Lazy Man and Money

And Just Like That…

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… our lives were changed forever. No, no one has died. This is good life-changing news.

Did you expect something different with that title? Well, I’ve never been a fan of Sex and the City.

The big news is that my wife is changing jobs. That doesn’t seem big on the surface. She’ll still be in the Uniformed Services earning the same officer pay she has for about 9 years now (though it has been adjusted for inflation). One difference is that she knows she’s going to like this job a lot. How does she know? She did it for a few months in an emergency capacity to help with the COVID response. She’d end the work-day saying, “I like this (virtual) deployment better than my regular job.”

It seems that the feeling was mutual because they created a full-time position, called up my wife, and said, “We want you doing this full-time.” She got the paperwork in and it was finalized a few days ago.

This is a good time to catch you up on where she was with her career. She’s been passed over for military promotion eight times now. They keep asking her to do new things such as adding an MBA to her Pharm. D. It took years, but she did it. She became the president of a six-thousand-officer group and was invited to the White House this year (which is typical with that job duty). I go into a lot more detail about how we were hoping to receive the million dollar email. That’s roughly how much the promotion would be worth to us when you factor in current earnings and the future pension increase.

Since she has the pension and we’re in a good financial place she doesn’t need to work. With the combination of a job she didn’t enjoy, the rat race requiring her to do more and more unpaid work, and the annual promotion rejection, why should she stay? That’s why, back in January, we started to plan the exit: Can My Wife Retire? We’ve been saving cash to have as big of a cushion as possible.

As recently as late September, I wrote Where Do We Go From Here detailing how she’s in “for one more year” until her presidency term is up. That happens just around the time that the 2022 promotion list comes out in June. The conclusion is that we had another eight months or so to save cash and finally get out if she wasn’t promoted.

Big Changes All Around

Obviously, working at a job you like with you people you like will change your career outlook. She’s also getting out of all the extra committees and organizations that they recommended she have to get promoted. She’s done them all and it’s time to do less and give other people a chance to hold those positions. Those two big changes will do a lot to improve her work/life balance. That means that the push to retire isn’t as strong.

There’s one more thing though.

Military jobs have a thing called a billet associated with them*. The billet can be translated to General Schedule (GS) levels of government work. Roughly, it equates to the importance of the position. Work at a higher GS level and you’ll get paid more. However, with the military, you are paid based on your rank, not the billet level of work that you do. Theoretically, you could be an O-7 (a top officer) in an O-3 billet and you’d get O-7 pay. You could be an O-3 (a lower-ranking officer) in an O-7 billet and you’d get O-3 pay.

My wife is an O-5 officer, but she’s been in an O-5 billet this entire century. When we moved to California in 2006 it was because we were both in bad work environments, but also because her job offer was an O-6 billet. When we got there they readjusted the billets across the board and it was reclassified as an O-5 billet. When we moved back to Boston in 2013 it was to get closer to our families with our first kid was an infant. But also, the job was an O-6 billet. They reclassified it as an O-5 billet again.

The elephant in the room about the promotion rejection has always been the billet. I’m convinced the promotion board looked at that and said, “This officer hasn’t progressed in 20 years. Why promote her?” The promotion board gives recommendations on how to improve (get an MBA for example) and that’s always been on there.

There’s never been a good solution to the billet problem. I have no confidence in the system – moving for a higher billet seems useless. Since my wife can choose where she works (a very unique position for officers), why uproot the family for a gamble that never seems to pay off? There have been very few local O-6 billets available. The ones that have come up are management positions in Boston – a two-hour, each-way commute from where we live in Newport, RI. My wife technically works out of Boston but has had a generous work-from-home policy (even before COVID) which made living here possible. Managers don’t get work-from-home, so it would be another 20 hours in a car.

The last four paragraphs were a long way of explaining, that this job is an O-6 billet. Officially. She’s accepted the job and is starting early next year.

Last year, they promoted 5% of the officers at her rank. From what we can gather about the scoring system, she would have had it if they promoted 5.2%. They used to promote around 20-25%, but the percentage has been shrinking every year. With the billet problem solved, it feels like this could be the year.

