How do you convert a military pension to arrive at a lump sum amount saved for reference/comparison purposes?
People claim you need X amount (for example $1,000,000) to live a comfortable retirement, but I have a pension. How do I determine what portion of that amount (or any other) I've already met with my pension?
Answers | 3
I always like to work that question backward: "How much do I need to live?" is where I start. That means that I pull out a budget sheet and work through my expenses. If retirement's a long way down the road,don't worry about finding exact numbers....you'll keep honing your retirement budget along the way.
Once you have a number that's in the ballpark, THEN see how much of that your pension covers. I like that approach better because it addresses YOU and not an arbitrary rule of thumb. When I was an advisor my client was ALWAYS different than the rule of thumb.
So, say you are going to need $75K in annual income to maintain your household, medical costs, travel and hobby costs, etc. That means you would need $75,000/0.04 = $1,875,000 - $1.9 mil sounds like a lot, but this is equivalent money, not cash in the bank.
Assume you are a couple, with combined Social Security of $3,000 a month. That becomes 3,000 x 12 / .04 = $900,000 (equivalent)
Assume your military pension will be $2,500 a month.
That becomes 2,500 x 12 / .04 = $750,000 (equivalent)
Say you've been putting money into the Thrift Savings Plan or IRA's or whatnot and have accumulated $200,000
That's simple -- it's $200K
So, you have $900K (equiv) from Social Security, $750K (equiv) from DOD, and $200K in retirement accounts -- total to date is $1,850,000 in cash and equivalents,
or 1,850,000 * .04 = $74,000 in expected income per year.