That’s a bold headline, especially if you are a retired enlisted military member only bringing in a little over a thousand dollars a month in retirement pay. But it’s true. Military retirement is worth well over a million bucks. In some cases, it is worth millions of dollars.
Before we get too deep into this, I want to define what I am talking about. I’m talking about two factors – the long-term value regarding how much you will receive in a direct pension over the lifetime of your retirement benefits and the value of the retirement benefits, including healthcare coverage and other benefits. Combined, these benefits are easily worth over a million dollars, even if you don’t have the spending power of a million dollars right now.
Table of Contents
- How Much is Military Retirement Really Worth?
- Example Monthly and Annual Military Retirement Pay
- How Much is Military Retirement Pay Worth Over a Lifetime?
- Value of Military Retirement Medical Benefits
- Commissary, Base Exchange, and Other Base Benefits
- How to Calculate the Present Value of a Military Retirement Pension
- Financial Discounting – Determining the Long-term Value or Retirement Pay
- Comparing Military Retirement Value to a Lump Sum Value
- Comparing Military Retirement Value to Investing in TIPS
- Comparing Military Retirement Value to Buying an Annuity
- Your Military Retirement is Worth Millions
How Much is Military Retirement Really Worth?
Take an example of retirement pay for an average military career. Since military members are eligible for retirement benefits at 20 years, we will use a reasonable rank and service time for our examples.
It is reasonable to assume that the average enlisted member will be able to retire at 20 years, having achieved the rank of E-7, and the average officer should be able to retire at 20 years at the rank of O-5.
Of course, there will be outliers based on when you served, your career field, and other factors, but these ranks and service times should apply to the majority of careers (if anything, I am aiming at the conservative side because many people choose to serve longer than the 20-year mark, earning an extra 2.5%-3.5% on their retirement pay per additional service year, depending on whether they take the high 36 retirement plan or the Redux retirement plan).
Example Monthly and Annual Military Retirement Pay
As we mentioned, we will look at a military retiree with 20 years of service at the ranks of E-7 for enlisted and O-5 for officers. The base pay for these ranks in 2009 is:
E-7 Retirement Pay Estimate:
- Monthly: $5,232.46
- Annually: $62,789.52
O-5 Retirement Pay Estimate:
- Monthly: $10,081.03
- Annually: $120,972.36
Example 1 High-36 Retirement Plan
Most retirees under the High-36 Plan will receive 50% of their base pay at 20 years, which would equal the following amounts:
E-7 Retirement Pay Estimate:
- Monthly: $2,616.23
- Annually: $31,394.76
O-5 Retirement Pay Estimate:
- Monthly: $5,040.515
- Annually: $60,486.18
Example 2 Blended Retirement System
Those under the BRS would receive 40% of their base pay at 20 years (2% per year of service), which would be the following amounts:
E-7 Retirement Pay Estimate:
- Monthly: $2,092.98
- Annually: $25,115.8
O-5 Retirement Pay Estimate:
- Monthly: $4,032.41
- Annually: $48,388.94
How Much is Military Retirement Pay Worth Over a Lifetime?
The next factor to consider is that military retirement pay will be there day in and day out. There are few places in the world that someone can receive a lifetime pension starting at or around age 40. Many military retirees will receive a monthly cash payment for over 40 years. When you add in the cost of living and inflation adjustments, we’re talking about some serious cash!
Using the numbers above from a recently retired E-7 or O-5, we get the following lifetime payments (note: these military retirement pay numbers are not adjusted for inflation and do not include any COLA increases; this is not a planning tool, but for illustration purposes only. Your specific retirement benefits will vary based on your situation):
Cumulative Retirement Pay Under High 36
E-7 Retirement Pay Estimate:
- 20 years: $627,895.20
- 30 years: $941,842.80
- 40 years: $1,255,790.40
O-5 Retirement Pay Estimate:
- 20 years: $1,209,723.60
- 30 years: $1,814,585.40
- 40 years: $2,419,447.20
Cumulative Retirement Pay Under BRS:
E-7 Retirement Pay Estimate:
- 20 years: $502,316.20
- 30 years: $753,474.30
- 40 years: $1,004,632.40
O-5 Retirement Pay Estimate:
- 20 years: $967,778.80
- 30 years: $1,451,668.20
- 40 years: $1,935,557.60
Even without COLA or other inflation adjustments, we can see that we are reaching some serious numbers. Each additional year you serve before you retire can add another 2.5% to your monthly and annual pay, and each higher pay grade you achieve can add hundreds or even thousands of dollars per year. As previously mentioned, the numbers used in this article are meant to be a conservative estimate.
