The following is a guest post by Hank Coleman from Money Q&A. Hank is an Army Major on Active Duty with four years left until early retirement.
When I retire from the Army in four years, I don’t plan on getting another job. I don’t plan on coming back to work for the federal government as a GS (government scale…we love our acronyms in the military, right?) employee or even as a contractor like so many of my peers.
After I retire from the military, I plan to move back to my hometown of Charleston, South Carolina, sit on the beach, and maybe write a book. And, I’m not going to write a book because I need the income. I’ll write a book if the subject comes to me in an epiphany because, like many, it’s a bucket list goal and a way to leave a legacy. But, I don’t have to do it.
I’ve set myself up for financial independence and early retirement so I can sit on the beach and write if I want to. I’ll probably keep blogging because I love it. But, I don’t need to take a job after the military. Not bad for early retirement at 42 years-old, right?
There’s no need for an officer in the military (and maybe even an enlisted soldier) to have to work after retirement if he or she doesn’t want to. Here are four ways that you can set yourself up for success and not work another day, if you don’t want to, after hanging up the uniform.
Get a Pension After 20 Years
One of the best financial benefits the military has right now is its pension plan. The government is one of the few industries in America still providing retirement pensions to employees. Currently, in the military, the pension is a defined-benefit plan where you receive 50% of your base salary after you serve for 20 years on active duty. That’s not a bad deal at all if you can last the 20 years in uniform of course.
For example, a brand new second lieutenant that joins the military after college can retire at age 42 (assuming he or she got their degree at age 22). A soldier enlisting out of high school could theoretically retire at the age of 37, earning 50% of his or her salary for the rest of their life. For every year you serve after 20 years, your retirement currently grows by 2.5% each year. So, someone retiring after 21 years of service would receive 52.5% of his or her salary every month after retirement, 55% for 22 years, 57.5% for 23 years, and so on.
Currently, in 2017, a brand new second lieutenant that just joined the army with no prior service as an enlisted soldier earns a base salary of $3,034 per month or about $36,400 per year. There are other special monthly payments, allowances for housing and food, and combat pay that aren’t factored into the retirement equation. The government only uses a service member’s base pay figure when calculating the military’s pension.
To give you another example, a lieutenant colonel, which retires this year after 20 years of service in the military, currently earns $8,798 or $105,576 per year. So, that lieutenant colonel’s pension would be worth approximately $52,788 per year or $4,400 per month.
So, many financial planners and experts use 80% income replacement in retirement as a rule of thumb. So, using our example above with the 50% pension, members of the military would typically only need to have investments for retirement that would replace 30% of your income. In our example above, a lieutenant colonel would need investments that produced approximately $31,672 per year in income in retirement. Needing only 30% income replacement thanks to the pension is a reason that financial independence and early retirement without working another day is truly possible for military retirees.
Recently, the federal government has unveiled its new blended retirement system that is a mix of defined benefits and defined contribution plans that looks to reward members of the military with retirement benefits even if they don’t stay until the 20 year mark. Starting in 2018, the government will invest 1% automatically of new recruits’ salaries into the Thrift Savings Plan (TSP), the federal government’s version of a 401(k) retirement plan. The government will also match up to 5% of a service member’s contributions to his or her TSP that vest immediately and in which they can take with them to a new job if they get out of the military.
Under the blended retirement system, the traditional pension accrual rate is reduced to 2% per year of service giving members of the military only 40% of their base pay per month after reaching a full 20 year retirement. Still not a bad deal when you consider the matching TSP contributions that’s currently not available to the military and a 40% pension (or more if you stay past 20 years) for a 37-42 year-old. The military’s pension (and even new blended retirement system) is the cornerstone to retiring early and achieving financial independence as a retired military service member.
Invest in TSP
If you want to retire from the military and have the option of not working another day in your life, you have to max out your retirement investment opportunities. You have to contribute the maximum amount to the Thrift Savings Plan (TSP), which as I said before is the federal government’s version of a 401(k) retirement plan. The TSP is a group of index funds overseen by the Federal Retirement Thrift Investment Board, an independent government agency that is managed by president appointed board members.
Like a 401(k) plan, investors can contribute up to $18,000 per year in their TSP accounts before taxes, which also reduces your taxable income. And, those over the age of 50 can make additional catch up contributions of $6,000 per year. The TSP invests money before taxes, but in recent years, the TSP has also added a Roth version to allow service members to contribute after-tax dollars to the same allocation of five different index funds they have to choose from in the plan.
