Retiring On An Officer’s Pension: Jane’s Family Of Four

The Retiring on a Military Pension posts have received a lot of attention over the past two weeks. Between page views, comments, and people emailing me to ask for a case study on their own situation, it’s clear this is information you guys are looking for. So I’m happy to announce I’m turning this into a recurring series!

I’ll be posting new case studies as long as people keep asking for them. If you are interested in having me run your numbers, email me at militarydollar@militarydollar.com or message me through my Facebook page: https://www.facebook.com/MilitaryDollar/.

You can find the previous case studies here:

• Can You Really Retire On A Military Pension? (Single Officer @ 20 years)
• Retiring On An Enlisted Military Pension (Single Enlisted @ 20 years)

Remember: I am not a personal finance professional! Nobody should be making life-changing decisions based on what you see in this blog. It’s merely a way to get you thinking about what is possible. If you want professional help, I recommend contacting a certified financial planner, preferably one who abides by fiduciary duty. You can read my full disclaimer here.

Enough with the boring technical talk. Let’s get on with the fun stuff!

Jane (not her real name) is an O-5 (Lieutenant Colonel) in the United States Air Force. She has a husband and two children, currently aged 1 and 9 years old. She is looking at retiring in 6 years as an O-5 with 22 years of service.

Jane has shared her family’s current budget with me for this post, along with information about her investments. In previous editions of this series, we’ve looked at what a retirement budget might look like using only the pension as income. Today we’re going to look at something that’s probably more likely, which is a family that has both the pension and their own investments.

First let’s figure out how much potential income Jane might have in retirement. Then we’ll look at Jane’s family budget and see if the projected income is enough to cover their expenses. Finally, we’ll get Jane’s take on the plan.

Scenario: Lieutenant Colonel retiring at 22 years

Assumptions:

• State income tax rate 0% (Jane’s family plans to retire in Texas, which has no state income tax)
• Do not own their primary home outright at the start of retirement
• Own an investment property outright at the start of retirement
• No Disability (they believe they will have some, but with the difficulty of predicting what it will end up being, Jane asked me to run the scenario assuming no disability)

According to this military pension calculator, an active duty O-5 who retired on January 1st, 2017 with exactly 22 years of service would be receiving a pension of $57,554 annually. That’s $4,796/mo.

Investments

This is where Jane’s scenario is going to get much more realistic in the eyes of some readers.

Their current investments are:

• A rental property with a mortgage balance of $15k (will be paid off by the time she retires)
• Thrift Savings Plan with a current balance of $96k
• 529 plans for the children with balances of $18k and $2k. They will each also receive 50% of Jane’s GI Bill.
• A taxable stock account with $5k

They are currently contributing:

• The mortgage payment to the rental property
• $850/mo to the TSP
• $100/mo to each 529 plan
• Nothing to the stock account (this account is not discussed further in this post)

The rental property is currently bringing in $925/mo ($11,100/yr) in rent. Jane describes this as “a steal” for the current tenants. When these tenants leave, they will likely raise the rent. But, because I do these calculations in present-day (2017) dollars and we don’t know what the future will hold, we’ll use $925/mo.

For the other accounts, let’s look at some calculators.

TSP

Though I’ll be using 2017 dollars for the pension, rental income, and budget, I do want to quickly show some possible future balances for the TSP. You’ll see why looking at present day dollars for some things and future dollars for others doesn’t screw up the calculations in a minute.

Using this calculator with the current balance, keeping the current contributions, and assuming a 7% annualized average return, we see that the TSP will grow to approximately $222k by Jane’s estimated retirement year. I like this calculator because it allows you to put in a range of potential returns. I put in plus or minus 2%, so the potential range is ~$201k to ~$246k.

If Jane were to decide to use the Substantially Equal Periodic Payment rules of the tax code to withdraw money at the start of retirement, and assuming she and her husband use the joint life expectancy calculation (a conservative option), they could potentially bring in $8,497 per year from the TSP starting in 6 years. That’s another $708/mo. I found that number using this calculator and accepting the default Reasonable Interest Rate of 2.36%. If you aren’t familiar with SEPPs and think you want to retire early, definitely check out my post on SEPPs.

529 Plan

The 529 plans are not part of the retirement income calculation, but Jane provided the info so let’s look at it very quickly. I used the same calculator for this as I did for figuring out the future value of the TSP account.

Her older child has 9 years until they turn 18, the age at which I’m assuming this account would be needed. $18k, with a $100 monthly addition, invested for 9 years at an average annualized return of 7% ends up with ~$49k. At 5% the result is ~$42k and at 9% is ~$57k.

Her younger child has 17 years until they turn 18. $2k, with a $100 monthly addition, invested for 17 years at an average annualized return of 7% ends up with ~$46k. At 5% the result is ~$37k and at 9% is ~$57k.

