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AS A FIRST-YEAR dental school student in 1999, when I was debating whether to apply for a military health-professions scholarship, I never gave a thought to receiving a military pension. In fact, I don’t even recall knowing that was a possibility.
I was already in debt to the tune of $65,000 from my undergraduate degree, so I was simply seeking financial aid for dental school, typically considered the most costly type of graduate education a person can buy—more so even than medical and law school. Yet, fast forward to today, and my eventual pension is perhaps the single most valuable element of my retirement plan.
When I retire in four years as a colonel with 24 years of active duty service, my pension—in today’s dollars—will be worth $91,400 per year. This pension starts the day after I retire, unlike most pensions, which don’t begin until age 65. It also includes an annual cost-of-living adjustment (COLA) equal to that received each year by Social Security beneficiaries, so my government pension will never lose its purchasing power.
The exact math behind military retirees’ pension is based on the average of their final 36 months of pay—which is tied to their rank or grade—combined with a multiplier tied to the number of years served on active duty. A member of the military must typically serve at least 20 years on active duty to be eligible for an immediate pension and lifetime health care. Many will serve up to 30 years or longer, thus receiving significantly higher pensions than I will.
Although I’ve learned it isn’t wise to consider my future pension to be part of my investment portfolio—because the pension is not an asset per se—it still feels like part of our nest egg, and it largely shapes our retirement planning efforts. For example, the $91,400 I’ll begin receiving in a few years is roughly equal to having a $2.3 million portfolio and withdrawing at a 4% annual rate.
Put another way, the pension equates to $2.3 million less that I’ll need to invest and save for our family’s retirement needs. It’s also $2.3 million that’s not subject to the rise and fall of the financial markets and, because the pension has a COLA and can’t decrease, it’s tantamount to having $2.3 million in inflation-protected bonds that will never go down in value. But again, it’s not truly an asset because, when I die, the pension dies with me. Unless I’m willing to pay for the “survivor benefit plan”—a rather expensive way to insure the pension—my wife receives none of it when I’m six feet under.
To protect my wife’s future and also build a nest egg to cover other expenses the pension won’t cover, such as college, weddings and large or unexpected purchases, we’ve been living below our means since the very beginning and investing as much as possible in a low-cost 80% stock-20% bond mix of index funds. I also have a relatively inexpensive $2 million 30-year term life insurance policy that should cover my wife and kids, at least until it lapses at age 72.
The upshot: Combining the pension—which will begin when I’m age 51—and investments, it’s possible I’ll be able to “retire retire,” which in the military vernacular means, “retire from the military and not have to get a civilian job.” Without my pension, that would be completely impossible, at least at that relatively young age.
On top of that, the military provides a generous health-care insurance plan for retirees, covering my and my wife’s medical needs for life, as well as our children’s needs until age 26 if they remain fulltime students. These benefits aren’t completely cost-free, although the annual enrollment fees and co-pays are extremely low compared to most health insurance plans.
While I anticipate my pension being a catalyst for early retirement, it certainly comes at a price. First, it’s a fully cliff-vested defined benefit, meaning if someone separates from the military prior to serving 20 full years on active duty, there’s zero pension. Zip. Second, we essentially give up our personal freedom during the 20-plus years of service—including choice of location to live, occasionally less-than-ideal housing on military installations, being on-call 24/7 for deployments, incurring a legitimate risk of injury or death in combat, and forgoing the opportunity to have a more lucrative private practice as a dentist.
Third, our spouses and kids pay the price for our careers. Indeed, lack of stability is the norm for military families in terms of homes, neighborhoods, neighbors, friends, churches, schools, sports teams, piano teachers and the like. One of my daughters had lived in four homes on three continents by the time she was two years old.
Is the pension free, easy money? Not at all. But in our case, it is a game-changer. I anticipate it being the key to retiring (or actually “retire retiring”) potentially 12 to 15 years earlier than I could have done if I’d gone into private practice instead.
