Well. Apparently the thought of retiring – truly retiring, not just moving to a new job – after 20 years in the military struck a chord with the interwebs. That post has been shared a lot over the last week. But as I said, I couldn’t possibly do a post about retiring on a military officer’s pension and not talk about what it would/could look like for an enlisted member. Retiring on an enlisted military pension is not quite the same as retiring on an officer pension.
Most people know that enlisted members earn less than officers with the same number of years of service. This is obviously going to have a big impact on a military pension for retirees. Two military members, one who has always been enlisted and the other who has served as an officer, are going to have dramatically different monthly pension payments.
So the question becomes, just how feasible is it to retire on an enlisted military pension? Remember, we are talking about fully retiring. As in, they aren’t looking to transition to another career and receive another paycheck.
Well, today I have my first ever guest on the blog, David from Financial Serenity Blog, to answer that question.
David is an E-6 (Staff Sergeant) in the United States Marine Corps. He lives in a low cost of living area, which helps him keep expenses low. He has shared his actual, current budget with me for this post. Why? Because not only is he living on the amount an enlisted member is likely to receive upon retiring from the military…he’s living on less!
I’m not gonna lie – when I first saw his numbers I thought he must be leaving something out. But…I don’t think he is. He has basically all of the same expenses I do, he just spends less on some of them. So while your initial reaction may be to scoff at the budget, I’d ask you to approach it with an open mind. I think his budget checks out.
I’m going to use his real life budget to show what it might look like to retire on an enlisted military pension. Then we’ll hear from David to get some more information.
Scenario: Master Sergeant retiring at 20 years
Assumptions:
- 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
- Single-no-dependents
- No Disability
For this scenario, I’m looking at David’s life. Right now, he is single with no dependents. The budget below is based off that. As always, your numbers would be different based on your own scenario.
I’m also assuming that he would be an E-8 at retirement, based on the “Average Years of Service At Promotion” table in this article. I recognize it’s a few years old but it’s all I have right now.
Side note: Why do Marines promote to E-6 so much earlier than Airmen???
According to this military pension calculator, an active duty E-8 who retired on January 1st, 2017 with exactly 20 years of service would be receiving a pension of $29,350 annually. That’s $2,445/mo.
As you can see, we are working with a much more limited budget this time as compared to last week’s post. But as I’ve already said, David is already making it work on less than this amount.
Let’s break it down
Taxes: $198/mo, $2,380/yr (I used this calculator for estimating taxes. I find it to be nearly spot on every year)
At $29,350 annually, after accounting for deductions and exemptions, David will be in the 15% tax bracket. That’s because with a $6,350 standard deduction and $4,050 personal exemption, he is looking at taxable income of $18,950, which is in the 15% bracket.
Running Tally: $198/mo, $2,380/yr
Housing: $830/mo, $9,960/yr
David’s rent on his current apartment is $615/mo. Remember, he lives in a low cost of living area. He budgets $85 for electricity, $65 for internet, $15 for Netflix, and $50 for his cell phone for a total of $215/mo. The apartment building pays for his water/sewer/trash. $615 + $215 = $830/mo for housing expenses.
If you are thinking to yourself “That’s crazy! I could never find a place to live that cheap!” I will say – even as someone who follows this kind of lifestyle, that seemed low. So I did a quick search, and here is a small portion of the many places where you can rent at least a one bedroom apartment for $615 or less each month. And these are just within the United States. There are also many places abroad where you can live for the same or considerably less.
- Phoenix, Arizona
- Oklahoma City, Oklahoma
- Indianapolis, Indiana
- Wichita, Kansas
- Little Rock, Arkansas
- Amarillo, Texas
- Eugene, Oregon
- Pueblo, Colorado
- Mobile, Alabama
- Toledo, Ohio
- Knoxville, Tennesse
- Jacksonville, Florida
Running Tally: $1,028/mo, $12,340/yr
Insurance: $120/mo, $1,440/yr
David is currently paying $80/mo for car and renter’s insurance. Throw in $24/mo for a single member to receive military retiree healthcare and $16 as a sinking fund for the very low copayments to make it an even $120/mo.
