Retiring On An Enlisted Pension: Joe’s Family Of Four

Welcome to the fourth entry in the Retiring on a Military Pension series! You can find the previous case studies here.

I’ve been saying I want to do a case study on an enlisted family. Well, I had several people respond to that call. Today we’re going to hear from the first in that category, Joe.

In the upcoming weeks and months, you’ll hear from a dual-mil enlisted family, and a dual-mil officer family. You’ll hear from people who have already retired, and those whose careers are just starting. More families, and more single people. Hopefully I can get a single parent to join in (interested? See the bottom of this post). I’m really excited about where this series might take us.

And by the way, if you don’t plan to stay in the military for a full career, I want to hear from you too! Most servicemembers don’t retire from the military. We can still look at your financial situation together and try to do a little fortune telling.

In the meantime, let’s look at Joe’s situation. His story (and budget) is more along the lines of what I think the average servicemember experiences. 

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.

Joe is currently an E-7 (Master Sergeant) in the United States Air Force with 15 years of service. He has a wife and two children, ages 7 and 12 years old. He is hoping to retire as an E-8 (Senior Master Sergeant) with 26 years of service.

Joe is currently living overseas and in on-base housing, so his current budget doesn’t really give us a good picture of what he would spend in retirement. Therefore, he has also sent me a projected retirement budget. That’s what we’ll be using today.  

Reminder: all dollar amounts are in current-day, 2017 dollars and discussion of taxes are using 2017 tax rules unless otherwise specified.

Scenario: Senior Master Sergeant retiring at 26 years

Assumptions:

• State income tax rate 7% (Joe’s family plans to retire in South Carolina, which has a state income tax exemption for military retirement pay but still charges some tax)
• Do not own a primary home outright at the start of retirement
• No Disability (assuming no disability is more financially conservative)

According to this military pension calculator, an active duty E-8 who retired on January 1st, 2017 with exactly 26 years of service would be receiving a pension of $42,336 annually. That’s $3,528/mo.

Let’s look at the budget

Taxes: $186/mo, $2,236/yr (note I used this calculator for estimating taxes. I find it to be nearly spot on every year)

Assuming Joe and his wife file their taxes as a married-filing-jointly return, $42,336 in income, claiming one child (the other should be out of the house by then), and accounting for standard deductions and exemptions, they will have a $748 annual federal tax liability. That is because the deductions and exemptions drive down their taxable pay very low. I ran the numbers twice to be sure.

They will also owe state income tax in South Carolina. Figuring out how much was difficult partly because South Carolina does not seem to have a nice calculator like the IRS, and partly because they are in the process of significantly raising the deduction that military retirees are allowed to take. I decided to go with the 2017 deduction ($8,800) even though it will double by the time Joe actually retires. Realistically, they will have lower taxes in retirement.

With an $8,800 military pension deduction, standard deduction, and personal exemptions, they will fall in the 7% bracket in South Carolina, meaning their tax liability should be $1,488 per year. I may be off if there are other deductions and exemptions I’m not aware of.

Running Tally: $186/mo, $2,236/yr

Housing: $1,687/mo, $20,244/yr

Joe expects their mortgage in South Carolina will cost $1,200/mo. They expect electricity to cost $135, $25 for water/sewer/trash, $40 for internet, $100 for satellite television, $12 for Netflix, and $150 for cell phones for a total of $462/mo. They are also planning $25/mo for a storage unit.

$1,200+ $462 + $25 = $1,687/mo for housing expenses.

Running Tally: $1,873/mo, $22,476/yr

Debt: $100/mo, $1,200/yr

I’m not providing any details here, but it should be included in the budget. Joe is expecting to pay $100/mo towards debt after he retires from the military.

Running Tally: $1,973/mo, $23,676/yr

Insurance: $370/mo, $4,440 /yr

The annual enrollment fees for a family plan of TRICARE Prime health care is a ridiculously low $565, or $47/mo. TRICARE Dental costs $113/mo for a family. Joe is expecting life insurance policies to cost $100/mo and long-term care insurance (smart!) is another $60/mo.

Add in $50/mo as a sinking fund for medical copayments and you have a total of $370/mo, $4,440/yr.

Running Tally: $2,343/mo, $28,116/yr

Transportation: $426/mo, $5,112/yr

Like me, Joe isn’t currently paying a car payment but expects to put away $100/mo towards saving for future cars. His car insurance estimate is $800/yr, which is $67/mo. I’ll leave that as is, but given that he will have a 16-year-old at retirement age I think it might end up being higher. He expects to spend $200/mo in gas.