Casey Campbell is an active duty military periodontist and a homeschooling father of five. He and his family currently live in Northern Virginia. The views expressed in this article are those of the author and shouldn’t be construed as official or as reflecting the views of the U.S. Air Force or Department of Defense. Casey’s previous article was A Moving Predicament.
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I appreciate all the thoughtful comments, especially as pertains to my inclination to forego the Survivor Benefit Plan (SBP), instead relying on a 30-year term life insurance policy–at least until it expires when I’m 72–and the rest of our investment portfolio to fund my wife’s living expenses if I pass away before her. Undoubtedly, providing for her well-being is my top priority, although “there are many roads to Dublin”, the SBP being one of many. In my case, the SBP premium would be $495/month for 30 years, with premiums increasing each year at the rate of inflation and providing a death annuity of $50,250/year in today’s dollars for my wife. If I do indeed forego the SBP (I’m not sure yet on this), we anticipate having other streams of income to provide for her needs if I pass away after my term life policy expires, including my social security and regular withdrawals from our investment portfolio. There’s no way I’d forego the SBP if we had no other means of covering her needs. Although the SBP annuity is the right option for some, there are other reasonable means of providing financial security apart from annuities, of which the SBP is simply one annuity option. SPIAs would be another, although it’s tough to find one with COLA like the SBP has. There’s a very good book discussing the many pros and cons of the SBP for those interested, called Military in Transition’s Guide to the Survivor Benefit Plan: Navigating the SBP, by Forrest Baumhover. Although I won’t speak for the author, the book indicates that in most circumstances, the SBP is a more expensive option than other methods for providing for a spouse–especially if one has an investment portfolio that can fund withdrawals (at a 3-4% withdrawal rate) that would pay out more than the SBP’s annuity payment. In my case, the SBP annuity payment is $50,250/year, so the portfolio would need to be at least about $1.5M to predictably equal or trump the SBP. Would it be nice to also have the SBP annuity in addition? Yes, although if it’s not necessary, I’d rather not pay the extra $495/month for 30 years. In short, SBP is an excellent option for many, although it’s not necessarily the only or best option for all.
Rob Berger had a interview on his Dough Roller blog with Doug Nordman who retired from the Navy and has penned a couple of Military Financial Guides. He also got a lot of push back about his financial choices when he retired from the Navy. I enjoyed listening about his decision for his family to have surfing lessons start the day after leaving active duty at age 41 when he did retire, retire. I agree there are a lot of paths to financial freedom and you seem to have planned one that will work for you and your family to retire happy.
The blog is referenced below should anyone want to listen.
Best, Bill – Army 72-74
https://podcasts.apple.com/us/podcast/the-nitty-gritty-of-military-retirement-with-doug-nordman/id743822914?i=1000550267439
I don’t believe $495 is the correct amount, unless you plan to have no other post-military income. Realistically, your marginal tax rate will be at last 24% and most likely 32%, plus possible state income taxes. At 24%, the actual hit to your take home income by keeping the SBP is about $376 and at 32% is $337. If you rerun your analysis with those adjusted figures, the SBP option becomes even more compelling.
I just re-verified that for an O-6 retiring with 24 years and 7 months (which I plan to have when I retire), the monthly SBP premium in today’s dollars is $495.43. Thanks for factoring in the tax-adjusted “real” impact of the monthly premiums. That’s a great point. I have to admit that all the comments by smart people on this thread are making me re-think it. I really appreciate your time and thoughtful post.
You’re welcome. And let me also say what so many others on this page have expressed: thank you and your family for your service!
Thank you for the explanation, that’s much clearer. Some thoughts:
— $495/month is a meaningful sum, but it’s a couple of hundred less than the average US new car payment.
— $495x12x30 is a still more meaningful sum, but it’s a fraction of $1.5M. Without wishing to be morbid, you will only pay that much if you live for thirty years after you retire.
— The COLA is priceless. I have a pension, but it doesn’t have a COLA and has been gradually losing value over the years – not so gradually recently. I expect my Social Security payment to pass it in the not too distant future. You can, I think, find annuities with a fixed annual increase, but if you find one with a real COLA you need to come back and tell us.
— There are few sure things, but a federal government pension is most likely one of them.
