How much is a military retirement worth?
Let's say you did it. You made it through 20 years of commanders calls, deployments, SAPR training, mandatory formations, PT, and all the other facets of military life and you have been handed your certificate of appreciation signed by future President Kanye West. How much was your time really worth?
There are a few ways to calculate it, but I prefer to convert the annual pension amount into a Safe Withdrawal Rate (SWR) from a balanced portfolio of investments. Let's say you use the Trinity Study method and compare your pension to withdrawals of 4%/year. 4% annual withdrawals of your balanced portfolio should, theoretically, almost never fail to last you through your retirement.
If you are a Major (O-4) at 20 years of service, you would be making roughly $30,000/year after taxes from your retirement pay alone. If you divide that by 0.04, you learn that $30,000/year is the SWR from $750,000. Your military retirement is worth, roughly, $750,000.
If you are a Master Sergeant (E-7) at 20 years, your retirement pay will be roughly $20,000/year after taxes. That is equivalent to withdrawing 4% every year from a balanced portfolio of $500,000.
I prefer to compare military retirement to returns from investments rather than an annuity like many others do. The reason I have this preference is because most annuities do not offer cost-of-living/inflation adjustments, or if they do, they will cost significantly more. It's important to remember that the Trinity Study shows that you can withdraw 4% of your portfolio and this should account for inflation-thus giving you an annual SWR in real dollars.
If you are a frugal person, $30,000 should be enough to live off of comfortably. Mr. Money Mustache lives off of significantly less. The magic of the military retirement is that you didn't actually have to put any of your pay aside to access it and it comes with some killer benefits (healthcare and commissary access to name a couple).
Now here's a fun thought experiment: how much would you have had to contribute to your retirement savings every year throughout your 20 years of service to match the value of the pension?
If we assume that you made equal payments and didn't make any return on your investments, you would have needed to contribute $37,500 annually to make the O-4 retirement or $25,000 annually to meet the E-7 pension. This is obviously untenable since both are more than base pay for O-1 and E-1. If we plug the values into a compound interest calculator, though, we see that a very motivated second lieutenant could make the initial investments needed to reach $750,000 over 20 years at 5% average annual returns-they would need to invest nearly $23,000 a year (almost exactly the maximum allowed for IRA and TSP contributions) to self-fund their pension at 20 years. For the E-7, they would have needed to start saving just over $15,000 a year from their first day of service.