Value of Military Retirement Medical Benefits
OK, there is a minimal annual Tricare payment, but compared to what civilians pay, it is basically a non-issue. Healthcare benefits for military retirees are also guaranteed – they won’t drop you after you have required expensive procedures or for preexisting conditions. Guaranteed medical coverage is a massive blessing in today’s society.
Here is a little more information about the kinds of insurance available to civilians: comparing individual and group health insurance. Hopefully, that will help you better understand the value of military retiree medical benefits!
Military-sponsored medical benefits are incredibly valuable, especially as you age, and when the benefits also cover your spouse. There are very few similar civilian healthcare plans. Most people spend over a thousand dollars per month for basic medical coverage, which often doesn’t include out-of-pocket expenses for doctor visits, co-pays, medical procedures, prescription medication, or other associated costs.
It would not be unreasonable to place a value of $15,000-$20,000 per year on military retiree medical benefits, even for a healthy individual. Add a spouse to the benefits, guaranteed coverage, and little to no out-of-pocket expenses for complex medical procedures, and you can easily double or triple that number.
Medical benefits alone can be worth hundreds of thousands of dollars or more throughout a lifetime (and sometimes into the millions of dollars for people who receive complex medical care over a long-term period).
Commissary, Base Exchange, and Other Base Benefits
I won’t even try to assign a value to these benefits because they don’t apply to all military retirees equally. Some people may practically live on base, visiting the base clubs, shopping at the Commissary and Exchanges, using the gyms, auto hobby shops, etc., and others may not live near a base. They may not be able to take advantage of any of these benefits. So this category falls in the “good deal if you can get it” benefit but is not a core part of the equation. But it is worth mentioning because many retirees save a lot of money each year by shopping on base.
How to Calculate the Present Value of a Military Retirement Pension
One challenge to the analysis is that the military pension includes a cost of living adjustment, so the amount of the income stream has to rise every year by the rate of inflation.
Another problem is that no one knows how long the pensioner will live, so it’s difficult to predict how long the pension will be paid out.
Finally, the calculated lump sum must be invested in a safe and stable asset to ensure it survives for decades. Unfortunately, the safe and stable assets have a very low yield, so it takes a larger lump sum to produce an income stream big enough to pay the pension.
Financial Discounting – Determining the Long-term Value or Retirement Pay
The answer to these puzzles involves the mathematical process of “discounting”.
Accountants and actuaries devote their entire careers to studying asset yields, human longevity, and other risks. They calculate the statistical probability that a specific lump sum can pay a particular pension for the necessary number of years.
The good news for pension recipients is that the calculations are much more accurate when the analysis is simultaneously applied to hundreds of thousands of pensions as a group. Even better, the Department of Defense can rely on the number-crunching skills of another giant bureaucracy of inflation-adjusted payments: Social Security.
The mathematical details of discounting an inflation-adjusted annuity are well beyond the scope of this post. There’s not an easy formula to convert that $100/day pension to a precise lump sum. However, a few more straightforward estimates are reasonably close to the more complicated methods.
Comparing Military Retirement Value to a Lump Sum Value
The easiest estimate assumes that a military pension keeps up with inflation. This eliminates the more complicated factors of correcting future dollars for inflation. If a military pension keeps up with inflation then the pension’s value in today’s dollars stays constant.
The lump-sum value of the pension is the total amount to be received during the rest of the veteran’s life:
- Lump sum = (annual pension amount) * (remaining life expectancy)
A 38-year-old veteran receiving $3000/month with a COLA might reasonably look forward to 35 more years of life. The estimate of the present value of their pension would be
- Lump sum = ($3000/month) * (12 months/year) * (35 years) = $1,260,000.
