With all the talk about the Federal Reserve eventually raising interest rates, we should discuss how it affects the value of the military retirement. As interest rates rise, the theoretical value of a military retirement is reduced. This is because you can get a higher rate of return on safer, long-term assets with civilian 401(k)s or saving-account equivalents. Also, the military retirement is fixed for that year and as mortgage rates and loan rates go up, it makes the retirement worth less than the previous year. The COLA annual increase helps decrease the impact of rising interest rates.
If an O4 with 20 years was about to retire this year (2013), he or she could expect to receive $43,702, annually, before taxes in retirement ($7,283.70/50% * 12 months). To generate this annual income, one would have to invest in the safest, longest-term asset and the usual measure for this is the 30-year US government bond which currently yields 3.567%. The value of the retirement at this interest rate is $1,225,175. This is all theoretical and the only practical use would be to compare what you would have had in a 401(k) after 20 years in a civilian company.
Using the same assumptions, an E7 at 20 years would expect to receive $25,970 before taxes. The value of the retirement would be $728,074.
If the 30-year bond interest rate goes up 1% to 4.567%, then the O4's retirement value would decrease to $956,913 and the E7's to $568,653. Again, these values are theoretical, but it is important to know that fixed incomes, like a military retirement, is worth "less" in an environment of higher interest rates.
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