by Scott R. Tucker

April 24, 2020

When it comes to planning for their financial future, many veterans don’t realize what their service is really worth. They don’t know how to calculate military retirement pay present value properly because they aren’t focusing on the bigger picture. At US VetWealth, we can help you protect the true value of your service.

The typical veteran approach to the standard post-military job hunt reflects this. So does their acceptance of the status quo military financial planning “benefits” when they retire. In both cases, many veterans are cheating themselves. The total value of their military retirement pay is actually much higher than they think it is.

There are two issues that many military and veteran families don’t understand:

Regular Military Compensation

RMC is the combined amount of your military pay plus the tax advantages of these allowances. Your military pay includes your basic pay, average basic allowance for housing, and basic allowance for subsistence. All military personnel have a RMC based on their pay grade, years of service, and family size. You can watch a video on how to calculate your own RMC here.

The big takeaway here is that you are making more money than you probably think you are. Are you thinking in terms of matching your basic pay with a civilian salary post-military? Then you are not asking for enough money. You are setting yourself up for a significant pay cut in civilian life.  Just look at how much you receive tax-free for housing allowances. Shockingly, veterans often forget about these benefits when searching for a new career.

Why Calculate Military Retirement Pay Total Present Value?

So you should make a similar consideration when you calculate military retirement pay present value. It's important that you understand what your post-military pay benefits are worth when factoring in a pension protection plan. This is because it's important to consider what the spouse of the retired veteran would receive at the time of the pension earner's death.  Technically, the military pension is only tied to the life of the veteran. So a privatized life insurance solution must be considered to protect it. 

What Happens to Your Military Retirement Pay After Death?

Around the time their spouse retires, military spouses must decide whether or not to accept the Survivor Benefit Plan (SBP). The SBP is a form of life insurance. It guarantees a basic level of support in the event a retired veteran predeceases their spouse. If the retiree and spouse elect NOT to take the SBP, then whenever the retiree dies, retirement payments will stop.

Retiring veterans do not have to qualify. It doesn’t pay out a lump sum to the beneficiary like most life insurance policies. It pays a portion of the deceased veteran’s retirement pay each month for the remainder of the surviving spouse’s life.

How Do You Cancel the Survivor Benefit Plan?

You don’t. That’s why this is such a major financial decision. Once you accept the SBP, you remain in the program for life, and this “benefit” isn’t free. 

veterans survivor benefits guide

A Few Quick Facts about the SBP

  • The SBP costs the same for everyone—6.5% of the military pension, automatically deducted from the veteran’s pension check.
  • How much does a surviving spouse get from military retirement pay? The SBP only pays 55% of the veteran’s pension to the surviving spouse.
  • The SBP does not include disability payments. When the retiree dies, any disability payments stop.
  • The spouse and children automatically receive full coverage ( at a cost of 6.5% of the pension). The spouse can elect a lower amount or decline coverage. To decline, the service member’s spouse must opt-out with a notarized signature.
  • The retiree receives no benefits (or refunds) if the spouse predeceases the service member.
  • There is no equity or return on investment in the SBP while the insured retiree is still alive.
  • Children over 21 cannot be beneficiaries. If the spouse dies after the retiree, if all children over the age of 21, SBP payments stop. The SBP offers no opportunity to leave a legacy.
  • There is a significant opportunity cost to the SBP. The money contributed to it over the 30-year payment term could have been invested in the private marketplace.

Is the Survivor Benefit Plan a Good Deal?

Essentially, when the veteran dies, the value of his or her pension (and military service) is halved. The ONLY way that the Survivor Benefit Plan makes good all-around financial sense with regards to return on investment (ROI) is if a service member dies within a few years of retiring. 6.5% of the pension adjusted for inflation, deducted over a couple of years, in return for 55% of the pension, again adjusted for inflation, to be paid to the spouse for life sounds like a pretty good deal. It is, as long as the insured retiree dies within a few years of retiring from the military.

Veterans Group Life Insurance (VGLI) Doesn’t Reflect the True Value of Service and Military Retirement Value

Life insurance in the military, like everything else, is one-size-fits-all. Service Members Group Life Insurance SGLI is the government-sponsored life insurance provided during active duty military service. SGLI coverage ends with active duty. Veterans Group Life Insurance (VGLI) is life insurance for retired military. The Veterans Administration administers VGLI. The government offers VGLI to veterans as a replacement for SGLI. There is no qualification requirement if a retiree accepts coverage within 240 days of service. This makes it a good option for the service member with a life-threatening disability who cannot qualify for privatized life insurance. But for most retiring service members, VGLI has some definite disadvantages.

  • The VGLI death benefit is only $400,000.
  • A veteran who is still young and in good health can likely qualify for a higher death benefit at a lower premium rate on the private market.
  • Like SGLI, vgli costs the same for everybody. However, the base cost of VGLI (which starts at $800/year) is much more expensive than SGLI (which is a flat $300/year for the active duty service member).
  • VGLI premiums go up every five years. You can find out how much they go up by referring to the cost table provided by the government. Ironically, when the insured gets into their sixties and seventies, when the probability of actually dying increase, the costs are astronomical. It is unrealistic to expect that any veteran who’s living off their pension will be able to keep up with them.

Is VGLI worth it?

In many cases it is not. When veterans learn how to calculate military retirement pay present value, it’s clear that VGLI doesn’t reflect the true value of service. VGLI costs are also very high compared to the other options that available to protect your spouse and family.

What’s the True Value of Your Service?

Status quo military financial planning options do not know how to calculate military retirement pay present value in a way that reflects its true value. It's important to not just rely on what an active duty retirement caluclator spits out. Consider this scenario.  

