If you haven’t picked up on this by now, I don’t intend to work for pay after I’m done in the military. If I end up getting out before I qualify for a military pension, I’ll move on to a Plan B or C or D. But right now my Plan A is to retire on a military pension.
Exactly what rank and year I retire at is, of course, still to be determined. But since I’m an officer, I’m going to lay out my possible scenario here. I’m going to go with retiring at 20 years, even though that’s not necessarily my plan. Why? Because the pension would only go up in size from there, so a 20-year pension is kind of a “worst-case” scenario (fully recognizing how awesome any pension is!).
Today I’ll be looking at a potential budget I could live on if I were receiving a 20-year, no disability, retire as an O-5 (Lieutenant Kernel 😂🌽) pension. Next week I’m going to look at what an enlisted member’s retirement budget might look like (you can find that here). There are wayyyy more enlisted members in the military than officers, so I can’t leave them out! But their pay is lower, so their pensions are lower. That’s going to change what a possible budget would look like. And, if I can get some folks with dependents to share their numbers, I’ll try to do a multi-member family version too! Reach out to me if you want me to do a case study for your situation.
So, is it really possible for someone to retire on a military pension? Spoiler alert: yes.
Note: All numbers in this post will be based on 2017 dollars. All tax talk will be based on 2017 rules.
The Military Pension
I’m not going to get into the nitty gritty details of the military pension system here. Suffice it to say, under the current High-36 system, retirees get 50% of the average of their highest 36 months of pay if they retire at 20 years. That’s based on the current formula:
2.5% x Number Of Years Of Service x Highest 36 Months Of Pay
So, for someone retiring right at 20 years, it’s a 50% pension. That isn’t 50% of total pay and allowances, just basic pay. But it’s still a very respectable amount. Once people start retiring under the new Blended Retirement System, the formula will be different. The earliest that can happen is over 8 years away, though, so we’ll stick with the legacy system’s formula for this post.
Scenario: Lieutenant Colonel retiring at 20 years
- State income tax rate 0% (some states have no income tax, others don’t tax military pensions, so this is very doable)
- Do not own a home outright at the start of retirement
Remember that for this one, I’m looking at what my own situation would be. These numbers are based on what I personally spend in different categories. Your numbers would be different.
According to this military pension calculator, an active duty O-5 who retired on January 1st, 2017 with exactly 20 years of service would be receiving a pension of $50,918 annually. That’s $4,243/mo.
Before we even get started, let me say I recognize the ridiculousness of questioning whether a single person can survive off nearly $51,000 each year. I know it’s possible. It’s more than the median earnings of full time employees in the United States.
However, I often run into military members who insist a military pension is not enough money to live off. Just in the past year, I had two people literally laugh in my face at the thought of my pensions + rental income + investments being enough – an amount much higher than the pension alone. According to them, it would be nigh impossible to live off less than $100,000 annually.
This is a dollar by dollar breakdown of exactly how it could work. Because while not everybody may want to live on just a military pension, I want to show that it is possible. Options, people. Options.
Let’s break it down
Taxes: $489/mo, $5,870/yr (note I used this calculator for estimating taxes. I find it to be nearly spot on every year)
At $50,918 annually, after accounting for deductions and exemptions, I’ll be in the 25% tax bracket. That’s because with a $6,350 standard deduction and $4,050 personal exemption, I’m looking at taxable income of $40,518 – still in the 25% bracket. Yes, there are things I can do to get into a lower bracket, but based on normal rules that’s where I’ll end up. Besides, there are Other Factors (see bottom of post).
Running Tally: $489/mo, $5,870/yr
Housing: $1,580/mo, $18,960/yr
This is based off living in what is currently my rental property. My current PITI (principal, interest, taxes, insurance) is $1,033. Utilities including water/sewer/trash ($55), gas ($80), electric ($120), cable/internet ($120), and cell phone ($40) comes to $415 total. A sinking fund for home repairs is $100/mo. $1,033 + $415 + $100 is $1,548/mo. I’m rounding up to $1,580/mo to account for unexpected expenses.
Running Tally: $2,069/mo, $24,830/yr
Insurance: $100/mo, $1,200/yr
Though I expect I won’t need life insurance once I’m financially independent (the point is to replace income) I’m still budgeting $50 for it each month. If I need it, it’s in the budget. If not, that’s extra money. As a military retiree, I’d qualify for incredibly cheap healthcare, as low as $24/month if I stick with the military networks. Copayments are so low that I’m not even worried about budgeting separately for them, at least not while I’m young and healthy. I’m planning $100 total for these.
Running Tally: $2,169/mo, $26,030/yr
Transportation: $315/mo, $3,780/yr
I will pay for cars in cash, used (2-4 years old), and drive them for 8-10 years, so my transportation costs will be low. I’ll set aside $100/mo for future cars, a practice I’ve had in place since 2007. Car insurance on a used, economic but safe car is cheap. On my last car, I was paying $55/mo, but it was almost 12 years old at that point. Assuming a newer car I’m planning $90/mo for insurance. Gas and other transportation (like Lyft) should run about $75/mo. $50/mo for repairs and maintenance should cover the rest of my transportation expenses. That’s $315 total for the month.
Running Tally: $2,484/mo, $29,810/yr
Travel: $500/mo, $6,000/yr
As a retiree, I’ll be able to take advantage of cheaper “slow travel,” where you can maximize your dollars instead of hustling back and forth and paying $$$$ to get everything done in time. I’ll be looking into opportunities like house sitting to save money. And as a military retiree, I’ll have the time and ability to pursue Space-Available travel, so flights will be potentially nearly free and staying on bases will be cheap. All of that, plus travel hacking, will hopefully add up to a lot of travel for not a lot of money!
Running Tally: $2,984/mo, $35,810/yr
Everything Else: $1,000/mo, $12,000/yr
This is everything else that a person needs to pay for: food, entertainment, clothing, pet stuff, charity, gifts, etc.
Running Tally: $3,984/mo, $47,810/yr
That leaves $3,108 each year for things I’m forgetting or larger-than-expected expenses. That’s a pretty good buffer, in my opinion.
I do plan to have other income in retirement. Right now, my two main sources of income outside my job are my dividends in my taxable brokerage account and my rental property. Assuming I still have each of those things when I retire, my actual income would be more than $50,918. Again, the budget I showed above is what my minimum budget would look like.
I also have all of my investments that aren’t currently throwing off an income – the principal of my taxable account, the equity in my rental, my TSP, and my IRA. All of that is icing on the cake if I receive a pension. If I don’t, or if something happens that lowers the value of the pension, it will be how I derive enough income in retirement. This is my Plan B.