that your rating is going to be a little bit higher if you stick around. So essentially that could mean, you know, several hundred dollars more in tax -free income each month.

or you know upwards of you know a few thousand dollars in a year.

Mike (17:13)
Yeah, so now we talked about it being pretty advantageous to stay till retirement. But there are definitely some caveats and considerations when you’re thinking about this decision. The first one I’ll hit on again that we talked about is these are pretty broad numbers. Again, I’d expect them to vary at least

25 % either way again depending on the situation when you’re actually retiring or looking to get out so make sure you you know don’t go Mike and Amy said it’s you know $110 ,000 per year and that’s exactly what it is it’s gonna vary you know based on your age your health and all those other things that go into planning and then investment returns inflation taxes all those things we can’t know about now

So, know, Amy, what are some other things besides those kind of big caveats?

Amy (18:12)
Yeah, I mean, so we talked briefly about taxes. Military pensions are fully taxable at the federal level and by some states as well. In our example, we’re assuming that you have to save in a taxable account to buy the annuity. So that means that for the annuity payments, you would actually be receiving some of that money as a return of capital. So meaning that it’s already been taxed, it’s not going to be taxed again.

So theoretically your tax bill could be a little bit lower. The differential may or may not be as big as the differential that we talked about in taxes when you leave the military. So it’s not a one -for -one trade -off, there, you know, it is a consideration that that annuity could be taxed a little bit more favorably than your pension.

Mike (19:08)
Yeah, and another thing, you’ve got some flexibility if you’re saving on the outside. You don’t immediately need to buy that annuity at 20 years. You know, what would have been your military retirement time? So so that is one nice thing for the military. You’re tied to the pension. It’s tied to your life. And, know, it ends when when you die, you know, outside some other factors. But

you know, if it’s if if you invest well and can keep it growing for another 10 years, you know, or longer beyond, you know, when you you would have retired, you know, maybe you can make up more of that difference at that point.

Amy (19:54)
Yeah. And you know, another thing is that it’s not always all about the money. you know, there’s, there’s a lot of reasons that it might be better for you and your family to get out. military life is, is, is rough. It’s hard on, it’s hard on the whole family. You’ve got moves, you’ve got deployments. if you’re able to get out and stabilize in one single location, or at least not move as often, that could be worth a whole lot more to your family and to you than it, than a

It might also allow your military spouse to pursue more stable income or some more stable employment which could offset some of the value of the pension. So with that Mike, any other thoughts to kind of wrap up?

Mike (20:40)
Yeah, those are all great points. I guess I was kind of surprised how much the value is even under the BRS. That was one of the concerns when people talked about this was, you’re taking that away. But I think specifically on the officer side, they really still are kind of golden handcuffs that you hear about that it’s going to be hard to.

as you get into mid -career, find something else that’s going to make you enough to kind of replace that full pension. Which is kind of interesting because my old career field in the Air Force, which was cyber, just announced some new bonuses for cyber officers, I guess, to keep people in the career field. And, you know, the one, they’ve got two kind of tranches of cyber.

And for one, they’re targeting officers in the nine to 15 year range and the other between seven and 11 years with, you know, one hundred thousand dollars over four years, which I mean, is great and hopefully gets more people to stay in. But, you know, based on this, think targeting them earlier, you know, may be better. And then I think for the 10 years and beyond.

You know, DOD should really just develop a calculator with all this information in it and, you know, just send that out to people as they come up on that. You you get your annual statement of compensation where they say, the tax rate, you know, tax free is worth this and your bonuses are this and the commissary is worth this much. You know, add this on there that, that pension, you know, here’s how much it would really cost you to go out and find that.

I don’t know that they ever will do that just because there’s a lot of assumptions based into that. It’s not as easy as a single year snapshot, but I think it’s kind of interesting when you actually do run the numbers how much the pension really is worth.

Amy (22:44)
Yeah, I agree. I was also surprised to some degree. Just one final note to wrap up. It’s important that you do your own calculations. Like Mike said, there’s a ton of assumptions in there. You need to make sure that the assumptions apply to you.

Also, keep in mind, we used an annuity as sort of a proxy for the calculations. That’s not a recommendation that you replace your pension with an annuity. There could be other ways, better planning methods, other tools for you to use in planning your retirement if you plan to leave. That was just sort of

a good way to frame this discussion, so not a recommendation. You definitely need to get some advice unless you can do all of this on your own in terms of doing the calculations, getting comfortable with assumptions, and make sure that you understand how everything is coming together and how it unfolds over time. So with that, Mike, I think we’re wrapped up and we’ll talk to you again in a couple weeks.