Running Tally: $1,148/mo, $13,780/yr
Transportation: $120/mo, $1,440/yr
David is paying about $90 for gas and saving $30 for car maintenance each month right now. That’s a low $120 total for the month. He’ll tell you how he pays for new cars a little later on.
Running Tally: $1,268/mo, $15,220/yr
Travel: $350/mo, $4,200/yr
David currently cash flows his travel, but previously budgeted about $350/mo for it. As a military retiree, he would also be able to take advantage of Space-Available travel, so some flights will potentially be nearly free and staying on bases will be cheap.
Running Tally: $1,618/mo, $19,420/yr
Everything Else: $605/mo, $7,260/yr
David currently budgets $225 for food, $30 for supplies around the house, $150 for health/beauty (I assume that includes clothing), and $200 in “mad money” to do whatever he wants. That’s a very reasonable $605/mo.
Running Tally: $2,223/mo, $26,680/yr
That leaves $2,670 each year, or $222/mo, leftover. That’s actually a very nice buffer, considering how low the income is. That leaves him with 9% of his gross military pension, or 10% of his net pension payments, for emergencies, increased expenses, etc.
Those were my own thoughts on what his budget might look like if he retires on an enlisted military pension, using his current budget as a guideline. Now let’s hear from David to see what he thinks.
First up: this is your budget, with a little extra added to pay for the things you will need once you retire from the military. Does this look feasible to you? What would you change?
Yes, this budget looks very feasible. Actually, many of these categories I over budget in as a safety net. One example of this is my food budget of $225. This month I’ll spend about $150. My only change would be to health and beauty. I won’t be getting haircuts every week once retired from the Marine Corps. So that category I would look to lower and probably add the difference to the travel funds. Also, I do plan to eventually start a family so I would have to adjust based on that scenario as well.
Your current spending is incredibly low! Why did you decide to live so frugally?
Well, it’s funny you say that because to be honest I feel like I still spend a lot of money. I literally have gone to Florida, Las Vegas, San Francisco, and Key West so far, this year. Well it all started in 2015, I was PCSing from Arizona to Mississippi where I am now stationed. I just went through a divorce and realized I wanted more out of life. I just turned 30 and did not have much saved up like many other enlisted. So, I decided at that point it was time to slowly change not only my lifestyle but my mindset as well. As mentioned above I do plan to marry again and start a family one day. So, I figure the more I can save now the better off my family will be. Especially when I might not be able to save like this with kids.
Have you always been this frugal?
I wish I was always frugal! I kick myself in the butt all the time knowing how much more freedom I could have if I saved more in my 20s. I was the exact opposite of frugal before I started this journey. Actually, I spent close to $100K in vehicles in my 20s. Yet now I feel it gives me a great perspective to help others because I was there and made that mistake.
You are earning more than you spend. What are you doing with the rest of the money?
I currently save all the rest of that money. I use the TSP as it is a great tool for military members. I also max out my Roth IRA every year and put the rest into a taxable account. I have learned my money is basically little workers and I need to put them to work to earn me money. The more I save the more opportunities and choices I will have down the road.
I try to hit close to a 50% savings rate each month. Some months I’m able to save more some I save less. It’s crazy how fast it adds up when you invest your money. In two years, I have increased my net worth by 400%. Now I believe some people might be thinking it’s impossible to save that high of a savings rate. Yet once I stopped buying stuff to chase happiness, impress and get validation from others life became very cheap. Now once I am married will I still save like this? I would like to think I will save more than this. Because I will have two incomes as long as we have the same ideals about finances. Of course, once kids come to play it will come down. But at that point I hope to already have a good foundation of wealth to my financial house.
You don’t have money in your budget for things like buying a new car or saving for a down payment on a house. What is your plan for future large purchases?