A 40-year-old retiring male E7 with 20 years of service has an active duty RMC of $104,000 a year (see table column A.) This E7’s military retirement pay will be roughly $30,000 a year (See table column B). If his spouse elects the SBP and he predeceases her, she would receive 55% of the pension. That’s $16,500 a year (E) or about $1,375 per month until she, also, passes.

So what is the true value of the E7 military retirement pay? Will the veteran and the spouse receive that true value in this scenario?

How to Calculate Military Retirement Pay Present Value the Right Way

Let’s assume that the E7 lives for 30 years beyond his military retirement, to the age of 70. That $30,000-a-year pension (B) paid out annually over 30 years, including adjustments (2.5%) for inflation over the next 30 years, amounts to a total of $778,000 (D). This is the amount of money that the E7 would need to have RIGHT NOW, invested in an account that’s earning at least 4% interest, in order to generate a $30,000 a year annuity.

In the event that the E7 dies, his spouse will only receive 55% of that pension, or $16,500 a year (E). If the spouse receives SBP payments over a 30-year period, the value of those payments, again adjusted for inflation, is $531,000 (F). That’s significantly less than the true value of the pension (and the E7’s service) over that 30-year period.

Is it possible for the surviving spouse to realize the full value of E7 retirement pay through SBP payouts? Sure. The spouse would have to receive an SBP payment of $1,375/month for over 58 years in order to realize $778,000. But this situation is highly unlikely. To add insult to injury, that 6.5% SBP premium payment is pre-tax. The spouse’s has to pay taxes on the SBP payouts. This reduces even more how much the surviving spouse can expect to receive. It also makes it even less likely that she will ever see anywhere near the true value of the E7’s military retirement pay via the SBP.

Let’s bring VGLI into this picture.

The E7 whose spouse accepts the SBP is paying $1,950 a year to protect that E7 military retirement pay (6.5% of the $30,000 a year pension). He is used to paying $300 a year for SGLI. However, VGLI costs significantly more SGLI, because the amount of government subsidy significantly decreases. In year one, the cost of VGLI is $800 a year (vs. $300 a year being paid for SGLI). Now the retired E7 used to paying $300 a year for insurance is paying $2,700 a year ($1,900 for the SBP + $800 for VGLI). That’s an increase of nine times. And the cost of VGLI goes up on a set scale every 5 years for everybody, regardless of health. Over a 30-year period, during which the E7 is statistically unlikely to die, he will have contributed over $180,000 into the SBP and VGLI.

If the spouse predeceases the veteran, the family will see much less return on this investment. If the veteran predeceases the spouse, and both SBP and VGLI are paid out, the spouse will receive a maximum of $400,000 in a death benefit. That’s if they elected the maximum coverage. This amount will keep the spouse going at their $104,000 a year lifestyle for only four years. The surviving spouse is likely to struggle over the long term. Furthermore, there’s no opportunity for the E7 and his spouse to leave a legacy for the next generation.

Do You Want the Value of Your Retirement Pay Reduced by Half?

Let’s assume that the E7 dies around 30 years after retirement at the age of 70 with the VGLI still in force. The spouse, who is the same age, lives for another 18 years. The best case scenario here, with regards to ROI, is that a) the E7 dies, and b) the surviving spouse receives $400,000 from the VGLI death benefit, and $297,000 in TAXABLE SBP payouts ($1,375 a month for 18 years).

That’s a gross ROI of $697,000 – hundreds of thousands of dollars LESS than the true value of the E7 military retirement pay ($967,000). And this is even before accounting for having to pay taxes on the SBP payouts. But wait, let’s not forget to subtract the $180,000 the E7 and his spouse paid for this coverage. That brings their net ROI down to $517,000. That’s approximately half of what the E7’s military retirement pay was worth adjusted for inflation over 30 years. And again, there is no legacy for any children when the E7’s spouse passes away.

Calculate Military Retirement Pay

There are other options that will truly value your military service.

Here at US VetWealth, we understand how to calculate the true value of military retirement pay and protect it. We have designed an alternative to the status quo military financial planning options, going above and beyond traditional active duty retirement calculators. Our solution offers equity growth, as the plan earns interest based on the S&P 500 performance, not the federal bond rate. It also offers a lot more liquidity that the retiree can access while still alive. It offers a safeguard against negative market returns. It allows you to both comfortably fund retirement and do what the SBP can’t possibly do, leave a legacy behind you when you die. We call it your Survivor Liberty Plan.

This completely new approach to privatizing the SBP or pension protection has become available in recent years. However, few financial professionals are aware of this solution and the game-changing benefits it brings to solving the SBP problem. Modern life insurance can provide the death benefit protection of a term policy like the VGLI while also producing an annuity stream much like the SBP. To be more accurate, it can provide an annuity stream much like the pension. But the payouts are higher, and you can use it while the veteran is still alive! Further, after 30 years, the costs are significantly lower than the costs of SBP. The ROI is also significantly higher than on VGLI, a term insurance, or whole life policy. It also costs less than the typical Thrift Savings Plan (TSP), 401k, mutual funds, or other retirement plans.

If this interests you, then click here to learn more about the Survivor Liberty Plan.

About the author 

Scott R. Tucker

Scott R. Tucker is an author, speaker and the founder of US VetWealth, a lifestyle and financial consulting brand that helps service members go from paychecks and government benefits to wealth and liberty. He likes to say, "I Help The 1% Who Serve Our Country Become The 1% Who Influence It." A West Point graduate, serial world traveler, military financial expert, and entrepreneur, Scott brings valuable experience and insight to those who have sacrificed so much in service to our country.

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