What Would You Risk for a Million Dollar Retirement Pension?

What Would You Risk for a Million Dollar Pension

In 1993, I enlisted in the U.S. Army to escape from my childhood. I had no idea that 21 years later, I would retire with a million-dollar retirement pension, especially since my first month’s paycheck (June 1993) was only $753 before taxes!

Would I do it again?

I’m not sure. Is a million-dollar military retirement pension worth the opportunities lost, especially if you’re a high achiever? That’s a topic worth discussing later…

We choose to serve in the military fully aware that we may die or be wounded in combat. Even during peacetime, military operations are inherently risky by nature which is why safety and risk-mitigation are so important. Since 2001, the U.S. military has suffered many casualties during various operations listed below:

Operation / Casualty Type Death Wound
OEF Hostile Death 1,844
OEF Non-Hostile Death 502
OEF Wounded in Action 20,094
OFS Hostile Death 29
OFS Non-Hostile Death 13
OFS Wounded in Action 211
OIF Hostile Death 3,481
OIF Non-Hostile Death 930
OIF Wounded in Action 31,957
OIR Hostile Death 12
OIR Non-Hostile Death 32
OIR Wounded in Action 53
OND Hostile Death 38
OND Non-Hostile Death 35
OND Wounded in Action 295
Total 6,916 52,610

Source: Defense Casualty Analysis System

In 2016, there were 2.1 million service members in the U.S. Active Military, Reserves, and National Guard combined. Our veteran population is approximately 20 million as of 2017, so less than 8 percent of the total US population has ever served in the military.

Very few people become rich serving in the military unless they retire as senior-grade officers (pay grades O-6 to O-10), but there are always exceptions.

Military Retirement Pension After 20 Years of Service

There are three rank structures in most branches of the military. Most people who enter the military join the Enlisted ranks (pay grades E-1 through E-9) which make up 83% of the military force. Warrant Officers (W-1 through W-5) are very specialized technical officers who primarily manage systems. Warrant Officers represent approximately 3% of the entire military force (no Warrant Officers in the Air Force). Officers (pay grades O-1 through O-10) represent approximately 14% of the military.

The chart below depicts the typical retirement pensions in today’s dollars for the Enlisted, Warrant, and Officer ranks who retire with exactly 20 years of active military service. This calculator also estimates what our retirement pensions might look like 10, 20, and 30 years later.

Years After Retirement
Year
Annual Pay After 20 Years of Service
Enlisted: E-7 Warrant: W-3 Officer: O-5
1 2017 $26,838.00 $35,046.00 $50,918.00
10 2026 $32,271.77 $42,183.64 $61,309.01
20 2036 $39,659.72 $51,862.72 $75,411.06
30 2046 $48,738.46 $63,759.41 $92,759.89
Total $1,101,803.98 $1,440,546.43 $2,094,563.85

Source: Military Retirement Calculator at militarypay.defense.gov

The average active-duty (full-time) service member retires from the military in their 40s. The Reserves and National Guard use a point system that enables them to retire at age 60 or earlier depending on time spent on active-duty.

A military retirement pension can pay out $1 million or more after retiring … if you live long enough to collect it.

This is only one way of looking at the military retirement pension.

The 4 Percent Rule

The 4 percent rule is a simple way of calculating how much you can safely withdraw in order for your retirement savings (retirement investments) to last for approximately 25 years. I use a time-frame of 25 years instead of 30 to stay conservative. If you divide $1 million dollars by 25 years, you’re left with $40,000 per year. For simplicity, we’re not going to factor in the historical 3% inflation rate.

An E-7 or W-3 that retires with 20 years of active duty military service will not earn $40,000 a year. They do not meet the 4 percent rule. However, those who get promoted to higher ranks (pay grades E-8 to E-9 and W-4 to W-5) can earn $40,000 a year or much more based on their total years of active duty service.

Thrift Savings Plan

The Thrift Savings Plan (TSP) is the federal version of a 401K. Federal employees can contribute up to $18,000 a year into a tax-advantaged TSP retirement account. Federal employees aged 50 and above can contribute an additional $6000.

I invested in the TSP starting in 2003 until I retired in January 2015. As a retiree, I cannot contribute any additional funds into my TSP account because I’m no longer a federal employee. The TSP was first offered to military service members in 2002 but I didn’t know much about it then. Maybe I wasn’t paying attention because I was busy learning a painful lesson about investing in individual stocks.

Read how I started investing in the stock market [here]

No one taught me about what I should invest in. In fact, no one mentioned anything about the TSP. We were focused on the aftermath of the 9/11 terrorist acts and preparing to deploy overseas.

I had to learn how to invest by trial and error … many errors.

At first, I didn’t do anything but contribute to my TSP. I didn’t actually select an investment type or types so my contributions automatically went into the G Fund (lowest risk).

A few years later, I decided to learn a little bit more about how to invest in the TSP. I changed my contributions from the G Fund to the L2040 Fund. This is a life-cycle fund that diversifies investments across different TSP fund types. As the fund nears its target retirement date, it becomes less risky (less volatile). Vanguard’s Target Retirement Funds are probably the best alternative to the TSP.  Their average expense ratio is a minuscule 0.13%. Target retirement funds are ideal for investors who simply want to “set it and forget it.”

3 Tips for Investing in the TSP or 401K

1. Invest ASAP!

In 2003, the maximum annual contribution limit for the TSP was $12,000.

Time is your investment’s best friend.

In 2003, if I had invested $12,000 into the TSP C Fund ( the equivalent of the S&P 500 index) and never put in another dime, that investment would now be worth $20,160.

To put things in greater perspective, if you had only invested $10,000 into the S&P 500 40 years ago and never put in another dime, that investment would now be worth $164,200!