Great question for sure. I have a twofold solution for this question. My first thoughts are I’ll use my taxable account for all big future purchases. That is why I started one last year. My second thought is I would cash flow the purchase over a period of time by buffing up my emergency fund. This is in case the market goes down and the taxable account takes a big hit. By doing this it will give it time to heal.
I typically have about $1,000-$1,400 a month that I will invest into the taxable account or cash flow big items. So, if I really wanted to I could start today and in about 10 months have the cash to pay for a newer vehicle. With doing that I would never have to stop contributing to retirement and I could let the taxable account heal and grow if need be. The house I would use the same concept only for a longer period of time. At my current rate, I already have almost a year of expenses saved up in my taxable account.
Have you calculated what you think your investments will be worth by the time you retire? What do you plan to do with the money?
Yes, I have calculated this number many times over. Probably too many times to be honest with different scenarios. I love planning things out and I seem to be good at it for the most part. To me a big piece of this is knowing what is your number to reach Financial Independence (FI). Once I know that number I can start planning avenues to be able to reach it. I would like to retire at about 24 years in the military – at that time I plan to hit around $600K in investments and cash. My plan is to continue to let that money grow.
But I would like to buy a house to live in and probably one rental property. Currently planning to just put 20% down or so on both. The perfect scenario is I make enough on the pension and rental income that I don’t have to touch the investments except for a little bit if I decided to completely stop working. But we all know nothing goes as planned and that is why I still make growing my investments a priority. At the 4% withdrawal rate $600K would give me $24K a year of income add that to my pension and I or my family would not have to do any work unless we wanted to.
What advice would you offer to other military members who want to retire early?
So many things I could say to this question. I would start by saying don’t let those pay increases cause lifestyle creep. Don’t mind that your neighbor got that $50K truck, yea it’s cool but you don’t need it and it won’t get you your freedom. We must look at savings as not really sacrificing – instead we are buying more time or our freedom. Military members have a very unique opportunity that creates the perfect storm to be able to retire early. This is because we can get a good pension if doing 20 years or more and the incredible low cost of health care once retired.
Figure out your “why” you want to do this as that will keep you motivated. Figure out what your passions are and what really brings you the most value and long-term happiness. By doing this I would bet you will not only feel more content in life but you will save incredible amounts of money. Lastly read every day, read books, blogs, articles, listen to podcasts, there is so much knowledge out there for free that will change your life and ultimately help you on this journey.
In Summary:
- Invest as much as you can, in both tax-advantaged and taxable accounts
- Avoid lifestyle creep
- Establish a good foundation for your financial house (love this!)
- Keep learning more, every day
I want to thank David for helping me out today. It’s good to see proof that retiring on an enlisted military pension is within reach. If you have any questions for him or feedback for me, please leave a comment below. And please check out David’s blog at https://www.financialserenityblog.com/. Thanks for reading!
Thank you for sharing. It is definitely doable to live on an enlisted retirement pension if you set yourself up for it.
We are just a couple years further down the road than David. We are a family of 3, husband will sew on E-7 in a couple months with 6 years left until his 20-year mark. We are debt free with a paid for home (currently a rental property).
We ran the numbers a couple years ago and we could live on my husband’s pension if we wanted.
Instead, our plan is to both work part-time (~30 hours) and be present and involved with our son’s life. We are choosing to work in order to give back to our community and to retire quite comfortably which will most likely happen in our early 50’s.
Nichole, what a great story! I’m impressed with your progress, impressed with your attitude, and impressed with your reasoning for continuing to work. Congratulations to your husband on the promotion and all of you for the life you’ve put together.
Mil$
This is so doable! We are doing it right now! My husband retired from the Army two years ago, at the age of 41. His pension is $2600 before taxes and I’m not working. While on AD, we saved at least 50% of his take home, along with the income from my jobs. So far, we have not touched any savings and are living strictly on his pension. Our son is out of the house (he graduated in 2013), so its just us and we are blessed to be sitting in a wonderful position – able to donate to charity and able to still be able to help people with physical needs. Plus there’s still time and money to do things we want to do.
