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When Should You Retire from the Military?

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That's one of the questions we'll be facing sometime in the next decade. My wife has about 13 years of service and at 20 she's eligible to retire.

For most people in the military, safety is one the key concerns. We have a bit of a different situation as my wife enjoys a typical office job with a lot of traveling. As a pharmacist she's not going to be on the front lines in any foreign wars. She's not even going to be administering health care in any unless things get so bad that America itself is a battle zone.

Being in the military has some amazing perks. We get to shop at commissaries, which are essentially non-profit grocery stores. However, the biggest and best perk is the military pension. After 20 years of service, a service member is eligible to retire with 50% of his/her base pay. If they choose to stay on that percentage goes up 2.5% to reach 75% at 30 years of service. That's when they start to kick you out.

This brings a natural question, how long should you stay in the military? Obviously the longer you stay in the more your pension is, but the whole point of having a pension is to use it and enjoy it, right? There's no right or wrong answer for everyone here, but when I looked at the pay charts there were answers that seemed a lot more "right" than others. I'll illustrate with an example of our own case. Well be using these military pay charts. It may be handy to open that in a new tab or window (clicking it should do that).

My wife is an O-5 with over 12 years of service. As we can see that gives her a pay scale of $6999 a month (awfully exact people these military folk). If you scroll down to Over 20 years of service, you'll see that she maintains the same rank (which is typical), she'll make $8199 a month in base pay. Retire with 20 years of service and her pension will be $4100 (I'm going to round up the 50 cents) a month or $49,000 a year. That's a pretty solid pension when you factor in our other retirement saving and the fact that we may continue to work. If she advances a rank, which is likely in the next 8 years she'll be at the $9371 level good for a pension of $56,226.

Important note about inflation: Military pensions are adjusted for inflation as are these pay charts each year. Thus for the most part we can ignore inflation factors.

Now, let's look at what happens if she stays in and goes longer than 20 years. If she doesn't advance in rank her pension goes to $8446 a month after 22 years and stops growing. However, since 2 more years of experience gives her another 5% of pension (2.5% growth each year) she would make $55,743.60. After that she is "only" working for the very nice salary and the increased pension size (I had to double check my typing there - yikes). I put only in quotes, because that's still a lot, but there's no growth in salary.

However, if she's able to advance a rank to O-6, the growth curve continues until 26 years of service before it levels off. Where retirement for an O-6 would give $56,226 at 20 years, at 26 years, an O-6 would get 65% (the 6 years more years of service gets closer to the 30) of the $10,350 salary or $80,730 a year! Of course during this time the O-6 also gets the nice paying salary.

When pensions, life expectancy also comes to mind. If you were to work 40 years, getting 100% of your base pay as a pension is great, but if you get at age 70 and die at age 75, you didn't really maximize that pension money too much. My wife will be 43 or 44 when she has 20 years of years of experience (I can't remember which). If we were to assume a life expectancy of 75 years (I'll be conservative), that's 31 years of pension at $56,226. Going with the hope that she's an O-6 at the time that would be $1,743,006 in pension pay over that time (and again, this is adjusted for inflation). However, if she goes with the 26 years she'll retire at age 50, giving her 25 years of pension at $80,730. That's $2,018,250 in pension. Those 6 years add another $275,244. If she were to live to 80 it becomes a $397,764 difference and at 85 it becomes a $520,284 difference.

I'll let you do the math for the total value of that pension (hint: it is close to $3 million). It should come as no surprise that the military is seriously looking to reduce the pension benefit as a way of balancing the budget.

One thing I should have noted previously is that there are a few retirement systems in the military. This uses the Final Pay system, which my wife wouldn't qualify for. Since it applies to people in the military before 1980, very few people people will be in the system. There's another system called the high-3, which averages the high 3 years of pay to determine the benefit. This is more accurate, but it makes for a much more complicated analysis. The principles still remain the same, but the numbers and years change slightly.

