Net Present Value Calculation of Military Pension Plans

by | Oct 24, 2023 | Case Study | 0 comments


Jess retired from the Coast Guard which is part of the Office of Homeland Security [MM/DD/YYY]. Upon retiring, she immediately began receiving distributions from the military pension, associated with her service at the Coast Guard. She receives concurrent retirement disability pay (CRDP) because the federal government determined that she is at least 50% disabled. The CRDP is paid through the VA. It is not considered marital property. The Coast Guard confirmed to me that as of [MM/DD/YYY], Jess’s base monthly pension amount, not including CRDP/VA benefits is $9,801 per month.

The COLAs for military pensions versus civilian pensions for federal employees are not necessarily the same. The COLA formula for civilian pensions (FERS) is based on the Consumer Price Index (CPI-W), which is announced every October. However, the COLA with respect to a military pension is determined by Congress every December, and they may or may not mirror each other.

The most COLA announcement from Congress with respect to COLA for military pensions occurred [MM/DD/YYY] with an announced 1.3% rate.
On [MM/DD/YYY], the Social Security Administration announced an upcoming CPI-W rate of 5.9%. The formula the federal government applies for FERS is the CPI-W less 1% if the CPI-W exceeds 3%. Therefore, the FERS COLA for [YYYY] is 4.9%.

For the military pension, I will provide a net present value based on both a 1.3% COLA as well as a 4.9% COLA.

Because Jess is already collecting her military pension, we know exactly her current payout. The formula for determining the FERS monthly pension distribution amount is based on 1% of her “high-3” average salary multiplied by years and months of service and divided by 12. Assuming that Jess’s current high-3 is $250,000 along with a current vested portion of 6.5 years, I determined that if she were to retire with 6.5 years of service with the DOD, she would receive $1,354 per month.

Coast Guard Military Pension:

The net present value of Jess’s pension that currently distributes $9,801 per month varies tremendously if we apply a COLA rate of 1.3% versus 4.9%.

With a COLA of 1.3%, the net present value is $2,660,000. With a COLA of 4.9%, the net present value is $4,432,000. Of course, applying a COLA somewhere between the percentages, would impact the value accordingly.

Department of Defense FERS Pension:

Applying the announced FERS COLA currently applicable of 4.9%, results in a net present value of $612,000.

Combined Value of Both Pensions:

Despite the fact that no doubt the opposing side will argue that a 4.9% is too generous to apply as an on-going basis looking forward, if we nonetheless apply this rate for both the Coast Guard as well as the DOD pensions, they result in a combined net present value of $5,044,000.