You also need to supplement your investing in a TSP with additional investments in Roth IRAs to help you active early retirement and financial independence after you leave the service. After maximizing contributions to Roth IRAs and the TSP, I’ve also tried to find the best return on investment with other investments like real estate, peer to peer lending, dividend stocks, and trading stocks in taxable accounts.
Living Off a Captains Salary
For years now, I’ve been living off of a captain’s salary despite being promoted to the rank of major. My wife and I had a balanced monthly budget when I was a captain. So, it was easy to simply ignore the increase in income that came with the promotion.
It was “found money” when I got the promotion in 2011. It was nice to have, but we didn’t have it factored into our current budget. So, why change anything? We just ignored the temptation to spend the hefty new pay raise or let lifestyle creep take hold. By continuing to live off of the old salary, we were able to rapidly increase our contributions to the Thrift Savings Plan and our Roth IRAs.
The difference in salary for me was $506 a month or $6,072 per year initially. For, the past six years, that’s a savings of over $36,000 without having to change a single thing about our lives. Like I said, it was essentially free money. And, it is money that we continue to plow into retirement savings.
Investing Annual Pay Raises
The military typically receives an annual pay increase. It’s a nice perk that the civilian sector doesn’t always see. It’s somewhat meant to keep up with inflation. During the George W. Bush years, the annual pay raise in January was pretty good, averaging 4.1% for the eight years President Bush was in office. The large annual pay raise during those years was often meant to narrow the pay gap the Government Accountability Office (GAO) said existed between the military and civilian sector.
Then, President Obama started tightening the federal purse strings. In fact, the annual pay increase for the military under President Obama routinely sat at 1% or so, the lowest annual increases since the Vietnam War. But, I digress. The annual pay raise for members of the military is creeping back up. This January we saw a 2.1% increase. Proposed legislation for next year’s budget looks to have another 2% or more increase in 2018.
Members of the military also receive what’s called longevity raises. Typically every two years, a service member will receive a slight pay raise even if the military hasn’t promoted him or her. For example, if you’re an Army major with 10 years in service, this year you can expect a $343 monthly raise when you hit the 12-year mark.
Annual pay raises are nice, but financial independence and retiring early come down to what you do with them. Like living off your previous rank’s salary, I’ve found it always best to forget that you even received an annual or longevity pay raise. Every January, I increase my allocation to my Thrift Savings Plan. For our same example of the Army major above with 12 years of service, that 2% annual raise equates to another $144 in investment contributions every month.
If it doesn’t exactly sound like a picnic, you can consider increasing your investment contributions by 1% and raising your lifestyle by the other 1% from your raise. It may not sound like a lot, but that $72 could add an extra date night per month or family outing around town.
Almost Free Healthcare for Life
While a member of the military is on active duty, they have no out-of-pocket costs for healthcare. It’s 100% provided by the Department of Defense, and the military member’s family has very minimal costs. Low cost or no cost healthcare is an incredible benefit for members of the military, and it saves them thousands of dollars per year. The benefits continue with only a few small fees in retirement alleviating military retirees from having a huge financial burden of rising healthcare costs.
As a military retiree, you maintain your full medical coverage, but some of the fees do increase slightly (up from zero). Depending on which medical plan (called Tricare) you choose, your new costs typically include an annual fee of $565.20 per year for your entire family for the top level Tricare Prime, typically less than $30 per visit in copays (depending on which procedure), and a catastrophic cap of $3,000 annually per family (which typically applies to the mid-level Tricare Standard where you choose your own doctor).
While there are always drawbacks to government paid healthcare such as wait times and the lack of choice of doctor, the price is hard to beat for a retiree on a fixed income. Low cost or no cost healthcare help make the dream of retiring in your forties a distinct possibility.
Finding a Second Lease on Life
Not working after retiring from the military isn’t for everyone. A lot of people like to work. Working as a government employee or a contractor for the federal government is a great way to continue to serve our nation even if it’s not in a uniform.
But, members of our military have served our nation at a very trying time. The global war on terrorism continues to be our longest war. Many service members have multiple combat deployments, humanitarian assistance missions, months of training away from home, and countless moves that uproot their families.
If you want to sit on the beach, open your own business, be a stay at home parent, check off items on your bucket list, or turn a hobby into a side hustle after retiring from the military, you should. You’ve earned it. But, it will take some planning to make your early retirement dreams a reality. It’s not impossible. But, the time to start laying the ground work is now, right when you join.
Note – Remember that you shouldn’t misconstrue anything we’ve discussed here as specific financial advice. Everyone’s situation is different even in the military. You should see out the advice of a qualified certified financial planner to help you nail down exactly how much you should save and invest in order to retire from the military and have the option to not work another day in your life.