I have no idea what college expenses will look like in 9 and 17 years, but hopefully these amounts, with 50% of a GI Bill, are enough to cover their expenses.

Total Income Potential

Conservatively speaking, using the pension and the rental income, Jane’s family’s potential income – in 2017 dollars – is $68,654 per year or $5,721/mo. If they decided to use Substantially Equal Periodic Payments, they are looking at a higher annual income. However, I want them to preserve their investment as much as possible so I want to see if they can “make it work” without the TSP withdrawals. Plus, there is another potential income source that we’ll see at the end.

For that reason, I’ll be using $68,654 as the income upon which I base their budget.

Now let’s look at the budget

Taxes: $202/mo, $2,424/yr (note I used this calculator for estimating taxes. I find it to be nearly spot on every year)

Assuming Jane and her husband file their taxes as a married-filing-jointly return, with $68,654 in income, claiming two children, and accounting for standard deductions and exemptions, they will be in the 15% tax bracket. This does not include any tax savings on the depreciation of their rental property or counting the interest on their primary home, so it’s a “worst case” scenario. A pretty great “worst case,” if you ask me!

Running Tally: $202/mo, $2,424/yr

Housing: $2,174/mo, $26,088/yr

The total mortgage payment on their primary home, including principal + interest + taxes + insurance, is $1,580/mo. They budget $225 for electricity, $90 for water and trash, $45 for internet, and $200 for cell phones for a total of $560/mo. Their Netflix/Hulu/HBO costs will come in later based on how they budget. HOA fees are $34/mo, $400/yr.

$1,580+ $560 + $34 = $2,174/mo for housing expenses.

Running Tally: $2,376/mo, $28,512/yr

Rental Property: $454/mo, $5,448/yr

Jane expects the rental property to be paid off by the time they retire, so the only expenses will be taxes and insurance, property management, and upkeep. Taxes and insurance are $155/mo or $1,860/yr. Property management is 10% of the rent, or $93/mo or $1,116/yr. Personally, I believe in setting aside 10% for vacancies and 10% for maintenance, so those things will cost $186/mo or $2,232/yr. The HOA on the rental is $20/mo, $240/yr.

$155 + $93 + $186 + $20 = $454/mo for rental property expenses.

Running Tally: $2,830/mo, $33,960/yr

Insurance: $310/mo, $3,720 /yr

Let’s estimate $50/mo for life insurance. The annual enrollment fees for a family plan of TRICARE Prime health care is a ridiculously low $565, or $47/mo. TRICARE Dental, which I didn’t price out in earlier case studies (my bad) costs $113/mo for a family. Add in $100/mo as a sinking fund for the copayments (more than I’ve used previously due to the children) and you have a total of $310/mo, $3,720/yr.

Running Tally: $3,140/mo, $37,680/yr

Transportation: $495/mo, $5,940/yr

Jane and her husband are currently paying extra on their car payment to get it paid off quickly, so I’m not going to use that amount. They expect to enter retirement with paid off cars. Therefore, I’ll budget $200/mo for them to save for cars which they will pay for in cash. They are currently paying $85/mo for car insurance and $160/mo in gas. They don’t currently budget for car maintenance, but if you’ve been reading for awhile you know I like to budget for eventualities. Therefore, I’ll say this is $50/mo.

$200 + $85 + $160 + $50 = $495/mo or $5,940/yr.

Running Tally: $3,635/mo, $43,620/yr

Travel: $800/mo, $9,600/yr

Jane didn’t include travel money in the budget she sent. I’m assuming this is either because they cash flow it instead of budgeting for it, or they don’t travel much with two children. But in retirement, there will be more opportunity, so let’s give them some travel money shall we? How does $800/mo sound?

Running Tally: $4,435/mo, $53,220/yr

Everything Else: $1,150/mo, $13,800/yr

Jane’s family currently spends $800/mo on food and household items and $150/mo on entertainment, which includes Netflix, Hulu, HBO, and weekend events. She didn’t include a number for clothing, random spending money, or gifts, but we’ve got some money to spare. I’m going to say $200/mo for the rest of that kind of stuff. $800 + $150 + $200 = $1,150/mo.

Running Tally: $5,585/mo, $67,020/yr

That leaves $1,634 each year, or $136/mo, left over for emergencies, unforeseen spending, etc. That’s without touching any of the money inside their TSP account. It’s a little bit tight, but they can definitely live on the income they will have available, based on their current level of spending and including the (low for now) rental income they already have. And of course, there is still the TSP money and the plan to raise the rent on the investment property.

But wait, there’s more!