My wife surprised me with something else though.

Pensions are based on the average of the highest 36 months of your salary. If she got promoted she has always said that she’d stay the 3 years to maximize the pension. Now she’s saying that she’ll work another 7 years. We’ll see how that goes, but I wasn’t expecting that to be on the table. Running the numbers, the difference in lifetime earnings (salary plus pension) of retiring now and retiring with the promotion in 7 years is $2 million.

There are a lot of “ifs” and projections in this article. Maybe she won’t like the new job. Maybe they’ll somehow take the billet down again. Maybe she won’t get promoted. It’s impossible to know. However, it does appear to be life-changing right now.

* For any military people reading this, I’m a civilian and I’m going to make mistakes with the terminology, but this is an explainer of how I have understood it to work.

What’s My Pension Worth?

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The short answer to that question is zero, because I don’t have a pension… however, my wife does. She completed 20 years of military service in March, but continues to work (for now).

Pension - Net Worth

Earlier this month, I asked the question “Should You Include Your Pension in Your Net Worth?” and found that opinions were generally mixed. Most (61% in my small Twitter poll) believed that you should include it. This is consistent with how finance professionals and divorce courts view it.

However, there are still plenty of people who feel that a pension shouldn’t be included in your net worth. They explained that a pension is future money that you don’t have and can’t gift in an estate.

I ended up deciding that I’ll keep two logs. One log will count all the traditional assets and liabilities used in a typical net worth calculation. The other log will include the value of a pension and this website. I don’t know if there’s any great value in keeping two logs, but there’s no harm and it is a little work once you calculate the values. Also it doesn’t matter since net worth numbers don’t drive any of our financial decisions.

The first question in the comments of the article was what I wanted to write about today.

“How do you value the pension?”

If you are going to include a pension in your net worth, you have to have a number to plug in there. Fortunately, there are a couple of different methods that we can compare and contrast. For the purposes of this article, I’ll be presuming a military pension, but your pension circumstances may vary. If you are in the military, you may also be interested in “When should you retire from the military?”

1. Calculating Pension Value using Life Expectancy

The first idea that came to mind is to use the simplest math possible. My wife’s pension will be $[X] when she retires. Her life expectancy will be roughly [Y] years. The number of total pension dollar she’ll be paid is “$X * (Y – [current age])” The Social Security Administration has a life expectancy calculator that’s helpful.

Plugging my wife’s information into the calculator shows she is estimated to live another 41.7 years. That’s just as cold as I expected from the SSA. There are other life expectancy calculators that may be more accurate by factoring health and lifestyle behavior. This is good enough, especially because nothing is guaranteed.

My wife is a fairly high ranking officer (so proud!). If she retired tomorrow, her pension would be $55,462 per year. Simple math gives us: ($55,462 * 41.7) = $2,312,765.40 total pension dollars. (Since military pensions grow with inflation, we don’t have to worry about eating up the buying power.)

If my wife continues to work longer, you might think this method would value her total pension as being worth less. After all, she’ll have fewer expected years to collect. However, the pension will grow with more years of service.

2. Calculating Pension Value with with Annuities

On its most basic level, a pension is an annuity. Thus we could look at how much it would cost to buy an annuity equal to the monthly payout of the pension. I found a couple of calculators online, but they tried to get me to sign up and/or give personal information that I believe would lead to a sales pitch.

One showed that it would cost around $1,200,000 to produce the same $55,462 per year in income. I was surprised that it was so low. However, that $55,462 was not inflation-adjusted, so that $55,462 in 40 years from now is really worth $20,655 (assuming 2.5% inflation).

I next looked for inflation-adjusted annuities. Unfortunately, while they exist, they are harder to find and seemingly impossible without getting caught in the potential sales pitch.

For now, I’ll presume that the 1.2M in annuities without inflation protection would be about the same as the 2.3M number by using life expectancies when inflation protection is factored in. It at least seems plausibe.