The life-expectancy estimate ignores other discounting factors in favor of simplicity and speed. Its main advantage is that veterans can quickly estimate a lump sum for their expected lifespan. Veterans in good health with long-lived ancestors may decide that they have 40 or even 50 years of retirement, raising the current value of their pension.
Comparing Military Retirement Value to Investing in TIPS
Another quick estimate is to assume that the pension is the income stream from a lump sum of Treasury Inflation-Protected Securities (TIPS). TIPS are an extremely safe and stable asset with built-in inflation protection. The market for buying and selling TIPS is huge and liquid, so their prices are reasonably accurate.
One flaw of this estimate is that, unlike a military pension, when the pensioner dies, there’s still a lump sum of TIPS generating a stream of income (though participating in the Survivor Benefit Plan will continue to provide cash flow to the retiree’s surviving spouse, if there is one).
Another drawback is that a TIPS’ maturity (now a maximum of 30 years) is usually less than the pensioner’s remaining life expectancy.
The advantage of this estimate is simplicity and speed:
- Lump sum = (annual pension) / (TIPS annual percentage yield)
A January 2009 Treasury auction sold 20-year TIPS at an inflation-adjusted annual percentage yield of 2.5%. So for that $3000/month pension,
- Lump sum = ($3000/month) * (12 months/year) / (.025/year) = $1,440,000.
Comparing Military Retirement Value to Buying an Annuity
Another estimate of the lump-sum value of an inflation-adjusted pension is a commercial annuity. The annuity market is generally regarded as liquid because insurance companies compete to offer the “best” price without losing money. However, they still charge more than the actual value of the annuity to make their profit.
Insurance companies could be unable to make annuity payments or even go bankrupt and should be considered a riskier source of annuity payments than TIPS or other government bonds.
One of the “less risky” annuities comes from an agency sponsored by the federal government– the Thrift Savings Plan. TSP annuities are purchased from an insurance company. The federal government does not guarantee them, but the insurance company is presumably charging a smaller fee (to sell a large volume of annuities), and the annuity’s cost would be closer to its value.
TSP annuities are priced monthly and do not offer complete protection against inflation. The advantage of estimating a pension’s lump-sum value from a TSP annuity is its lower price and the TSP website’s calculator. Assuming that the $3000/month pension is paid to a 38-year-old veteran and limited to 3% annual inflation:
- Lump sum (TSP website annuity calculator) = $1.4 million.
$1.4 million is the price that a veteran would pay in the market to buy a TIPS portfolio or an annuity that would yield their inflation-adjusted pension of $3000/month for the rest of their life. Other research analyzes the theoretical cost of annuities and discounted values– only the cost and not its market price. (This includes a research paper on military pensions– the citation is in the book.)
These estimates range from about $1 million to $1.2 million. They’re only theoretical estimates. These annuities can’t actually be purchased like the assets of the other estimates, but they’re a more conservative estimate of the probabilities of longevity and other risk factors.
Let’s get back to the veteran who’s just finished 10 years of service and is wondering if it’s worth staying in the military for another decade. After analyzing the pension’s present value, which sounds more compelling now: $100/day, or lifetime income of over $1 million?
Your Military Retirement is Worth Millions
Thousands of dollars coming in regularly quickly add up over the years. Add in increases for inflation, essentially free health care, and other benefits, and you can see how a military retirement can quickly be worth millions of dollars over a lifetime.
I didn’t stay in long enough to qualify for military retirement benefits – I separated from the USAF with an Honorable discharge after 6.5 years of service. Part of me looks at the military retirement system with a bit of longing. It is an excellent system for those who qualify, and I would love to be able to receive military retirement benefits for the rest of my life. However, separating from the military was the best move for me at the time, and I have no regrets regarding my separation or my military service. I am proud to have served, and the military is a large part of who I am today.
*disclaimer about this article: The calculations are for illustrative purposes only and do not reflect the exact retirement benefits you will receive. This is a simplified look at military retirement benefits and does not take many factors into consideration, including taxes, disability benefits, inflation, COLA, and other factors.
