Recently, I completed a book focused on saving for retirement. As I listened to the audio book, the author shared high numbers that would help ensure your family wouldn’t run out of money along with tips on how to retire early. The numbers provided felt overwhelming and daunting. The book led me to start deep diving into my spouse’s and my own retirement accounts, calculating numbers and wondering how to get from here to there. But one thing was missing in the calculations. The military retirement pension my spouse is set to receive when he retires from the military.
I knew he would be receiving a pension for as long as he lived after service with the potential to pass it on to me if I outlive him. But I didn’t know how I could convert his pension into a number to show us the value of the pension. Having a number would allow us to calculate how much we truly needed to invest for our future. Knowing its value gives us a clear goal to ensure we can retire and be financially stable.
How Do You Calculate the Present Value of a Pension?
A little bit of internet research can lead you to a lot of different tools to help you calculate the present value of a pension. There are a number of charts that simplified the process to multiplying a number by how long you expected a pension to last. There are also various formulas with detailed formulas that required inputting numbers to calculate your pension’s present day value. While calculating the value of a pension is technically a mathematical equation, there is this challenge that none of us know how long we will live. So it becomes more of an art than a science.
The good news is that the pension doesn’t ever run out while you are alive. This means you can have peace of mind because if you under estimate the value and live longer the benefit will still be there.
When you calculate the value of a military pension, it adds up quickly. Even what feels like a small pension is worth a lot of money over time. For example, if you have a military retirement of $2,500 (approximately half of E-5 pay as of 2025), you would have a present value of over $1.3 million assuming you retire around the age of 40 with a life expectance of 78 years. For a military retirement of $5000 (approximately half of an O-4 pay as of 2025), the present value is over $2.6 million with the same assumptions.
These numbers are amazing, especially when you consider they are not based on risk and instead our guaranteed entitlements. This entitlement starts when you leave the service. Many people choose to or must continue to work to help make ends meet or expand their current lifestyle until closer to retirement age.
Making Your Pension Go Further
For many years, we have looked at my husband’s retirement to increase our income while we continue to work. But now we are thinking differently about retirement and asking the questions: When do we want to retire? What do we want life to look like now and when we retire? This has led us to consider how we can use his military retirement pension to hit both current financial goals and the eventual goal of retiring early.
It is reframing a retirement pension as additional income to whatever career my husband chooses. And instead, seeing how we can use that additional income and not change our current standard of living. The pension will give us flexibility on what happens next and is one of the values from military service we didn’t quite understand until now.
Of course, the full pension does not all have go to retirement savings. Truly, I think it is worth indulging in areas that may have been out of reach before retiring from the military. Instead it could be spread out over a number of different financial areas, such as:
- Paying down debt
- Saving for upcoming college for children
- Building up a savings account
- Travel
- Retirement savings
- Anything that is an important financial goal for your family.
Reframing How to Look at a Military Pension
Instead of looking at your military retirement as additional income if you decide to work after you retire from the military, it can be an avenue for you to reach your goal faster. If you want to retire early, figure out where you need to be at the age you want to retire. Then calculate the present value of your pension at the retirement date and add it to your retirement planning. Maybe you want to pay for your children’s education. You can set aside some or all of your retirement pension to save for your children’s college. Or possibly you have large debt, like a home, car, or other large expense. Paying off that debt quicker with your pension may give you the financial security and freedom for the future.
There are so many options and creative strategies to help make your pension work for you and your goals. Reframing your mind on how you look at your military retirement pension can change how you view it and its value.
