Military Retirement and Early Retirement

Soldiers on PatrolCredit: Pixabay Public Domain Images

Draw-down may sound to some people like a great way to reduce spending – but it adds a staggering number of new faces to the number of new faces to the nation’s unemployment figures. According the statistics published by USAA and those of the U.S. Defense Department,

“Beginning this year (2014), the Pentagon projects a reduction of 129,000 personnel over the next five years. That’s in addition to the already 100,000 – 200,000 who voluntarily separate or retire from the military each year.”

Page 19, USAA Magazine Fall, 2014

This is one of those economic impact issues rarely talked about or mentioned in the media. Decreasing the size of the military always increases the U.S. unemployment numbers. And for military members that qualify for retirement, a military pension is no guarantee of financial security.

What is the goal? Answer: financial security in retirement. A secure and safe retirement is one when you never worry about whether or not you can pay your monthly bills. You’ve set aside enough funds to use for enjoying your retirement years doing the things you want to do.

Factors to consider: age of military retirement, desired age of full-retirement, amount of military retirement, debts versus needs/necessities versus wants, and additional financial resource streams.

What is your target retirement age, as in full retirement, no more job hassles? 

If your 40 now and retired from the military with, for example: a pension $25,000/year. Your active base pay was around $50,000; add housing allowance and ration allowance on top – and your actual active duty pay might have been approximately $60,000/year.

The first day of military retirement you have an earnings and spending shortfall of $35,000 a year. Therefore on the day you retire from the military you want to have at least $35,000 set aside in savings so that you can continue living at the same economic level just in case you don’t secure a job that will provide that income equal to or greater than the $35,000/year difference.

How much is your military retirement worth?

There are three versions of a military retirement regardless of whether it is an active duty retirement or reserve retirement: (1) Full Retirement 20+ years of service; (2) Early Retirement 15-19 years as a result of the Temporary Early Retirement Authority (TERA); (3) Medical Retirement as a result of a medical discharge. I won’t include anything here on the medical retirement program because the income a person receives under this system can be anywhere from a few hundred dollars a month or an amount equal to or greater than the full 20+ year retirement. There are too many variables to cover here; therefore, for planning purposes, it will usually be in the neighborhood of a percentage of the 20+ retirement income based on actual years completed.

RanksCredit: cory stophlet, 2014

Full Active Duty Retirement: Typically a military retiree has 20-24 years of service regardless of rank. This provides a retired service members approximated ½ of their base-pay as a pension. This is not ½ of their total pay; total pay includes housing allowance rations allowance, hazardous duty pay, jump pay or other allowance based on duty requirements. Two different, duty locations and hazard circumstances will receive different “total” pay amounts. However, base pay is the same for Sergeants of the same pay grade E5, E6, E7, etc. or Captain, O3 or O3E.

Whenever the U.S. decides to conduct a drawdown, there is almost always a provision for a 15 year retirement (more accurately, a 15-19 year early retirement). A service member with at least 15 years of active service but not more than 18 years, 11 months and 29 days and this service member either desires to retire early or is encouraged to retire early, this “early retiree” will receive less than 50% base pay pension. A 15-year retirement will be closer to 40% base pay or less. A military pension based on 20 years of service will not be sufficient to provide financial security, unless the retiree is a very senior ranking member (Colonel/General ranks).

Retirement pay is more accurate based on 30% to 40% of the total pay and allowance. So you have to imagine, or ask yourself: can you live on 30% to 40% of the income you are earning on active duty. Very rarely will anyone answer “yes” to that question.

How Much Will I Need

MAJ C Stophlet, USA RetiredCredit: cory stophlet 2014

How do you know what your money needs will be in the future? There is no hard and fast rule to answer this question. However, it is not difficult to give yourself a realistic and quantifiable goal. Some service members and new retirees may want to have a retirement income greater than their active duty pay; some may want to equal their active duty pay; and others may be content with half of their active duty pay. It is all depends on what you intend on doing for the rest of your life. Are you planning on traveling the country or the world; are you going into politics or start your own business; maybe you intend on shifting to non-profit careers or volunteer programs; or, like me, you are content to be a home-body and pursue your hobbies and interests and your income needs are minimal. That being said, for the benefit of having a retirement income target, we will use the “achieve a retirement income equal to or near that of full active duty pay,” for the duration of this discussion. 

Rule of Three

Let us start with this handy planning rule: The Rule of Three:  this means three income streams. [Note: The rule was created by this author and not a product of any financial planning organization. Feel free to use it as you see fit; no further attribute required.]

