Sign Up | Login
Explore | Questions | Tips | Journals | My Portfolio | My Badge
View this member's other questions

Military retirement pay

Posted by exvit on 3/2/2010 at 3:40 AM | 10 answers | 1642 views
Where should I count military retirement pay in my net worth? It's not like a 401K or similar account. I am guaranteed income (adjusted for inflation annually) of about $35K/year until I die. I am currently 40 years old...assuming at least 30 more years...this is well over $1.2 million. Should I count that whole total in my net worth?

Answers

I am not sure how to calculate a pension towards networth, although it is guaranteed future income, you don't know how long you are going to live, and it probably cannot be cashed in for a lump sum. I did a google search and found that some companies offer either a pension or a lump sum, but that is a one time decision that can't be switched.

A pension is similar to a paycheck or a social security check, and I wouldn't count a paycheck as part of my networth until it is in my bank account. I am going to continue to earn $70,000 plus inflation adjustments for the next 31 years (hopefully), but that $2 million+ isn't included in my networth.

If there is a way to find out a lump sum value of the pension (if something like that is available), that is what I would include in the networth, in the other category. I would definitely count the pension as part of the income section of the profile.
Yeah, your military pension is like job income. It would be added to your income tier, and once you start receiving it and saving it (not spending it), your net worth will gradually climb over time.

If you got a lump sum cash payment at once, that would go towards your Networth Cash.

For kicks, you could do an estimated Net Worth for say 30 years from now. You can roughly estimate your total income pension and then ALL the expenses you would pay out over the next 30 years (all big assumptions of course).

I used to do this to see the hypothetical charts and inspire myself to save more to make the rough projections a reality.
I wouldn't put it in net worth if it's not vested yet and it's not even liquid. The way I look at it, is until it is partially or fully vested, i.e. fully guaranteed to you and you have access to it, I would completely leave it out of net worth.

Once that does happen, you can 1) put it as a cash flow over time: add each distribution to your income as it comes, or 2) present value the entire notional.
Thanks. I have done some research and talked with my financial planner. There are basically two schools of thought with guaranteed pensions and he essentially said that the military retirement pay is in a special category. One, out of almost all pension systems out there, it is one that is highly reliable and virtually guaranteed. Two, it adjusts for inflation, is payable immediately upon leaving the service (2 more years for me) and guarantees other protections. Both these aspects make it different from a pension from most civilian companies. Also, according to him and the research I have done, you can look at it like you good folks have said or like an annuity in a way (although one you can't just liquidate completely). If you treat it like an annuity, to realize the cash payments I will receive, it would be equal to just over $1M (assuming at least a 30 year payout). That annuity would be in my networth. But, noting the liquidity problems, some do not count it. Again all...thanks for the input.
My Hubby is a firefighter with a pension, I wondered this too, thanks for asking.
I don't include my military retirement pay in our networth -- but I do include it in our retirement planning.

While it may not show up in the overall "number" -- it certainly provides a stable amount of income that allows some flexibility in your overall future -- both financial and personal!

Cheers!
I had the same question when I first joined here with my state retirement plan. I was advised to treat it like an annunity. You can calculate the value at www.firecalc.com
My husband has a teaching pension that builds up with his contributions so it's easier for us to just add that amount into our "Retirement" category. If he didn't conrtibute anything, we wouldn't include it in our net worth at all.

I have heard someone say that a $40,000 annual pension is the same as $1,000,000 in the bank since retirement planners suggest withdrawing 4% a year and $40,000 is 4% of $1,000,000.

In your case, a $35,000 a year pension could be the same as $875,000 in the bank...maybe you could see it that way...
Net Worth is basically the net amount of money that you would leave behind should you die today. In the case of military retirement you could count the amount money your surviving spouse would receive between your death and your spouses projected life expectancy.

Would you like to answer?

Sign up for a free account, or sign in (if you're already a member).