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Andy says
I was raised in Cuba under the oppression of the Castro regime before my parents brought my brothers and I to the US in 1995. I realized early on that this was the most positive life change a child could have – to move to the US from a communist state.
I joined the Army two weeks after graduating high school. I humbly served over 21 years as enlisted and as a Warrant Officer, retiring as a CW2 in July 2022. I now receive retirement and disability benefits, and if I make it another 40 years, my retirement will be worth over $3.4 million. And that is not including the healthcare benefits and all the other things. And, if my wife survives me, she will receive 50% of my retirement and my disability benefits. There are other benefits for military retirees/disabled veterans that vary by state, so I won’t discuss them here.
Now, I compare this with my fellow elementary students in Cuba that either served or are still serving in the Cuban armed forces, who don’t even have food to eat. One single egg costs about $3, one pound of pork meat costs about $20, and the average monthly salary of a Cuban worker is about $100, just to state a few facts. And guess what, potable water is only available for short periods at a time. Electricity is only available for a couple of hours a day, and they get lucky if it’s during the day and they are able to escape the heat in front of a fan.
My point with stating all of this is that America is great. Every US resident should aspire to serve their nation.
Mark says
It’s so worth it to stick with it. Medical alone saves us thousands of dollars per year. I retired after 23 years as an E-8, and my monthly income was $2,292 in 2006. Now it’s $3,437 monthly at age 59. This has allowed us to send our youngest to private school while living in Hawaii. Granted, I must continue to work to live in paradise! So worth it!!!
robert davis says
I retired in 1995 after 20 years in the US Navy. To be honest, there were a lot of things I didn’t like about navy life, being away from my family for Westpac’s, constantly being at sea, and having to move every few years, among many other things. But I’m coming up on 66 years old now. And without hesitation, I have to say that staying in till retirement was without a doubt the smartest thing I ever did in my life. The retirement pay and medical benefits can’t be beaten in the civilian sector.
Dave Twombly says
From the time I used a government pen to sign up at the age of 16 then the transportation, uniforms and equipment .Weapons and ammunition. housing ,food, medical care. serve 21and ahalf years as E7 with 60 0/0 disability . The space A travel and with 51 years since retirement I believe I have received more then a million dollars.
Difu Wu says
The pension is not even close to be worth millions. You can’t just multiply the annual pension amount by number of years to arrive at the pension’s value. Future cash flows have to be discounted, because you can invest each dollar you have today to make more dollars tomorrow.
Even if we take the higher O-5 annual pension amount of $46,184.40, and assume he lives forever, we can use the perpetuity formula = PMT/R = $46,184.40/0.07 = $659,777, where PMT is the annual payment and R is the discount rate. BRS offers a lump sum option for the military pension using a 7% discount rate, which approximates long term historical real stock market return.
Then you have to factor taxes into consideration. While most states exempt military pensions, the federal government fully taxes pension pay. If you have no other earned income, $46,184.40 would probably be in the 12% tax bracket, which means you only get to keep 88% of your pension pay. So $659,777 is worth only about $580,604 for the retired O-5.
CC says
While I understand the formula you are using, you miss a few key aspects of a military retirement. Lets take the O-5. Presume the O-5 joined the service at 25…retired after 20 years. The officers age is 45 at that point. They will receive the retirement of $46K plus cost of living adjustment until their death (spouse may continue to collect a portion until their death). Your PMT/R assumes a flat rate of $46K per year. The actual retirement pay will increase each year. If you included the amount necessary to save for the cost of living, the principal of $659K would have to go up.
Second, you fail to take into account the guarantee nature of the payment. You are using a 7% return rate (historical average of stock market). However, income from private investments that would be guaranteed would have a rate of return well below 2%. If you use the .02 (reflecting risk of investment) instead of .07(stock market average return) you end up with a valuation over $2M dollars.
Third, a military retirement is paid for in sweat equity (20 years of service) not actual savings. Military members do not have their paychecks reduced to pay for the pension retirement. Military members are also eligible for a 403(b)…a 401(k) for government employees.
On the downside, a military pension has no value for the most part upon the death of the retiree and spouse….where cash can be passed on to heirs.