If you are willing to save and tell yourself “No” during your time on AD, you can build a wonderful nest egg for your future!!
Wow, that’s incredible! With that level of savings, living on that amount of pension probably came pretty naturally, I’d guess? I’m so excited to hear you are not only able to make it work, you also have money available to give. That’s a great position to be in!
Mil$
If you plan to retire early why the Roth? You need the money to be available at retirement or at least available without paying a penalty.
Hi Josh – very good question. Hopefully David chimes in too so we can see if he has a different answer, but here is mine.
Funding a Roth IRA, either during working years or immediately after in what’s known as a Roth conversion ladder, is a very common tactic in the early retirement community. That’s because the Roth IRA has a special allowance not seen in all retirement accounts that allow you to withdraw contributions tax and penalty free.
That means if you contribute, say, $100,000 over the course of a 20-year career, you can withdraw up to $100,000 without taxes or penalties. You do have to leave the earnings in the account until age 59.5, though, unless you meet other special requirements.
It’s a way to save money in a tax advantaged account while also having it available for early retirement. It’s one of my favorite tax loopholes!
Mil$
I didn’t know you were able to withdraw contributions from a Roth tax free.
I was aware of the rule 72t and had initially thought of using that to spread out my income in early retirement and give my retired pay a small boost.
I’ve had some basic discussions like this with the “advisors” we’ve had on various AFB’s, but there knowledge level and target audience is for the 20 year old who lives paycheck to paycheck but drives a $30K car and invest nothing.
They need a class for these types of questions and scenarios.
Thanks for the posts and the follow-up comments have been great.
Tim,
Yep, tax and penalty free withdrawals of Roth IRA contributions is one of those quirky little things that makes early retirement possible! I wish more financial advisors mentioned it, but then so few people pursue early retirement that maybe it isn’t worth their effort.
This is a good article to explain IRA withdrawals. Normally I like to link to the primary source, which in this case is US Tax Code, but that section of the code is even more painful to read and understand than some of their normal work. So try this instead: https://investor.vanguard.com/ira/ira-distribution-rules
I plan to use 72t (http://militarydollar.com/2017/05/05/72t-rule/) if it becomes necessary, but ideally it won’t. That’s a trickier solution than many of the other methods because you have to calculate your payments very precisely. But, I love that there are many options available!
Funny you mention a class – that’s something I do occasionally. I’ve spoken at a few squadron events on these and other financial topics. The crowd always starts out lukewarm but once you explain how easy some of this actually is, people start paying attention. Maybe when I retire I can do it more often!
Thanks for your comment!
Hi, Josh yes I use the Roth because like Military Dollar said you can pull out contributions tax and penalty free at any time. I also have my taxable account that I continue to grow. So as time goes on and I get closer to that FIRE date that taxable account could help me bridge the gap as well. Yet my perfect scenario would be to have a pension and rental income to cover everything I need and the investments to be the cherry on top.
While my husband is no longer in the Marines, we spent the first part of our marriage as a military family and it astounded me how much money is blown through by most military members. A 20 year military career (especially with health care covered!) is really the PERFECT setup for early retirement. This should be required reading for boots 🙂
Thanks, Angela. I don’t think I’ll ever get that many people to read it, but hopefully it finds a few people who take it to heart. What more could I wish for?
I am always fascinated by retirement life, especially conversations surrounding cost-of-living and places that are beneficial for military retirement tax-wise. While there are benefits to living in a low-cost area and/or a place that doesn’t tax military retirement income, it is also important to discount living in a place your truly love, regardless of $$$ (assuming one can afford it, of course).
Great point! The three locations at the top of my list are all a little more expensive than the ones listed here, although luckily they are too expensive. I was surprised that you could get a place in Phoenix for that price, though. I really like Phoenix – it might be a good top 10 location!
*aren’t too expensive. Whoops!