He wants to budget $50/mo for car repairs and maintenance, which I think is a very good number for a multi-car household. Finally, he is budgeting $100/yr for car registration, with is $9/mo.

$100 + $67 + $200 + $50 + $9 = $426/mo or $5,112/yr.

Running Tally: $2,769/mo, $33,228/yr

Everything Else: $1,340/mo, $16,080/yr

Joe’s family expects to spend $600/mo on groceries and $300/mo on eating out, for a total food budget of $900/mo. Household items and health/beauty/clothing adds another $90 to the budget. Entertainment costs are budgeted at $200/mo, while gifts and charitable giving are another $150.

$900 + $90 + $200 + $150 = $1,340/mo.

Running Tally: $4,109/mo, $49,308/yr

I know what you are thinking. That’s way over budget! And you haven’t even added in travel expenses yet! Okay, let’s look at that.

Travel: $700/mo, $8,400/yr

Joe, like Jane, didn’t include travel money in the budget he sent. I’m going to do the same thing I did last time, which is assume they are, in fact, going to spend some money on travel. With two adults and one near-adult in the house, I think $700/mo sounds like a good number. That’s $8,400/yr for vacations and other travel.

Running Tally: $4,809/mo, $57,708/yr

So we’re more than $15,000 over budget. Clearly not a recipe for success. Hmmm….let’s look at some options.

Investments

Joe currently has over $27,000 invested for retirement and is contributing another $375 towards this goal every month. Assuming an annualized average 7% rate of return and eleven years until retirement, this will be over $130,000 by the time he retires. Not enough to make up the missing money in the budget, but well over the amount the average American family has saved by that time (he will be 44) according to this article. Warning: that link plays an obnoxious song after a few seconds.

Joe also has an impressive emergency fund built up. Once they reach their goal on that, he may have additional money available to invest. We didn’t talk about it much so I’m not including it here, but make sure you are considering all savings and investments when assessing your financial standing.

His Wife’s Income

Once Joe and family return from overseas in 2021, his wife plans to work again with an estimated income of $50,000/yr. Taxes will, of course, eat away at that, but we already know they can live off Joe’s income. If they wanted to they could put away $30,000-40,000 each year into retirement accounts for the final seven years of Joe’s military career. Alternatively, they could possibly buy rental properties to increase their retirement income or put the money into taxable accounts if they want it easily accessible.

If they decide to do this, they can dramatically increase the money they’d have available when Joe retires from the military. Based on having ~$27,000 now and $375/mo contributions for the next four years, they’ll have ~$56,000 by the time they return from overseas. If they then invest $2,875/mo for the seven years after that ($30,000/yr from Joe’s wife plus continuing his own contributions), they are potentially looking at a portfolio of ~$400,000 when he reaches retirement. That’s using an annualized average return of 7% and this calculator.

Note: Since I’m not increasing Joe’s contribution, and not using all of his wife’s paycheck, they can continue to keep up with inflation and even raise their standard of living during this time.

A $400,000 portfolio can theoretically safely contribute $16,000/yr to the household income using a 4% safe withdrawal rate. That plus his pension would be close to enough income for Joe and his wife to retire permanently after he leaves the military. He would be 44 and she would be 45, so they would need to use tax loopholes to withdraw this money without penalty. You can find out about two of those loopholes here and here.

However, due to the effects of inflation, it probably wouldn’t be quite enough to make ends meet unless they also reduced their spending. The $15,000 shortfall in 2017 dollars is more like $23,000 in 2028 dollars, assuming an annualized average inflation rate of 4%. And, Joe’s not quite ready for retirement yet. So we’ll assume this money is going to stay invested for a few more years.

Post-Retirement Work

Joe expects that both he and his wife will continue working after he retires from the military. Since the pension pays such a large chunk of their projected expenses, they won’t need to earn much if they don’t want to.

Earning a total of $30,000 between the two of them (Joe and his wife) would more than cover the increased taxes they’d have to pay and the difference between the pension and their projected expenses. I feel fairly confident saying that two people used to earning mid-five figures could earn a combined $30,000.

Should they choose to earn more than that, they could continue to increase their financial security by saving and investing more. I’ve already outlined that they’d potentially have $400,000 by the time Joe retires from the military. If they then save just $12,000/year for eleven years after that, they could have a little over a million dollars invested by the time Joe turns 55.

(this is all assuming an annualized average return of 7%)

With a retirement portfolio that large, Joe and his wife could retire fully at ages 55/56. They’d be eligible to take money out of their retirement accounts penalty free because the age 59.5 requirement is waived if you retire after age 55. The retirement accounts would have more than enough money to supplement the pension and provide them the lifestyle they are used to.