The lesson here is to look at the military pay charts and plot out a career path in advance. It is easy to say, I've had enough of the military and its time to get out. However, it is worth stopping and doing some math and seeing if getting that next rank advancement is worth it. The difference could be as much as a half million dollars.

Posted on May 22, 2012.

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Financial Planning, Retirement

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13 Responses to “When Should You Retire from the Military?”

  1. Steve says:

    Can she just arbitrarily pick what year she retires? She doesn’t have to finish out a, say, four year contract?

  2. Lazy Man says:

    Yep. I think she could separate herself this year if she wanted to (though it would mean no pension). The military retirement process is a little lengthy requiring at least 3 months (from what I’ve read) and typically taking 6, so you do have to plan ahead.

  3. Andy Hough says:

    My sister was going to retire after 20 years in the Navy last year but they offered her incentives to stay so she is going to be in for a few more years. Otherwise, she would have been retired before my Mom. The military definitely has a nice retirement program.

  4. Rick P. says:

    LM, I retired from the Navy after 24 yrs of service. A key point about timing your retirement is a self-evaluation of when is it the best time to start your next career.

    Regardless of what is said, employers do look at age when evaluating the worth of potential employees. Job searching in your early 40’s is alot different when you’re in your 50’s.

  5. Lazy Man says:

    Rick P.

    That’s a very good point. I hadn’t put much thought into that. In our case, with my wife being a pharmacist, I’m not sure if CVS would care that much.

    It can be a tough balance to take the security of some extra money vs. career prospects. That’s something to definitely look into and evaluate.

  6. robyn says:

    you both may feel differently when Lazy Baby arrives. while mrs. lazy man may be in a ‘safe’ position, you cannot help but weigh being with your child[ren] versus working since you will have that option.

  7. Lazy Man says:

    Robyn,

    That is very, very true. Since I work from home, I will likely take that for granted.

    It’s not really a given that we will have the option to both be at home. That’s a financial goal, but we know that goals don’t always become realities. The addition of a child (and who knows, children?) will make being at home more difficult. The hope is to write an article shortly mapping out how this plan “might” possibly work.

  8. Long says:

    I think your wife should consider becoming a clinical pharmacist after she retires. My wife is one and she is highly satisfied with her job, much more than she would have been working in a retail. I’m sure her years of experience in the military will be considered an asset.

  9. Lazy Man says:

    Clinical pharmacy is on the table. We are likely retiring in to Rhode Island which is the home of CVS, so retail pharmacy is big there. I think clinical is not as available. The other thing is that my wife would be looking for part-time and flexible hours, which is tougher to come by in a clinical pharmacist role.

    As for the work itself, I’m not sure which my wife would like. I don’t think she liked her brief work experience in college at the retail level, but on the other end of the spectrum, she’s mentioned that doing a job that is mindless would be a good change of pace. Perhaps she would like my Papa Gino’s cashier gig from when I was 16 ;-). It’s hard to speculate on that now.

  10. […] I mentioned on the article earlier this week, my wife gets a military pension after 20 years of service. I supposed this pension wouldn't qualify as retiring, but she'll be 44 at the time, which […]

  11. […] Man @ Lazy Man and Money writes When Should You Retire from the Military? – The lesson here is to look at the military pay charts and plot out a career path in […]

  12. My fiance and I are dealing with this right now, he is not sure whether or not to pursue a full military career or get out early. The pension benefits are pretty great.

    http://clutteredmoney.wordpress.com/

  13. The pension plans are nice (although changes are being seriously looked at right now) but a 20-year career can take a toll on you. I haven’t even hit the four-year mark yet and I can already feel the kinds of aches and pains that no 25 year old should have. For a lot of us in the combat arms branches deployments and injuries make busting out early and seeking other work more attractive than holding out for 20-years to get that pension.

    On the other hand if you are in a branch where you feel like you can make it the full 20-years then heck yes go for it! A full pension and retirement in your early 40s? There aren’t many gigs like that around anymore.

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