Have you done an analysis based on the new Blended Retirement System? I think that is going to major impact on the “retireability” of enlisted personnel. That initial 20% loss in retirement pay for close to 20-ish years is significant and will not be overcome by the government matching in TSP.
I’ve created a comprehensive series on the BRS. I disagree with the statement that the reduced pension won’t be overcome by the government matching. In some cases it will, in some it won’t. You can find a variety of scenarios that I’ve mapped out here: https://militarydollar.com/2017/05/15/brs-part-3-comparing-systems/. Or, if you are interested in reading my entire series, you can start at part 1: https://militarydollar.com/2017/05/01/blended-retirement-system-part-1-basics/. Note that the scenarios I ran were run on the BRS calculator while it was in beta mode. I plan to update them next week on the current calculator. Once I’ve done that I will make a note so you know it’s updated.
As far as running a case study based on the BRS, I haven’t…yet! Due to the popularity of these posts I’m going to be turning this into a recurring series, so it will definitely be covered in a future post.
One of the main concerns people have with the BRS is those 20ish years of reduced pension. I’m also writing posts that cover methods of pulling money out of retirement accounts early without penalties, and posts about other ways to have passive income in retirement. My first post about penalty free withdrawals is here: https://militarydollar.com/2017/05/05/72t-rule/. Using this method, you can conceivably take advantage of those government contributions right away in early retirement, potentially making the BRS/legacy decision a virtual wash from an “income at start of retirement” perspective. But I still need to actually run the numbers to prove that.
Plus, I’ll be publishing another post tomorrow about penalty free withdrawals from Roth IRAs. Additionally, I’ll be starting a series on real estate investing that will probably start in 3-4 weeks – keep an eye out!
Hello militarydollar,
Very good article, however, most military members who served 20 years or more also receive VA disability payments. That makes a huge difference….
It does and many do, for sure. I leave them out of this because you don’t know what will happen with disability payments until you receive your rating, so leaving it out is the more conservative way to plan. The payments would only go up, not down. But yes – very important once you are at that point!
I retired after 28 years / E-8, pension of $3934 per month, plus monthly VA concurrent disability compensation of $1600. Unfortunately, married with two children while active duty, resulted in not saving much prior to retiring from military and transitioning with significant debt. Good news, after working at $90k a year job for 8 years after retiring from military, I’ve paid off all debt with exception of home mortgage, and at the age of 55, one child on his own and the other graduating from college soon, spouse and I are considering retiring with $63k annual mil pension + VA disability, and $200k in TSP. We expect another $2400 per month ($28800 annually, mine & spouse combined) from Social Security at age 62, in 7 years, so am thinking we will be ok not working full time and retiring with just my pension & VA disability, or perhaps working part-time when and where we want to. All vehicles are paid for, live very modestly, and for vacations, usually just enjoy visiting family or weekend escapes that we can drive to, and volunteering at our church and community. Still crunching the numbers, but think we should be more than ok and excited about really enjoying life and freedom from punching that daily work clock. Any advice?
Go live your life doing what you want, lol. It sounds like you’ve earned it!
I earn $2566 a month in retirement after deducting taxes, SBP, TRICARE, & VGLI. I receive $2177 a month in VA SC disability. I also use the Post 9/11 GI Bill to receive $2701 a month for 9 months a year. Earning $81,243 a year is not bad!
In addition I pay no federal or state income tax on my VA SC pay & GI Bill money. Also the country I’m residing in covers 100% health care for all it’s residents (I have a Visa).
I retired in 2016. I was an E-7 with 24 years/one month and get a 10% increase in retirement pay due to earning a Soldiers Medal. I was rated 90% by the VA and I am attending UMUC while residing overseas permanently in Europe.
UMUC pays $2301 per month because their zip code is in the Maryland/DC area. It’s a high cost area just like Europe. I also get a “kicker” of an extra $400 per month because I initially enlisted under the Montgomery GI Bill and into a critical skills MOS. Hence $2301 + $400 = $2701. Life is good. 🙂