Can I Count On A Military Pension?

A reader asks:

“Thank you for your words of wisdom in your blog and being a source of motivation. I have a quick question and I would appreciate your advice. I have 18.5 years towards my military retirement and plan to go another 10 years or so. That would put me at 50 years old which is my goal retirement age. Unfortunately along the way I have not saved quite as well as I should. I am debt free but only have about $150,000 saved in several Vanguard index funds. I also have $20,000 cash in a money market. That’s it. I do place $1500/month into my TSP and Vanguard index funds (some of which are Roth IRAs) and plan to do so until I retire from the service in 10 years. My current plan to be able to retire is completely reliant on my military pension. My question is this: if you were in my shoes would you trust having this military pension for the rest of your life or would you continue to work past 50 in order to have the actual assets in your portfolio to retire without having to rely on this pension? Basically, how solvent is the military pension in your opinion? Thanks!”

It’s interesting that you ask these questions after Congress tried to whittle down the military retiree COLA. It’s the worst attack on retirement benefits since REDUX, and it took over a decade for the military to persuade Congress that REDUX wasn’t working. This COLA controversy was totally unpredictable (political risk) and changes to the military compensation system might still return someday to bite future military recruits.

Personally, especially after the COLA controversy, I’d trust the military pension for the rest of my life. (Nearly 12 years so far, so good.) It’s an entitlement in federal law. Military pension payments come from a special-purpose Treasury bond that DoD is required to fund, and it’s probably more financially secure than Social Security. (It’s definitely more stable than Medicaid or Medicare.) The other side of your question is that if DoD stopped paying military pensions, then other aspects of life in America would have become so bad that you’d no longer be concerned about the pension.

As we’re learning, benefits are more negotiable than entitlements. MOAA and other military advocacy groups are constantly educating our elected representatives on how a “small” benefits cut will affect readiness and trust. Keep yourself informed– subscribe to their website and e-mails for news that could affect your pension and other benefits. Join the national organization or a local chapter and help keep legislators aware of the effects of their budget votes.

However, we also need to watch out for our own finances and have alternate plans. If a retirement plan can be derailed by a single failure, then the plan needs to be stronger. During the next decade our Tricare Prime fees will continue to rise, some bases and commissaries may shut down, and federal long-term care insurance premiums will go up. As the military draws down, senior servicemembers who have not promoted may be voluntold to retire. Nobody wants to spend their entire retirement worrying about a part of our finances that we can’t control.

Take a look at your “worst case” minimum retirement assumptions. For example, you may decide that the fun has stopped and you’d like to retire at exactly 20 years of service. Calculate your pension for that rank. If your spouse elected full Survivor Benefits Program then your pension income would drop by 6.5%, and after federal taxes it would drop by another 10%-15%. If you’re not ready to retire this year then you can estimate your future High-Three 20-year retirement much more precisely if you assume that the military will have a 1.0% pay raise in 2015 and 2016, and manually average your highest 36 months of pay.

Once you’ve reached the 20-year point, you can decide whether you’re still having fun in uniform or whether you want to start your bridge career. If you’ve pushed hard for financial independence, you may determine that you don’t even need a bridge career. Maybe you’ll pull down a six-figure income in a defense industry related to your military skills. Maybe your military pension covers your expenses, and you’ll find a totally different (yet still fulfilling) way to spend your time. Take a harsh look at your expenses and make sure that you’re spending your money where you feel it has the most value. If you’re happy with your spending then you’ll be willing to work for it (either in uniform or in civilian attire). Don’t cross the line into deprivation, but cut spending on the things you’re not willing to work for. The more you can boost your savings today then the quicker you’ll compound the investments to financial independence.

Ideally you’d find work you love while it delivers a huge income. Until that happens, financial independence is your top priority. As you continue to optimize your spending and maximize your savings, at some point your military pension will fund a bare-bones lifestyle. It’s an inflation-adjusted annuity which serves as your safety net, and later it’ll be augmented by Social Security. Once you reach a safety-net level of annuity income then you can keep growing your other investments until they fund the rest of your lifestyle. You could certainly go with a 4% safe withdrawal rate by accumulating assets that are 25x the annual spending shortfall between your military pension and your budget. Statistically that works over 90% of the time (for at least 30 years), and the worst case is that you’ll have to live on “just” your pension & Social Security. In practice your retirement spending will vary, and that will cover any gaps in the 4% SWR’s future expectations.

There’s no magic number at which you’ll be able to declare your financial independence. Instead you’ll reach the point where one or two unpleasant surprises (like shrinking military benefits) will not bankrupt your planning and force you back into the workplace. Until then, if your plans can be derailed by a single point of failure like a smaller COLA, then you should keep working or finding more ways to cut expenses.

Related articles:
The regulation for calculating an active-duty military pension
Frugality is not deprivation
How many years does it take to reach financial independence?