The Wild Card

Jane’s husband intends to get a job after she retires. If this happens, they estimate he will earn $40k each year conservatively. His background is in a career that could earn a nice paycheck, but he will have been out of the workforce for several years by the time he restarts his career so that will likely affect his earning potential.

If he does earn $40k/yr, a very simple breakout of how they could spend that money might be:

• $10,000 for taxes (estimating high – 25%)
• $12,000 towards retirement accounts (increased spending should be offset by increased saving)
• $6,000 towards the 529s (it’s clear they want to pay as much of their children’s college expenses as they can)
• $12,000 towards spending (because they can!)

Jane’s husband doesn’t need to work after her retirement to make ends meet, but if he decides to they will have a lot of extra income to supplement the pension and rental income. That’s a pretty great position to be in!

Those were my own thoughts on what their budget might look like in retirement, using their current budget as a guideline. Now let’s hear from Jane to see what she thinks.

First up: this is my take on a budget for you to use in retirement. Does this look feasible to you? What would you change?

This looks very feasible.  I’m not sure we’ll spend $800/mo or ~$10K/yr on travel, but I’m happy to budget it like that.  We’ve been begging for an overseas assignment my entire career, but considering we had our children later in life and I’m only 4-6 years from retirement (1, maybe 2 more assignments at best), it looks unlikely.  So I’d love to budget to take them to see the world on our own dime.

You told me your family is low maintenance by nature. I assume that means you were never much of a spender, so I kept your additional spending low if your husband gets a job after you retire. Do you think you’d follow a plan like that, or would you use more of the money to increase your standard of living?

Correct.  I don’t see us changing our consumptive tastes.  Neither of us desire new/luxury cars, purses, shoes, gadgets, etc.  We might spend more money on nice restaurants once the kids are older, but I’d put that in our robust travel budget you’ve already set up for us.  And as far as standard of living for our domicile, we’d probably downsize if we did anything.  We’re currently where we’re at mostly because of the desire to be in a good school district, which unfortunately means we compromised our real desires for a home for what I call a “standard issue suburban” tract home.  We’d much rather live in an older, smaller urban home.

I notice you don’t have any money budgeted for kid’s activities like sports. My friends tell me those activities can cost a bundle. Do you think you’ll spend money on those activities as your kids get older? Why or why not?

Good point.  We currently spend about $100/mo on a YMCA membership, plus about $75/mo on swim lessons for the older kid.  I suspect as they get older, we’ll continue spending that much or more.  I wouldn’t ask you to re-run these numbers or anything, but probably a lot of families easily spend $200 or more on kids’ activities.

Is there anything you’ve had to overcome to get to this point? Things like student loans, credit card debt, difficulty with your spouse finding employment due to your career, etc?

Actually I’d say we’ve been very fortunate in that neither of us had school loans to pay off.  I went to a state university with a full scholarship, and then made the Air Force pay for all 3 of my master’s degrees (Tuition Assistance, AFIT gig, and IDE).  My husband joined the military right out of high school, served 8 years and maximized Tuition Assistance and his Post-9/11 GI Bill to get his bachelor’s and master’s.  He also got a scholarship to pay for half his master’s, so our out-of-pocket costs during that time were negligible.  We married young (19 and 22 years old), so we started out poor and once we started to get some income, we always wanted to live within our means.

As for the difficulty of my husband finding employment because of my career, we’ve learned to just live without the income.  It’s frustrating to start all over every year or two, but we’re also aware that because of my income, it’s a privilege that many families don’t have that one of us can stay home.

What advice would you offer to other military members who are looking at retiring early?

Start saving and find a balance in long-term investmests and being liquid.  I don’t know what the exact formula is, but both are important.  The military is full of surprises.  Just last year, I was surprised with an out-of-cycle permanent change of station, base housing had zero vacancies, the rental market was low on inventory and we were essentially forced to buy a home.  We were a little liquid, but had to borrow a few thousand dollars from my parents to make it work.

Overall, I think planning for retirement is about identifying what’s important in your life.  For us, we knew early on that we wanted to wait a little longer to have children and then wanted one of us (could have been either, it’s just how life worked out) that would stay home with the children until school age.  It meant identifying the sacrifices ahead of time, so we’re comfortable with our setup now.  And we also know that moving into our post-retirement lives, there will be more challenges (husband entering the job market at nearly 50 years old with little experience is difficult to swallow), but there’s ease in expecting that.

Many thanks to Jane for helping me out today. If you have any questions for her or feedback for me, please leave a comment below. Thanks for reading!

Next week I’m planning to have a case study for a family looking to retire on an enlisted pension. After that, the series will become less frequent – once or twice a month depending on how many case studies I receive. If you want me to run your scenario, please contact me at militarydollar@militarydollar.com or https://www.facebook.com/MilitaryDollar/.

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