This article was published originally on May 22, 2012. I’ve made minor proofreading edits.
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 years she’s eligible to retire.
For many people in the military, retirement is about safety. We have a bit of a different situation as my wife enjoys a typical office job, but 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 of those wars unless things get so bad that America itself is a battle zone. [2017 update: Actually, Ebola and Zika are things she could have been deployed for. It’s likely, in my opinion, that these kinds of diseases will be on the rise.]
Being active duty 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 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. We’ll 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.
With pensions, life expectancy also comes to mind. If you were to work 20 years, getting 100% of your base pay as a pension seems great. However, if you get to age 70 and die at age 75, you didn’t really maximize that pension money. 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.