Thursday, August 13, 2020
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James R. Auvil, OD, MBA, FAAO, CPC    

     A trend emerged during the FOS reception in Atlanta at the end of February. Retirement planning generated the most interest as a topic for future meetings, so with that in mind, I offer this brief article and accompanying spreadsheet (Retirement Planning.xlsx available on the Member Site under Member Resources).

     Retirement planning isn’t easy. It involves math, future value calculations, a lot of “what if” scenarios, family and location considerations and the emotions that come when abandoning a 20 to 30 year way of life.  Over the past decade, I've asked many officers (not just MSC officers) direct questions about their service along the lines of: Why are you still on active duty? Why did you decide to stay beyond 20 or 22 or 25 years of service? Was your plan to stay to retirement from the beginning? What makes you stay?  A few of them love what they do and decided to stay very much on purpose, a few of them settled into a comfortable norm and weren’t interested in the change that comes with retirement, and a few stayed on active duty by default, avoiding any choice until they reached the point at which the military forced them to retire.  By then, they were not interested in seeking a career that wandered far from their 3-decade experience. Many sought civilian government jobs in their field(s) doing pretty much the same thing they did while on active duty, but without the management headaches and military moves, while some vowed to never have anything to do with their career field.  I fondly remember one optometrist heading toward retirement about 9 years ago who told me, "Once I retire, I will never pick up a retinoscope again."  These are deeply personal decisions and I hope each officer who serves beyond the 20-year fully-vested retirement milestone does so based on an active decision to stay.

     It is nearly impossible to create a one-size-fits-all retirement calculator, especially for the military because the rates of pay and special pays vary by rank, time in service and time in service as an optometrist. This spreadsheet is intended only as a guide – you’ll have to adjust it to match your own circumstances and that means digging into the pay charts here and doing some math to find your actual and expected annual cash compensation rates. The spreadsheet necessarily includes several assumptions. Examples: future basic pay raises planned by Congress of 1.7% for FY2013, 2.0% for FY2014, 0.5% for FY2015, 1% for FY2016 and 1.5% for FY2017 compared to Employment Cost Index (ECI) rates of 3.3% in FY2015 and 3.5% from FY2016 through FY2019. If these assumptions hold true, it means basic pay will actually erode over time beginning in 2015 based on planned Congressional adjustments that extend through FY2017. What does that mean to you? Well, if you are able to retire in 2014 and beyond, it means that you may actually earn MORE retirement income if you retire in 2014 than if you retire in 2015 or 2016 or 2017. How can that be possible since the retiree compensation percentage increases 2.5% for each year beyond 20 years of service? It’s possible due to inflation and the extraordinarily valuable aspect of our military retirement: it automatically adjusts with the cost of living. Active duty compensation does not. So, depending on inflation, someone who retires in 2014 with 20 years of service at the 50% rate will have their retirement income adjusted upward at the rate of inflation in 2015, whereas someone who stays on active duty will see a 0.5% increase in pay. With the additional 2.5% retirement rate, a person who retires in 2015 at 52.5% of basic pay may actually take home less cash compensation than someone who retires in 2014 and who enjoys the inflation-adjusted bump in their retirement income. This is entirely possible, but not a guarantee. Results will vary based on your own circumstances and the actual inflation rates in 2014 and 2015 and beyond.  Feeling lucky?  The point is you should investigate this type of information long before it’s time to make your retirement decisions. Understanding the general financial aspects of retirement will allow you to spend time on more important topics like family quality of life and pursuit of other dreams, goals and jobs.

     Military compensation is broken down as roughly 43% cash and 57% non-cash (i.e. benefits). Civilian compensation is generally 80% cash and 20% non-cash. The non-cash benefit values are included in this spreadsheet just for information and they are based on Congressional Budget Office (CBO) publications that break down the percentage of value for military compensation. These values represent the amount of money you have been paid, but has been withheld from your pay, to cover these services and future benefits. For example, the CBO estimates 9% of your total compensation goes toward your future retirement income. Viewed in this way, you have truly earned your retirement by discounting your cash compensation each year of service by 9% and allocating that amount of money into a fund that will cover your future retirement.    

      On the first sheet, you will see a block of data on the right with a title “User Data”. Here you can enter your tax bracket, your years of service, an estimate of the amount of “installation benefits” you use that you will miss upon retirement, and the percentage of VA disability you expect to receive, if any. On the main spreadsheet data area you can enter your actual annual pay data (basic pay and BAH for 2010, 2011 and 2012) and make your own pay-raise calculations if you are promoted soon or jump up in pay due to a time-in service pay increase.  The years of service apply to each retirement year, so if you enter 20, the data will show the value of retirement at 20 years of service at each retirement year (2012, 2013, 2014, etc) based on the average of the current and previous two years of annual compensation (Top 3 method).  The “VA Disability Tax Advantage” is merely an estimate, as your actual VA disability benefit, if any, will vary based on individual circumstances. For the purpose of this spreadsheet, it just represents the portion of your retirement income that will not be taxed (e.g if you have a 50% VA disability upon retirement, roughly 50% of your retirement income will not be taxed – the value of this tax avoidance is represented on the spreadsheet as “VA Disability Tax Advantage”). This is just an estimate - VA disability calculations are a bit complex, but not unworkable.  I recommend looking up the rules if you think they apply to you to calculate a more accurate retirement value.

     The second sheet consists of annuity calculations intended to show the lifetime value of the difference between retiring in 2014 vs. 2015, or 2015 vs 2016, for example.  The last sheet consists of total annuity value calculations intended to show you the total value of your retirement, assuming 3% inflation, retirement age of 45 and a life expectancy of 76.  You can find several annuity calculators on the web if you choose to tailor this information to your own circumstances and assumptions.

Good luck and hope you see you in Phoenix in October!

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