3. Calculating Pension Value with Treasury Rates

A third way to look at a pension is by using Treasury Inflation-Protected Securities (TIPS). If someone gave you $1 million dollars and you put it in these, extremely safe investments, how much money would they generate each year. Current treasury rates between the 20-year and 30-year are very low, with an average of around 0.85%.

Thus we could say that hypothetical gift of a million dollars would yield only $8,500, a far cry from the $55,462 number we are aiming for. We need to work it backwards and take the $55,462 number and divide that by the 0.85% yield.

The result is that the pension is worth $6,524,941.18. That seems very wrong! It seems the problem is that interest rates are just too low.

What if we use another metric? The 10-year government bond rates is currently 2.33%. Using is makes the estimated value $2,380,343. Thus, if you invested $2,380,343 and were able to get a relatively safe 2.33% interest rate, you’d get $55,462 in interest.

However, the 10-year government bond rates are not inflation-protected. Twenty years from now, the $55,462 that you get back from that calculation will not have the same buying power.

4. Calculating Pension Value with a Finance Calculator

I found an interesting article on Sapling.com about calculating pension value. It uses a financial calculator, which is something that I’ve never been good at. It looks like this might be worth more value when you are looking at a point somewhere in the future when you get access to the pension. For us, it doesn’t seem to work since that date is not determined.

Final Thoughts on What a Pension is Worth

It’s hard to put a definitive number on what a pension is worth. However, considering that the first, second (after inflation-adjusting), and third calculation all came to about the same $2.3 million number, I will use that for the second net worth log.

That’s a very, very large number. It’s so big that it dwarfs much of our other financial assets – as you would expect. That’s why I’d keep it in a separate net worth log. It’s also a good time to reflect that I created this blog and have written about FIRE for the last 13 years because I knew my wife’s financial contribution wasn’t just her salary, but also a large stream of passive income. In 13 years of time, I haven’t been successful in creating $55K+ of annual passive income to match her. However, our alternative income is getting very close.

I don’t believe there’s a firm right or wrong answer to what a pension is worth. Fortunately, this is one area when a reasonable estimate is usually good enough.

Our Early Retirement Plan: Motivation, Numbers & Tools, and Conclusion (Part 5)

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If you are just starting this, I suggest you start at The Introduction – Part 0. Alternatively, you can jump to Our Early Retirement Plan: Where We Are Now (Part 1), Our Early Retirement Plan: My Personal Income (Part 2), Our Early Retirement Plan: My Wife’s Plan (Part 3), or Our Early Retirement Plan: Obstacles and Expenses (Part 4).

In the end, for us to succeed, we are going to have to continue to be motivated towards our goals, continue to learn about better ways to reach them, and act on the things that matter.

Part of the learning and motivation come from reading articles like the Money Magazine one that I highlighted in the beginning. Still others may come for friends and peers like My Dollar Plan’s escape from the rat race.

In part 2, I mentioned that retirement planners suggest that you can withdrawl 4% of your retirement nest egg each year and still maintain the principle. When I looked at our finances, we aren’t close to having the funds to live off of that. However, when you add my alternative income from “retirement lifesytle jobs”, an inflation-adjusted pension, two modest retirement nest eggs (and time to grow them), two investment properties, it may turn out to be a decent income. If we continue to practice our frugal lifestyle and catch a few breaks (me doing the child care while working – if possible, and getting cheap health care from the military), I think the plan is entirely possible. It’s easy for me to sit here and speculate, but what about a real world test? Glad you asked.

One of the most useful pieces of software is Bill Sholar’s FIRE Calc. I ran some rough numbers through there to see how we’d do. Looking at the publically available military charts it like my wife should have a military pension of around $50,000 in today’s dollars indexed for inflation. At the same time, my websites and businesses should be at least at $48,000 in annual income in 11 years. This is an extremely conservative estimate as I should make $40,000 this year – and I see a lot more growth on the horizon. Next we looked at what our expenses might be. Our rent, our biggest cost, is $24,000 this year. I suspect that we could easily get by on $50,000 given our frugal lifestyle. Just to build plenty of wiggle room, allow for some great vacations, or save some money for the potential children, I estimated that we’d need $80,000 a year. These numbers disregard any potential income from social security, our investment properties, or savings my wife might make until she retires. The calculator says that we could live until age 100 with around 11 million dollars. That might sound like a lot, but it is closer to $1.5 million in today’s dollars – still not chump change.

