Asset allocation considerations for a military pension (part 3 of 3)


(Thanks to Tomcat98 of the discussion board for introducing me to one of the authors of the studies quoted here and in the book.)

Here’s the conclusion to the nitty-gritty details of the following question:

If you’re receiving a military pension, then how should you invest the rest of your portfolio?

Investors are always admonished to have a diversified portfolio of stocks, bonds, cash, and perhaps real estate or commodities. Investment companies offer “balanced” funds, and the TSP offers “lifestyle retirement” funds that adjust their stock/bond asset allocation to a target retirement date. However these methods ignore an investor’s human capital of their pensions and Social Security. An earlier post showed that the lump-sum value of a $3000/month military pension is at least $1 million. This inflation-adjusted pension is paid by the federal government using Treasury securities that have zero risk, so it’s the equivalent of an extremely high-quality bond portfolio. An investor with a $250,000 investment portfolio split between stocks and bonds may think that their stock/bond asset allocation is 50/50. But adding in the $1 million lump-sum value of a military pension shifts the actual stock/bond allocation to 10/90! *  Even if the investment portfolio loses half its value, the loss of overall net worth is not 50% but rather 10%.

Other researchers have found similar imbalances for retirees whose Social Security benefits have skewed their asset allocation almost as heavily toward bonds.

How should military members use this information? How does it affect their decision to stay in the military? How can the lump-sum value of their pension and Social Security benefits affect their asset allocations?

First, servicemembers have to consider their human capital in their decision whether to leave the service or stay until retirement. During a 20-year career it’s possible for enlisted to earn over $1 million in pay and benefits, and officers to earn twice as much.  Money should not be the most important factor in a retention decision– but it’s significant. “It’s only money” is a tough choice to follow through on!

Second, military veterans can assume more risk (returns and volatility) in their investment portfolios. Their likelihood of continued employment is higher than most civilian occupations and their human capital is distributed more evenly during their careers. Their asset allocation could be more conservative if they leave active duty for the Reserves/NG or quit the military entirely, but during active duty they can invest more aggressively.

Third, a military pension is probably a veteran’s most valuable asset. As a high-quality bond, it allows investors to move the rest of their investment portfolio heavily into stocks or other assets. If loss aversion causes emotional distress during a bear market, the paper losses in a stock portfolio can be considered a small percentage of the retiree’s net worth. Their pension and Social Security are inflation-adjusted assets that are far more significant, even if a stock portfolio loses half its value. Veterans (and financial advisers) have to consider the lump-sum value of these benefits in designing investment plans and asset allocations.

*[ End note: A $250,000 portfolio split 50/50 between stocks and bonds has $125,000 in each asset class. A $1 million pension value adds $1 million of bonds for a total of $1,250,000 split between $125,000 in stocks (10%) and $1,125,000 ($1 million + $125,000) in bonds (90%).]

Congratulations! If you’ve read this blog for the last six months then you’ve just reached the end of the book’s table of contents! The book includes much more than this blog, of course, but you’ve just finished hitting the high points. From now on I’ll post about ideas for the next edition, or subjects that didn’t fit into the text, or material that ended up on the editor’s floor.

But before we start back in on those topics, we’ll take a break to talk about more surfing.

Related articles:
Asset allocation considerations for a military pension (part 1 of 3)
Asset allocation considerations for a military pension (part 2 of 3)
“Present value” estimate of a military pension
Saving base pay and promotion raises
Military pension inflation protection
Tailor your investments to your military pay and your pension
Where to put your savings while you’re in the military

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I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers and veterans.

  1. […] is roughly: 70% stocks / 20% Bonds / 10% cash (emergency fund). I’m also mindful of the fact that a military pension could be considered as being roughly equivalent to an annuity or the bond portion… and that interest rates have nowhere to go but up. However, I don’t even attempt to guess when […]

  2. […] with our four stock asset classes and we’re not investing our retirement money in bonds. Our military pensions are the equivalent of bonds, so we usually keep over 90% of our retirement portfolio in […]

  3. Reply
    Doug Nordman March 30, 2011 at 3:10 PM


    Most servicemembers (and even most veterans) have no feel for the expense of civilian health insurance. I think military healthcare will get more expensive, but I think it’ll still be a lot cheaper than the civilian equivalent.

  4. Reply
    Jan March 30, 2011 at 3:00 PM

    Great set of articles.
    I don’t have a pension of any kind- military wife- nine school districts in 20 years. We have had no problem living solely on VA disability and military pension since we both(60 & 53) retired for good. All other monies accumulated are “savings”. The savings are strictly my retirement funds.
    Healthcare is our second largest, longterm benefit. Healthcare alone is costing my non military family members a bundle as they hit their late 50’s and unemployed. Glad to have that covered until medicare kicks in.
    My son (ADArmy)says that if the health care goes- his boots will hit the ground to corporate soil. To him it is more important than his retirement. I’ll wait to see what congress does to retirements and healthcare before I agree with him.

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