Military Financial Independence on Amazon:

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About Doug Nordman

Author of "The Military Guide to Financial Independence and Retirement" and co-author of "Raising Your Money-Savvy Family For Next Generation Financial Independence."
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8 Responses to Can I Count On A Military Pension?

  1. Mel M. says:

    Excellent post! I am inclined to believe as you do that our military pension would endure…however, I am also inclined to think that it would be subjected to some change in the next decade as the ongoing assault from within DoD and other factions would continue, with our political leaders continually failing to address our growing debt and unrestrained spending.

    I think the OP would really need to sit down and clearly identify what his projected expenses would be prior to retirement and during retirement to get a full grasp as to what he needs during retirement, and whether his projected military pension (with his savings and investments) would suffice. With $170K saved up for retirement, I think the OP would really need to curtail expenses and ratchet up that savings rate over what he has been saving/investing currently, if he hopes to get close to his “number” in the next decade or so. I think one of your previous posts point to a 50% savings rate, over about 16-17 years of working, is required to fund a retirement…of course these are planning factors and there are plenty of variables that come into play but one can get a full appreciation as to what is required to fund a “comfortable” retirement. He would also probably need to focus his investments (maximizing contributions to TSP and IRAs as well as any taxable accounts) on mostly equities if not all in equities (higher risk, possibly higher returns). There’s also the option of moving to lower cost of living countries to stretch those retirement assets.

    There’s nothing worse than thinking you’ve crossed the finish line only to find out before crossing that line that they’ve moved the line even further.

    • Doug Nordman says:

      Good points, Mel! It’s a complex problem with plenty of variables, but financial independence does take about that much time at that savings rate. The good news is that he’s considering those variables now instead of only a year or two away from the transition.

      The military retirement system is in the news a lot these days, and sometimes it makes me wonder whether DoD and the legislators have really learned anything from the REDUX fiasco of 1986. One consolation among the political theater has been that Congress (eventually) and the administration (consistently) recognizes that all proposed changes should grandfather those who are currently serving.

  2. Rob @ The Military Financial Planner says:

    Did you see the proposal to increase SBP premiums to 10%?

    • Doug Nordman says:

      Ouch indeed!

      If I remember correctly DoD subsidizes half the cost of the program, so they probably feel that this is a “fair” adjustment. It’ll be interesting to see whether any change to the program actually occurs at all.

  3. DD says:

    The real question is what will your retirement $’s purchase… If a loaf of bread is $50.00, a gallon of gas is $15.00 and the COLA we are given is not commensurate with actual costs (it hasn’t been lately), that will be bad. The best thing we can do is stay out of debt and live well within our means.

    • Doug Nordman says:

      Good points, DD!

      Every retiree has to track their own personal inflation rates and not depend on the CPI. The military pension COLA is not perfect, but it’s the envy of almost all other pension systems (and more sustainable than them).

      In my own retirement (nearly 12 years) my expenses have dropped significantly. Retirees have much more flexibility with their spending (and the time to optimize it), so that would have happened with or without the COLA.

      Our fastest-growing future expenses will probably be travel and health– not because we’re spending so much more on them, but because everything else is flat or declining.

  4. Deserat says:

    Excellent question by the poster and excellent answers by Doug. I believe the key is to determine what you want for your lifestyle and then figure out what stream or steams of income will be required to maintain that lifestyle. Part of the process of becoming FI is to determine that balance point, i.e., what are those things that you would prefer or do not want to give up versus what things do you not really care about or value enough to buy the best or even buy. For many the military pension can cover their lifestyle cost, especially if they have some of the big monthly expenses covered (mortgage paid off, cars paid off, etc). From there it’s a matter of do you want to eat out a lot or not, what types of hobbies do you have, how much does it cost to develop those, etc. Many times, you can find ways to more economically enjoy your hobbies.

    As for the future benefits that the military will offer retirees, Doug is spot on with regard to retirees bearing more of the cost burden and some of the facilities being closed (example: many stateside military libraries were closed in the sequester). Prudent research on how to replace those services at the same or not as much of an elevated cost may be in order. Moreover, Doug is correct about longevity….I tell many that the ‘gravy train’ is over. To stay in, you will have to perform and meet the ‘up or out’ criteria – automatic waivers to retirement eligibility after being passed over two times is not a guarantee, either, witness the last few years of the Air Force not allowing Majors to progress to retirement eligibility.

    So, is the retirement there? Yes, if you make it to 20 – after that, it’s timing as well as performance based. What you control is your lifestyle costs and desires along with any other streams of income you have set-up (tax-deferred, after tax, extra jobs or ‘businesses,’ etc). Nowadays, it is prudent to have few back-up options for those streams of income, even if you have the ‘gold-plated’ defined benefit pension of the US military.

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