I am not saying a military pension for an O5 has a $2M value. I am merely pointing out that a military pension is different than most any other “investment” and using a private equity investment formula does not necessarily reflect the full value of the pension.
Dave says
CC: this is the best summary. Thanks!
Difu Wu says
@CC: I factored in COLA already in the 7% discount rate I used, which is the REAL stock market return, not nominal. The growing perpetuity formula is PMT/(R-G), where G is the growth rate. If you use 10% nominal return rate and 3% inflation rate, you get the same 7%.
It is important to note that 7% discount rate is not just my opinion. It is the rate used by the BRS lump option option. If you choose the lump sum option, 7% discount rate is what you get.
People who retire from the military generally have decades more residual life expectancy, which is a long term investment horizon. Fixed income options that earn only 2% a year guaranteed are only appropriate for short term savers, certainly not for long term investors.
Over any 30 year period since 1926, the stock market has returned an annualized 8% to 15%. While that is no guarantee the same will hold for the future, it’s pretty close to one, considering that this data included the Great Depression. Arguably, military pensions are not guaranteed either. The government could default or be overthrown.
My assumptions are actually very generous for the military pension. First, nobody lives forever. If you calculate the value of the pension as an annuity instead of a perpetuity, the value would be less.
Second, 12% bracket assumes the retiree has no other income. That is not true for many folks I know. Many retire from the military after 20 years only to work on a GS or civilian job. Using a higher tax rate, such as 24%, would make the pension worth much less. A more realistic value for the military pension is likely to be worth only half a million for the retired O-5, and far less for the retired enlisted man.
cc says
Difu, you are equating value to how much a pension can be sold for. Generally, it is almost never advantageous to sell a pension because it is sold at a discounted rate. Anyone considering doing so should definitely speak with a financial planner (Many VAs provide one) before doing so. It is the same thing as the tv advertisements that offer to buy legal settlements that are paid out over time…a million dollar settlement paid out over 20 years can be sold for immediate cash at a steep discount.
A second way to value a military retirement is replacement cost…how much would it cost in the public market to get a guaranteed payment for life. For example if we look at how much would it take to purchase an annuity for a 42 year old for say $4k payments a month for the life of person and their spouse to start paying immediately, the cost of the annuity would be well over $1m dollars. And the annuity would not include cost of living increases like a military retirement does. There are lots of annuity calculators you can use on the internet if anyone wants to look.
As I said before, a military pension is different than most current retirement plans out there. It is guaranteed…yes the US government could fall as you point out, but if that were to happen any other investment would also be pretty much worthless…and again an unlikely event in our lifetimes. It is not the same as stocks which can have wild fluctuations in value in the short term….which matters for people that are using the money for their monthly expenses.
Simple Sailor says
As several have commented here, the meaning of value can have a different meaning. I took a slightly different perspective looking at my monthly military retirement income stream and VA disability compensation which started at 42 upon retiring from active duty. I’ve read that financial planners often use the 4% guideline for drawing down on a lump sum to perpetuity i.e. .04 x $1M will give you $40K annually to spend…in general. At least in those terms today’s E7 and definitely 05s are in that situation even with the new avg of the high 3’s plan now in place. Plus military retirement Tricare is still small compared to private sector, less than $100/month for me and the spouse. Plus for those drawing VA disability, that portion is tax free. Someone mentioned it definitely was sweat equity so we were not deducted from any of our paychecks while we were on active duty. Of course the drawback to that is 8 moves over a 20 year career which made my wife’s career impractica; no great equity in a house at age 42 moving all over and with mandated govt quarters overseas; the emotional costs of being away from family, missing big events due to patrols/deployments; of course the arduous and dangerous nature of the work itself; and starting over trying to wedge your into private sector work 20 years behind your competitors/peers. So you do earn that military pension in other ways. But now retired with most of my health intact, the pension and health care coverage are definitely beneficial and in my opinion worth at least $1M in that perspective!
Abner says
If I retire from the army at age 45, will I start getting my pension at age 45? Or do I have to wait until 55, 60 etc until I can start receiving it.