My hunch says early retirement is possible. The FireCalc tool seems to say it’s possible. It’s going to be something that I’ll have to look at every year, but at this point it looks like we are on track.

Our Early Retirement Plan: My Wife’s Plan (Part 3)

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If you are just starting this, I suggest you start at The Introduction – Part 0. Alternatively, you can jump to Our Early Retirement Plan: Where We Are Now (Part 1) or Our Early Retirement Plan: My Personal Income (Part 2).

Before I start, I should come clean. I’m going to be putting some words in my wife’s mouth. We’ve talked about things a bit and this post is a result of those conversations.

I’ve mentioned in the past that my wife is a pharmacist in the military. As such she gets a few different types of pay. She gets her base pay, a cost of living adjustment (COLA), a housing stipend, amongst others.

Tax Benefits

  • The housing stipend is paid to her tax-free. – This stipend is a pretty huge sum of money because it’s adjusted for home prices in the area of office. Since my wife works in San Francisco, one of the most expensive places to live in the US, she gets a lot of money. This money about 50% more than our actual rent. We pocket the rest – one of the benefits of living frugally.
  • We live in two states – We traveled west to settle in San Francisco, California we went through Reno, Nevada. We fell in love with it. The weather is great. It’s close to skiing, which my wife loves. It’s close to casinos, which I love (I just keep my bets reasonable). You’re wondering where I’m going with this? The military has thing called a Home of Record which can be different than your Legal Residence. It allows for the possibility of living in one state and voting or paying the income tax of another state. It’s a weird law, but we follow the rules. Plus, if the military didn’t move us around, we probably would have lived in Reno anyway. For more information see this About.com article.

Military Pension

Despite what you hear about pensions disappearing, the military pension is still strong. It’s backed by the US Government. I have difficulty imagining a scenario where congress passes something that would prevent the hard-working people of the military earning their pension. My wife is eligible for this pension after 20 years of service… around age 44.

The Military Pension is a fascinating personal finance topic. At that 20 year mark, you have the opportunity to retire, take 50% of your highest base pay (no more housing stipend or other pay). If you don’t want to retire and stay on another 10 years you would then get 75% of your highest base pay. It’s a tough choice, because you stay on your base pay is likely to grow and you get to keep more of it. Of course, you could always retire from the military, take the pension, and work elsewhere – collecting two paychecks. As a pharmacist, my wife should have numerous jobs available to her. This can be a tough decision and one that Plugged in Finance tackled recently. If anyone else wants to crunch numbers on this one, I’d be appreciative.

I should also mention that military pensions are indexed for inflation, so we will truly get the same amount of buying power each year. I’m not sure if other pensions set up that way.

Side Jobs

My wife has expressed interest in having a side job in retirement. She often jokes about having the job with the least about of thought necessary. I can’t come up with an example right now, but she did have an idea for a real job that she would like… chauffer for people visiting Napa Valley wineries. I personally wouldn’t want to be dealing with a bunch of drunk people, but I know I could make a killer blog out of Napa Valley Limo Confessions. It would make HBO’s taxicab confessions look like child’s play. I could also spin that off into a real winery review blog. In any event, the point here is that she is likely to wind down to working less, but not stop working completely. Even if she leverages here pharmacy license, she could make quite a bit of money in just one day a week. Thus some addition income can be expected from here.

Investment Income

Like myself, she’s been maxing out here retirement accounts – both 401K and Roth IRAs. We see no need to change that. It will be $19,000 a year for the next 11 years until she reaches that first retirement decision. That should be a nice nest egg by the time we are eligible to take the income.

Rental Property

I mentioned yesterday that I have a rental property. My wife has one as well. She had bought her’s before we had met. Like me, she barely makes back her expenses on it at this point. However, in 30 years it will be paid off and any income that it earns after that be a nice supplemental income.