  1. Military Retirement Pay = what “Uncle Sam” pays you. Once you start collecting, you are at the mercy of Congress as for any future cost of living increases.
  2. Second Structured Income or Personal Retirement Account = one or more of the following: Second job pension, 401K plan, Individual Retirement Account (IRA ROTH or Standard), Mutual Funds, Stocks, Bonds, Certificate of Deposit (CD), Money Market or Savings Account. This is the source you have to work on the most.
  3. Social Security Income = what the Social Security Administration sends you. Keep in mind that, if you go to work in a civilian occupation, you will continue to pay into the social security system building up your future potential SSI. That’s a good thing.

Your primary source income (1) must be able to cover the basic living essentials. While the secondary (2) and third (3) SSI source allow your to extend your or expand your resources to include the want-to-have and want-to-do discretionary spending.  This does not mean you have to live like a pauper; if your primary source (military) does not cover your basic living requirements then you know that you have to go back to work; unless you’ve successfully accomplished one of the other secondary (2) income option sources mentioned above.

Do Debt Management

  • Plan and Adjust your home and personal spending “must have” spending and debts down to an amount that is as close to your retirement income as possible. This can be very difficult for some people. It is in our nature to spend all we earn and often more than that amount. But let’s be real, unless you plan on working for the rest of your life, never really retiring, and you want to retire with little or no debt, you will have to work at it.
  • Pay off big debts such as mortgages and auto debts before retirement.
  • Pay off credit cards in full when the bill arrives. You will avoid interest charges while developing a good financial habit of only spending what you can afford to pay off the month the bill arrives.

Don’ts to Debt Management

  • Don’t use credit cards as a means of borrowing cash or cash advance. It can turn into a bad habit that includes high interest charges and for many, maxed-out credit debt.
  • Don’t try to elevate your lifestyle to that of the combined income of both your retirement pay and your civilian pay. If you do, you will find it excruciatingly difficult to scale down when you are trying to get by on just retirement income(s).  For example: If your full active duty pay was $60,000/year, then your military retirement income is going to be approximately $24,000/year; if your new civilian job pays $40,000/year, don’t raise your total living standard to $64,000/year. If you manage to get a second retirement income from your new career, regardless of whether it is a pension, IRA, or 401K plan, it will not be equal to the full civilian income. A more realistic retirement income from a civilian job or investments will be roughly half or less than half of the full civilian pay.

Example from above: your military retirement pay is $24,000/year; your civilian retirement (or IRA/401K) is less than $20,000/year; your actual retirement lifestyle income is roughly $44,000/year; not the $64,000 you received on active duty. Once you start collecting Social Security, depending on whether you draw at age 62 or wait until age 70, your numbers might look more like $24,000/year military retirement pay, PLUS $20,000/year civilian pension or investment income, PLUS Social Security income of about $12,000 - $16,000/Year. The message is that, realistically, your retirement income level won’t reach your previous full active duty income days until you are drawing from all three income sources we discuss in this article. There are a lot of variables and moving parts in this scenario; however, the end result will basically be the same – or at least that should be our goal. When you are fully retired; no longer relying on a job for income; you want to have an income stream that allows you and your family to live secure in the fact that you can cover your needs while still having the resources to enjoy your senior years.

Second Stream Planning Do’s

Go to work in a career/job that will assist you in establishing a second retirement income source. Find a civilian career that has some form of retirement plan, pension program, or 401K program; if they don’t have a pension or investing program, set-up your own through your bank. Include an automatic deposit from your civilian pay into that individual/personal retirement or investment plan. This does not mean that you should expect to work another 20 years or more. The goal here is to either earn a second pension OR build up one or more of the following individual accounts:

  • 401K retirement account
  • Regular IRA
  • Investment income account (usually a form of mutual fund)
  • Mutual funds
  • Stocks
  • Bonds
  • Combination of mutual funds/bonds
  • Certificates of Deposit (CD)
  • Money Market
  • Regular Savings Account

Gap Analysis

Tally-up your monthly bills to include an average dollar amount that reflects your discretionary spending habits. Take that figure and multiply it by six. That is the absolute minimum amount of savings you should have set aside before retiring from the military. If not, you will have to ensure that you have a new career ready to jump into as soon as you shed the uniform off; otherwise, your monthly living and managing of the budget will get tough and complicated.