Also, can I get my medical benefits starting at age 45 as well?
Thanks for clearing up the confusion, it was a great article!
Ryan Guina says
Hello Abner, If you are on active duty, then yes, you will receive your military retirement pay and medical benefits starting the month after you retire from active duty.
However, if you are in the Army National Guard or Army Reserves, you will not receive retirement benefits (pay or medical) until age 60, unless you qualify for early retirement. If you qualify for early retirement, you would receive retirement pay at the earlier date (no earlier than age 55), but your medical benefits would not kick in until age 60. You can learn more about early retirement from the Guard and Reserves in this article.
I wish you the best, and thank you for your service!
Helen says
My fiancé just retired from the Military on the 25 of September, he stopped at Washington DC to do his paperwork. Now he had been trying to get his money from the bank account and is unable to withdraw money. Why?? Is there a problem with the bank account? Please explain to me why can’t he withdraw money from his account?
Thank You
Shellie G says
I hope someone can provide me with an answer or point me in the right direction. In 2010 there was a study done on the value of a military ID card (http://bipartisanpolicy.org/wp-content/uploads/sites/default/files/BPC%20AEI%20Military%20Compensation%20Chartbook%20July%202014.pdf). However, does anyone know where to find an actual legal case that used the ‘value of the military ID card’ to determine equitable distribution if a military member and spouse divorce and they don’t meet the 20-20-20 rule (they have 20-36-18? (20 yrs military service, 36 years marriage, 18 years of the marriage overlap the military service). Thanks so much
John S says
I earn $2566 a month in retirement after deducting taxes, SBP, TRICARE, & VGLI. I receive $2177 a month in VA SC disability. I also use the Post 9/11 GI Bill to receive $2701 a month for 9 months a year. Earning $81,243 a year is not bad!
I retired in 2016. I was an E-7 with 24 years/one month and and get a 10% increase in retirement pay due to earning a Soldiers Medal. I was rated 90% by the VA and I am attending UMUC while residing overseas permanently in Europe.
UMUC pays $2301 per month because their zip code is in the Maryland DC area. It’s a high cost area just like Europe. I also get a “kicker” of an extra $400 per month because I initially enlisted under the Montgomery GI Bill and into a critical skills MOS. Hence $2301 + $400 = $2701. Life is good.
Dale says
How will military retirement be guaranteed as Washington is running out of money and it appears the Chinese Yuan will be the World currency possibly by 2014. Washington is looking to turn the military retirement into a 401K program which will save them money. To me this is a caution flag that Washington will not be able to pay retirees. If this is the case….be prepared….war in the streets of America!
Eugene T. says
Another way you might look at it is to establish a capital value of your retirement, i.e., determine what sum of money you would need invested to yield your annual retirement figure.
Using the 1/2 pay MSgt figures above: E-7 Annually: $23,972.40… and figuring a 2% return (well above bank interest, at this time), you would need a principal sum of $1,198,620 to yield the stated annual retirement…
Ryan says
Cliff, it is a great deal for those who are able to complete the 20 year service requirement. I thought long and hard about joining the Reserves after I separated from Active Duty, but it didn’t work out for several reasons. The Reserves is no longer an option I am considering, but I have a lot of respect for those who choose to continue their service. 🙂
Cliff says
Ryan,
Continue to serve in the reserves for 20 years and at age 60 your benefits will be almost identical to someone who served on active duty for 20 years! Now that’s really a great deal!
Bill says
You need to check your #’s again if you think the reserve will be the same as Active Duty.. not even close
Eric Forrest says
In numerous articles I keep noticing the following: “Most retirees at 20 years will receive 50% of their base pay, which would equal the following amounts:” Then it continues to show an amount equal to 50% of the base base upon retirement. The it also states the medical benefits.
1. For “most of us”, the real amount is the average of the prior 36 months of basic pay, which is less than 50% of the final basic pay upon retirement. Accuracy is important. Plus, we received no increase for 2010 due to the COLA calculations, even though our real cost of living rose.
2. Second, medical coverage must be paid for (although a great rate), and fewer doctors on installations is forcing more to go downtown and pay the co-pay amount.