How can you get the military to give you a $1,167,448 bonus? It’s simple: All you have to do is retire with an annual pension of $35,000 at age 43 after 20 years of service. Assuming you receive your pension until age 85, $1,167,448 is how much your military pension is worth in the civilian world.
We all know military benefits are pretty good. You get mess hall and PX privileges. You can take advantage of on-base housing and living subsidies, including medical care. And you get a pension – an incredible pension! In fact, it’s so good that few people in civilian positions ever get this kind of opportunity. So let’s examine the numbers behind a military pension.
Retiring servicemen and women can expect to get 50 percent of their base pay from their pensions after completing 20 years of service. Let’s use the example of an O4 whose monthly base pay, as of January 2003, was $3,311.10. With an annual three percent cost of living adjustment (COLA), that same officer can expect to earn $5,980 a month in 20 years, or $71,762 a year.
Assume this soldier retires at age 43 with 20 years of service but with no increase in rank. Also assume that this soldier can also expect an annual three percent COLA after he or she retires. In the civilian world, you would need to have saved $1,167,448 to receive a $35,000 pension from age 43 to age 85, and to get a mere three percent increase on that pension money every year. That, in short, is how much a military pension is worth.
Now, of course, the civilian world is known for paying higher salaries. So, let’s assume we take a young person at age 23 starting in the workforce. To have the same benefit as you get in the military, a civilian would have to save $1,524 a month from day one and obtain a 10 percent average return on his or her savings for the next 20 years. I can assure you that this is not a reasonable goal.
But suppose you put in 10 years of service and then leave to pursue a higher-paying profession. You will likely earn a lot more money, but you’ll also likely have a lot more expenses, and may not be able to save at the required rate to enjoy the same benefit a military pension may be able to offer. Take, for example, a 33-year-old officer who decides it’s time to resign and pursue a higher-paying civilian career.
If the officer wants to save enough to reach the $1,167,448 target amount in 10 years, the amount needed to equal a military pension of $35,000 a year with a three percent COLA, he or she would need to save $5,652 a month. That’s almost four times as much as if a person started saving at age 23 – and virtually impossible to do. This monthly savings figure is so much higher because so little time is available for the money to compound. The amount of money that has to be saved each month has nearly quadrupled, because the time frame for saving has been cut in half. That’s how compounding works; it grows your money exponentially.
It may seem as if your civilian counterparts are doing better financially, because they earn more money and can buy more things. But, in reality, you may discover you’re doing better in the most important financial area. It’s this lack of understanding that causes a lot of people in the service to leave the military before they’re eligible to retire. They think they can do better financially in the civilian world.
That’s why it pays to look at what a military pension can mean to you from a financial planning perspective. By looking at the actual numbers and using some basic assumptions, financial planning shows just how valuable a military pension can be.
If you’re thinking about resigning and moving into a civilian profession, you may want to think again about what you might be giving up. The safety and security a lifetime pension has to offer may be worth a lot more than you think. If you want to find out, talk with a financial professional and do the math for your own situation. You may be surprised at what you see.