Wednesday, April 4, 2012

Money – How much money do you have?


The other day I was thinking about how much money you would have on a particular return of investment.  Say you received $5,000 from your investment for the year.  How much money do you have to generate that return on investment?  I would like to hear you different answers and how you came up with your number.

This exercise helps you understand percentages.  This is such an important subject that I cannot talk about it enough.  I remember reading one of Warren Buffett or his business partner Charlie Munger talk about percentages and probabilities.  Charlie Munger basically said that these skills are important regarding investing.  

Unfortunately, I believe our schools do not teach us very well in these two areas.  Most people do not have statistics until they go into college, and only if they major in business would they “have” to take them.  Even after taking a statistics class, you probably wouldn’t know how to use what you learned in your everyday life.  Charlie Munger in his book “Poor Charlie’s Almanac” he talks in great detail about the importance of having an elementary understanding of many subjects and how they interrelate with each other.
Now that you have had time to think about how much you have to make that $5000…let’s look at your militaryretirement.

This is from 2009, but is still valid for this discussion.  If you retire as an E-6 with 20 years of service you will receive according to the chart $1,586 per month or $19,032
  •  E7 is $1,850 or $22,200 per year
  •  E8 is $2,032 or $24,384 per year
  •  E9 is $2,323 or $27,876 per year
Now, chances are if you are enlisted you won’t make E8 or E9 in 20 years.  Although I don’t think it is impossible.  My question is how much money is generating this type of cash?  For example…if your retirement investment is making 1% then this means the government would have had to sock away $2,220,000.  If you took $2,220,000 x .01 = $22,200.  How did I come up with $2,220,000?  Simple…I took $22,200/.01 = $2,220,000.

That is a lot of money!  So, if you believe that you could only make 1% on your investment you would have to save $2,220,000 in order to receive the same retirement the military offers you as an E7 with 20 years.  Looks to me like you are a Military Millionaire!  Unfortunately you cannot take that $2 million dollars with you, nor can you give it to your spouse or kids when you eventually pass away. 

However if interest rates increased to 5% then your military retirement isn't worth nearly as much.  $22,200/.05 = $444,000.  This is why at this given time these benefits are fantastic.  10 years ago...when interest rates were pretty high the military retirement didn't look very good.
Let me take a look at officers retirement now.
Most officers will probably retire at O4 or O5 after 20 years.  Let’s look at some numbers.
O4 is $3,179 or $38,148 per year
O5 is $3,524 or $42,288 per year
Using the same 1% for an O4 is equivalent to $3,814,800.  This amount is $1,594,800 more money than the enlisted E7 or 72% higher.
Some may argue that these numbers are not correct, but they are.  The military retirement is no different than an annuity with no survivor benefits.  
Military.com has information regarding this annuity.  Many annuities from insurance companies have several ways of getting paid.  You will always receive the highest amount per month paycheck when you choose an annuity with no survivor benefits…much like what you get for military retirement.

I hope this information has opened your eyes to the big money you can receive by serving in the Military.  In this low interest rate environment this benefit alone makes you a Military Millionaire.

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