Update: If you invested $495/month for 30 years you would need an 11.5% rate of return to have $1.5M. (See: https://smartasset.com/investing/investment-calculator#cgVzdCH2K1)
Thank you for your service! I am glad we are providing good pension to our military personnels after 20+ years of active duty. You earn it.
SCao, thank you for much for your kind words and without doubt it’s a “family earn”, and not just a “me” thing.
My thought about providing financial resources to my surviving family after my death has become “belt and suspenders”. That is, I came to the view that I should buy every provision available to provide options and redundancy to my survivors. Suppose there is a medical issue, a car accident, a job loss, and the effects of an economic downturn that requires selling the house, all happening in short order? Would extra pension benefits, etc. be a help and comfort then? I decided yes. By the way, those things happened to us inside two years-2007-09, before our retirement. No reason they can’t happen again after I’m dead and can’t help except through what I provided to continue after my death. We have investments, etc., but guaranteed income with a COLA is priceless to us.
I am shocked, as are many others that you wouldn’t sit down with your wife to see where you could possibly cut back (or take on some extra work after you retire) to afford the SBP payment which is not expensive, is subsidized by the government & would be very important to her as she ages & she could possibly live a lot longer than you. It seems you are concerned about providing for minor children in the event of your early demise, in that case $2M may not go far taking into account costs of further education for all. You gleefully talk about your pension & if the pension is very important to you to have until you die, it’s likely to be just as or more important to her as she will likely live longer & may need long term care/assistance as she ages. Investments in the stock market are subject to economic conditions which may cause a long downturn in stocks at any time & one can see investments sliced in half, they do not provide the same security as a guaranteed pension.
Margaret, thanks for your comment. Please see my new comment above which explains a bit of my rationale.
I’ve been a USAF retiree for 20 years now. I opted for the Survivor Benefit Plan (SBP) hoping it would be the worst investment I ever made. By living a long time after military retirement the SBP “investment” looks worse every year. If I had died young the investment would have been great, paying my wife 55% of my pension until her death. In 2003 I was the sole breadwinner for my wife and 10 year old child, so buying the SBP was a no-brainer, my wife would never have signed off on declining the option anyway. Although, I’m still paying for the SBP for another 10 years, it was still the best choice for my family at the time.
Thank you for your service, Curtis. It sounds like you made a very wise decision with your SBP.
What is your base pension (first year) as a percentage of your average final 36 months of pay? In my pension plan it’s 68%. (i.e. If your average high three is $100K then your base pension is $68K)
Mr. Clements is correct that if someone retires at 20 years, the monthly pension will be 50% of the average of the final 36 months of pay. For each additional year served beyond 20 years, the percentage will be 2.5% higher than 50%. So if someone retires at 21 years, the monthly pension will be 52.5% of the average of the final 36 months of pay. If someone retires at 30 years, the monthly pension will be 75% of the average of the final 36 months of pay. This system is slowly evolving to a lower multiplier percentage, i.e., the people joining the military today don’t get so generous a pension. But they do get a 4% 401k match that my generation has never received.
I believe it would be 50% if you serve for 20 years, and more if you serve for longer. You can learn more from John Goodell’s piece:
https://humbledollar.com/2021/03/standing-down/
I have to agree with those questioning the decision to forego the wife’s survivor benefit. Both my husband and I receive very substantial pensions from Wisconsin — one of the most highly rated state pension funds. We both elected for a 100% payout to the surviving spouse. We’ve been retired for 7 years and have found our post retirement spending is pretty much the same as pre-retirement. I suspect that the surviving spouse will not see a dramatic reduction in expenses, especially if tax rates go up dramatically. We hope to leave our Roths and IRAs to our kids.
Ms. Lavin, thanks for your comment. Please see my new comment above which explains a bit of my rationale.
Definitely pros and cons to serving as you did. The one big pro is that you can retire early with a large pension and health care.
401k’s were originally created to provide additional retirement income to pensions, but corporations got greedy and saw a way to eliminate a huge expense, the pension.
The military pension and healthcare is great, based on what you say here. Most will not get those in the business world.