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

I think this take on a budget is totally feasible. We do our best to live below our means and allow any extra money to buy memories and experiences versus physical goods. That said, while we could make due on a military retirement alone, that isn’t truly the plan. We’ll both continue to work after active duty and $30K/year between the both of us is more than achievable. If I could change anything, it would be to invest in a rental property or two. Doing so would allow our money to work for us instead of the opposite.

You mentioned to me that you’d like to pay part of your children’s education expenses but want them to have some ownership in it too. What do you think that will end up looking like? Will you have any GI Bill money left over for them, or are you planning to open a college savings account?

I’ve taken advantage of the 100% tuition assistance offered by the Air Force and haven’t had to use my GI Bill or pay out of pocket for a single course while earning my Bachelor’s. My wife attended culinary school before we met, so she is also completed with her higher education with no debt. Learning how to leverage your benefits and taking advantage of opportunities is something we value strongly. That said, 100% of my GI Bill is available for my daughters’ education (50% to each). Any remaining balances they’ll need to plan for through scholarships/grants/jobs.

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

OH YES! At one point we had nearly $11K in credit card debt and the monthly payments took most of any extra money we had each paycheck. We took a risk and invested in our first home instead of renting as we had in the past. This allowed us to save a few hundred dollars a month on a mortgage versus renting, all of which went to paying off the debt.

Three years later, facing an overseas PCS (permanent change of station), a rising housing market worked in our favor and we actually earned money on the sale of our home. We also sold both vehicles, extra furniture, and held a massive PCS garage sale. This might seem extreme to some but earned us enough to completely pay off all of our debt, start a respectable emergency fund, open a CD, max the annual TSP (government 401k) cap for the first time ever, and set us up for our new life overseas.

We learned a lot by essentially restarting our lives. But there are challenges. Mainly, we’re seeing an increased cost of living and difficulty in my spouse finding employment. As such, we’re planning around her lack of employment as if it will be this way long term. Aggressive savings are the name of the game now.

You mentioned considering a rental property. Is this something you are interested in pursuing? Why or why not?

We are interested in pursuing a rental property but we think it’s best to delay that venture until we return stateside. Attempting to manage a rental property in the U.S. from a foreign country is more work and risk than we’re willing to take at this time.

Did you plan to retire from the military when you started, or did you decide on that goal later in your career?

I don’t think retirement was ever my plan when I enlisted. I literally had no job prospects, money for college, or career opportunities when I graduated high school. I think I was just lucky to realize this at 16 instead of on graduation day. The initial plan was to do six years for the tuition assistance then chase a civilian career of some kind. My choice to remain on active duty is due to my oldest daughter. I didn’t think it responsible to separate after my first term with no clear plan to support my almost 3-year-old. It turned out to be the best decision I’ve ever made. Since then, I’ve just taken it one enlistment at a time, one grade at a time.

What advice would you offer to other military members who are looking to ensure their financial security?

I’m by no means a financial wonder, so my best advice would be to seek out those who are or, better still, educate yourself. No one ever tells us how many strategies exist to ensure your financial security. Unfortunately, it’s something we learn later in life or the hard way. Do yourself a favor, start early and avoid living in the now. When you do spend money, spend it on memories, not stuff.

Do you have any bucket list adventures planned for retirement? Tell us about them!

Of course! Right now we’re living in the Pacific for the first time in our lives. Our big vacation plans are: to hike Mt. Fuji, spend Thanksgiving in Tokyo, and visit the Great Wall of China within the next 30 months.

Back to me (Mil$). In Summary:

• Even if you could retire early from a financial perspective, you don’t have to. You can continue working. Financial independence just gives you more options for what kind of work you do, since you don’t have to search for the highest paying job.
• Just because you have debt now doesn’t mean you will have debt forever.
• Educate yourself!

Thank you to Joe and his family for helping me out today. If you have any questions for him or feedback for me, please leave a comment below. 

I have about half a dozen more case studies that people have requested, so you will continue seeing them. I do want to get back to the posts about military programs, though, so they will become less frequent. Keep an eye out. You can always visit the Retiring On A Military Pension page to see all case studies that have been published.

If you’d like me to run your scenario, please contact me at militarydollar@militarydollar.com or https://www.facebook.com/MilitaryDollar/. Just keep in mind that the turn-around time might be a few weeks.

And if you want to get notified of all future posts, including the Retiring On A Military Pension series, scroll all the way to the bottom and sign up for my email list. You’ll receive emails for new posts, plus I talk about upcoming posts and sometimes give readers the chance to influence future posts.

Your turn: What are your bucket list plans for retirement?