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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