Systematic Savings

This is a no-brainer, and the most universal piece of advice any financial planner or fellow retiree can give you. Set a target minimum amount for savings. This is a sum of money that you intend on maintaining as a minimum account balance.

Goal 1. Savings equal to 6-months differential between retirement income and full active duty pay.

After achieving the 1st Goal, don’t stop saving; move into Goal 2.

Goal 2. Increase the 6-months differential to 12-months differential between retirement pay and full active duty pay.

Goal 3. Establish and continually make contribution to an investment income account such as mutual funds/bonds, or a combination of mutual funds, individual stocks, bonds, certificates of deposit (CD).

Third Stream Do’s

Consider drawing your Social Security between ages 62 or 66. Although waiting until age 70 to collect Social Security Income (SSI) maximizes the monthly amount, there’s no guarantee how long you will live to collect that amount. The average lifespan is approximately age 76-78. If you wait until age 70 to collect the maximum amount of SSI, you will only draw for 6-8 years. If you take the reduced amount at age 62, you will collect for 14-16 years. Your choice needs to be based on income needs and your realistic life expectancy (consider your health profile, family history, average age of life for other members of your family with similar lifestyles and habits); be realistic.  

Note:  There is one advantage for waiting until age 65 to collect SSI and it have nothing to do with health or life-expectancy: it is to time your filing for Medicare and paying Part-B premiums. Remember, to keep your TRICARE for Life medical plan, you are required to pay Part-B premiums. If you file for SSI at the same time you file for Medicare at age 65, the premium payments will be deducted from your SSI. By waiting, the SSI income will be a little bit more than it would be at age 65 and that difference should be about equal to the premium payments.

A Place to Start

Start setting aside 6 to 12 months of cash that is equal to the gap between your retirement income and the previous full active duty pay. It is often a struggle for a new retiree, and family, to adjust their monthly spending down to a level closer to that of their retirement income. Not that you have to live like paupers; however, the goal is to be financially secure and debt free; or as close to it as possible. 


Mutual funds and CDs are a great place to start. CDs have no risk attached; however, their earning yields are low and the money is locked-in for a specific period. The upside is that CDs yield higher interest rates than a regular savings account and, because of the lock-in period, you’re not going to be tapping into them arbitrarily CDs can be rolled over after they mature, into new CDs essentially re-investing the principle plus accumulated interest.

For Reservist Retirees

Your reserve retirement is your 2nd Stream income. For all those former active duty veterans that are still young enough to join the Reserves or National Guard, you are missing out on an easy to do 2nd stream income. All your active duty time and all reserve component service is added together to determine your reserve retirement pay at age 60.  Check it out, you might be surprised at how much a part-time commitment will pay you in your retirement years.


Don’t forget to factor in medical care. Know that your TRICARE coverage is not 100% coverage; you will have cost sharing to absorb. If you have not applied for health care benefits from the Department of Veterans Affairs (Veterans Administration, aka VA) you are wrong. As a retiree, you are eligible for both the VA system and the TRICARE system. If the VA determines that you have service-connected medical concerns, those concerns will be covered by the VA for FREE to include MEDICATION. You can also receive care for non-service connected conditions and you only pay a cost share, after TRICARE covers their part. This does not include medications for non-service connected care. For instance, if you need blood pressure medication and it’s not to treat a service connected issue, you pay the co-pay portion; and, that is still a reasonable $8.00 for a 30 day supply regardless of the full price of the drug. Again, if you are not taking advantage of the VA health care – you are wrong. Sorry to be blunt, but you need to also know that the VA meets and exceeds the OBAMACARE requirements. Personal note: I use the VA as my primary care it’s easier to schedule and managed than to mix-and-match private care.

United States MapCredit: cory stophlet via MS PowerPoint, 2014

Where you live matters: Just a quick note. Consider living in a State and County with no or little State Income Tax. You will find an article here at InfoBarrel that lists those locations titled “Top 10 States for Tax Reduced Military Retirement.” 

To Sum-Up

Your military retirement is your first stream income; your civilian career pension or personally managed investment or savings account is your second stream source; your social security is your third stream income. When you reach the third stream you should be at that great point of absolute fully retired and out of the “rat-race.” This does not mean that you have to wait that long; if you are successful at building the second stream source to a level that covers all the gaps between your military pension and your actual funding needs and wants – well than you are really in a good position and you can fully retire whenever you want. When the third stream comes in, you are in a position to do just about anything you want within the three streams: financially speaking.  Splurge on something worthwhile. Have fun and enjoy retirement; you’ve earned it.