The average SS is way below your pension, and the average person has way too little money saved, according to certain institutions. Previous generations had pensions to rely on, but that has gone away in most cases.
In my case, I would not want to live with the cons of military service you listed, but would love to have your pension and medical benefits.
Fortunately, I was able to get an excellent paying position in financial services and accumulate a very large nest egg that provides more than enough income and cover the $8,000+ annual Medicare premiums for my wife and me.
Unfortunately, according to published statistics, too many Americans will live way below their standard of living while they worked.
I have a military retirement after almost 27 years of service. Because I entered the service before 30 Sep 80, my retirement was based upon my last paycheck, unlike Casey’s. I went full Survivor Benefit Plan (SBP) for many reasons I won’t get into here, however, when I made the decision a retirement counselor at the Coast Guard Pay Center told me they get calls every month from surviving spouses who’ve lost their husband’s retirement check. You see, the spouses never knew their husband declined SBP. To alleviate this issue, spouses for years now have been required to acknowledge, in writing, whether or not their military spouse elects SBP upon retirement. Another fun fact about the military’s SBP is that it’s paid up after 30 years. So, when I turn 78, if I’m so lucky, I’ll get a nice boost in my retirement pay.
And now my thoughts on military dentists. I grew up with a mouthful of cavities. The fact that my hometown, Eugene, OR, didn’t fluoridate their water probably played a role in that. My childhood dentist, a nice man, did not deliver pain free dentistry. I feared the dentist as a child. The first pain free dentistry I experienced was in the military. The CG uses Public Health Service dentists and they provided me fantastic care. While in Navy flight training, in 1987, a young Navy LT dentist told me he had to replace every filling in my mouth because they were deteriorating rapidly. He did a magnificent job, every Friday afternoon, for weeks, so as not to affect my training schedule. Given who enlists in our military these days, I wouldn’t be surprised if many of these young men and women need extensive dental care. My experience has been the military dentists, like Casey, will do a great job.
Mr. Brennan, thank you for your service! Military dentists have definitely grown in their skill and technology over the years, and they are very much able to provide cutting edge care–and never at a cost to the patient. It is very comforting to tell any given patient that we can treat all their needs without regard to payment ability, so the patient never has to wonder if the dentist is over-treating and/or trying to make the next boat payment.
Hi Casey,
Reading your statement, “Second, we essentially give up our personal freedom during the 20-plus years of service” is just reminded me again about the sacrifices that our Veterans and their families make to protect OUR freedom. Even though I know that our service members do not control their lives once they enter the service that line really struck me. Each time I feel I understand the sacrifices you make, I realize I really don’t. I get upset when I read that the government is not honoring the commitments made to our service members. It is imperative that that we do!
David, thank you for your kind words. I feel the same, particularly for our youngest military enlisted folks.
The more I think about your intention to decline the survivor benefit on your pension the more, er, puzzled I am. I read the linked article, and the government is subsidizing the choice, and there is no tax penalty. Why would you decline?
I am sure your wife has put as much into earning that pension as you have. Just bearing, never mind raising and home schooling, five children is an enormous effort, and with meaningful risks in the US. Plus, organizing all those moves! You may think that 72 is ancient, but according to Social Security a 72 year old woman, today, can expect to live another 16 years, and that should increase over time. (BTW, if you have kids at home, do you have term life on your wife?)
The market can be generous, but it can also decline, and your asset allocation is aggressive. If I had been a stay-at-home wife (which I was not) and my husband had asked me to sign off on no survivor benefits I can’t imagine agreeing without a better explanation than you have provided. She deserves the security of a COLA-protected government pension as much as you.
Thanks for your comment, and I fully agree that my wife has put as much into earning the pension as I have, and possibly more (as a homeschooling mom of five). Please see my new comment above which explains a bit of my rationale. I’m also slowly adjusting my asset allocation to 65/35 for the reasons you mentioned, and anticipate getting there in 5 or so years.
In your opinion, the asset allocation is aggressive. May I ask what you’d recommend? I ask because I’m in a similar situation with a pension and separate investments. Thank you.
Not just my opinion. Everything I’ve read on asset allocation would put 80/20 on the aggressive end. What is appropriate for you depends on your appetite for risk, your need for risk, and your age and employment situation. If you have a pension with a COLA your need for risk is lower. If you want advice I would recommend a session with a fee-for-service financial planner, operating as a fiduciary.
You link to information in your article regarding the survivor benefit plan from the Air Force. For the reasons cited in that article I expect I would choose the option to pay the premium to have pension coverage for my wife after I died if I was making such a decision for her and me.
Having a former employer end the business I worked in for 28+ years I decided I did not want expend time and effort to start a new firm at age 67. Your profession appears to be in high demand yet when you leave the Air Force I suspect it will be difficult to jump out of the frying pan into the fire of starting a second act of your professional career if you do not retire, retire. Even if you are financially secure enough to retire at a relatively young age you need to evaluate your purpose in life and your profession may be a big factor. It was for me.
Your article also reminds me of some of the comments that Dr. John Lim has written about regarding his decision to leave a traditional medical practice and to join the VA for family reasons. Could a second act at the VA be a win win for you and our veterans when you stop serving active duty military?
Thank you for your ongoing service.
Mr. Perry, thank you for your thoughtful comments. Although I mention “retire-retiring” when I get out of the Air Force, I do anticipate having another job at some point. It may not be as a clinical periodontist, but perhaps rather a high school chemistry, biology, or anatomy/physiology teacher. The VA is a great option too, as you mentioned. Thanks again.
My dad was career Army and retired with 24 years active duty service. Then he became a college administrator & professor for the next 25 years. When he fully retired, he brought in far more income / month with his two pensions + SS than he ever made while actively working.
My crystal ball isn’t perfectly clear but I’ll join with the others who recommend that you do go with the survivor benefit for your spouse. My father did this for my mother (who outlived dad by nine years) and it made a significant difference to her, even with a large estate.
Mr. Carr, thanks for your comment. Please see my new comment above which explains a bit of my rationale.
Thank you for your years of service! This is one part of my taxes that I’m happy to pay.
Thanks, and I’ll join you because my taxes are paying for it too!
I question your statement “…a rather expensive way to insure the pension…”. If I understand it correctly, the survivor benefit for your spouse costs 6.5% (pre-tax) to provide a 55% survivor benefit. When considering the tax savings and then the cost of the term life insurance, it doesn’t seem the additional cost of the survivor benefit is very expensive at all. Then there’s the value of the peace of mind that comes from ensuring your spouse has a COLA adjusted income stream that’s enjoys ERISA protections from all manner of future risks in our society to take it from her. I agree with R Quinn below and I’d think twice before assuming a lump sum will easily or reliably replace it.
OldITGuy, thanks for your comment. Please see my new comment above which explains a bit of my rationale.
Agreed. If I were the wife I would absolutely want that survivor benefit. (I might put it more strongly..) Doesn’t she have to sign off on forgoing it, or is that only company pensions?
Yes, my understanding is the survivor benefit is the default option and she’ll have to sign off for anything other than the full (55%) survivor benefit.
Pensions are the gold standard in retirement and in your case, unlike the private sector, they are guaranteed. The military is unique, but other government pensions especially state pensions are overly generous in terms of the affordability for the taxpayers footing the bill.
I don’t know the age difference between you and your wife or the actuarial factors, but before you take the leap, I’d double check the benefits of a survivor annuity and the guaranteed income it can provide.
What about the years beyond your age 72 when your wife may be vulnerable to performance of investments at the most risky ages?
I elected a 50% and 75% survivor option for my pensions and knowing my wife will have a steady income is comforting. The fact she is 4 years older than me, lowered the cost. A much younger spouse may be different.
Mr. Quinn, thank you for your thoughtful comments. I always take your writings under heavy consideration, given you wisdom and repertoire. I will definitely “measure twice, cut once” before foregoing the SBP.
I usually say that government pensions are too generous. But, for the reasons you mentioned, those who served over 2 decades in the military have more than earned it.