2.  Invest the maximum allowable contribution every month.

If your TSP contribution limit is $18,000 annually, you should invest $1500 per month. Wouldn’t it be great to be able to predict when the market rises and falls?

Quit dreaming. You can’t. Even if you get lucky once, it’s difficult to get lucky the second time. If you think you know a little bit about investing (enough to be dangerous) and try to time the market, you might get lucky and reallocate to safer bonds and treasuries at the market peak. However, you’ll have to go back in the market, won’t you? Try to figure out the market’s bottom.

By investing consistently, you avoid the trap that many investors fall into. Think of it this way, when the market is high, your investments are worth more. When the market is low, you’re buying more shares at discounted prices.

TSP 10 Year Performance (Retirement Pension)3. Invest in higher yielding index funds.

Warren Buffett recommends that the average person invests in the S&P 500 (historical return ~8% with dividends reinvested). The TSP C Fund is the equivalent of the S&P 500.

Consistently invest the maximum (currently $18,000 per year) in the TSP C Fund for a 20-year career, and you’ll have nearly $900,000 in your retirement account. You can’t withdraw from it without penalty until you’re 59 1/2 so it will be worth well over one million dollars when you might need to make withdrawals.

If you only invest in bonds or treasuries, your return on investment (ROI) will be significantly lower. The TSP G Fund comes to mind because so many people think these are “safe” investments. They might be safe but they’ll barely beat the historical rate of inflation (3%).

Index fund expense ratios are lower than those of mutual funds and professionally managed funds. By keeping expenses low, you maximize your returns. A 1/2% to 1% savings might seem inconsequential, but over decades, the difference could be worth tens of thousands of dollars.

Summary

Anyone who serves a 20-year career in the military can and should retire with a million-dollar retirement pension and an additional million dollars saved. Seek advice before joining so you know what military occupational specialties (MOS) are the best for promotions and post-military careers. Even if you enter the military at the lowest rank, like me, you can retire with a million-dollar retirement pension by picking the right MOS, working hard and getting promoted.

The TSP wasn’t around at the beginning of my career but I took advantage of it when it was offered. My TSP retirement savings alone are worth hundreds of thousands of dollars and will be worth millions in a few decades when I’m in my 60s.

When I quit working, I’m going to focus on things I love, like blogging, that will provide another source of income. It’s extremely important to have multiple streams of income to achieve financial independence.

What would you risk for a million-dollar retirement pension?

Please share with others and leave your comments below. I’d love to hear your thoughts.

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10 Comments

  1. Hi Darren, and thank you for your service. My wife is a civilian federal employee, and we absolutely love the TSP. As far as I know, the target date funds are just about the lowest-expense anywhere. Now we just have to up that contribution to the max 🙂 Thanks for writing about this!

    1. Welcome back Miguel,

      The TSP is great, especially if the government does a match. The expense ratios are ridiculously low and even Vanguard can’t touch them. Definitely, max out the TSP, right?

      Thanks for commenting. I appreciate it! 😉

  2. Wow thank you for sharing and thank you for serving for America, as a neighbour up north, I appreciate your sacrifice! 20 years is a long time. I have a colleague whose husband worked in the military for Canada and they seemed to move around a lot. Did you have to move your family a lot too?

    1. It was my honor and privilege to serve. One day, I’ll write a post or two about what serving in the military actually did for my life. I’m not ready to be that raw and real, yet.

      We moved every 3 years. One of the reasons I retired was to find a stable place for my kids to go to school and build lasting friendships. However, I’m not so sure if that’s as important as building resilience from all the moves if you know what I mean..?

      Thanks for commenting GYM. I appreciate it!

  3. Working in the federal government the pension is really nice to have especially with the TSP available. I have been able to max out my TSP since 2013 which is a really great feeling. Hopefully I can retire by the time I’m 50 and never work again but we shall see 🙂

    1. I think you’ll be fine. I’ll bet that as long as you keep improving what you write on your blog and continue to connect, other opportunities you haven’t even considered will materialize. I’m sure you’ll eventually find a gig that you absolutely LOVE and you won’t think of it as work anymore. As far as retiring from a government job…that’s a different story, now.

      Good for you with the TSP! Are you getting any matches? When I was still in, the government didn’t provide any matches. I heard they started doing that for military TSP accounts as an incentive. I try to inform every military service member I come across.

      Thanks for dropping by to comment. I appreciate it! 🙂

  4. Hi Darren,

    Firstly, thank you for being at the front line risking your life to keep us safe. I salute you for that, Sir!

    Wow, I had heard rumors about military being horribly underpaid but I really did not know you could end up with so much pension compared to an office employee.

    Your post gave me a pause to think about my own retirement plan. With an at least 8% inflation rate annually, I could foresee that 30 years from now, relying on my retirement funds (at best I can only hit 6 figures) will not be enough.

    I should really start doing something about it now! Thank you for getting me aware of that! All the best with your idea of starting an online business of your own!

    Cheers mate!

    1. Hi Wilson,

      The military retirement pension is one of the best available but there’s often a high price to pay in order to earn it. I know many people with failed marriages, non-existent relationships with their children due to constant deployments and “field trips,” addictions, post-traumatic stress disorder, disabilities, wounds, etc… Again, that’s why I’m not so sure I would go through it again. I am very proud of my service but I had a hard time due to the stress.

      Yes, you need to start taking care of your financial situation now! The historic inflation rate was 3% not 8% at least here in the U.S.

      Thanks for stopping by to comment. I appreciate it!

  5. You have provided specific information about financial planning that can help U.S. service members who are seeking to join the military or those who are close to retirement

    I live in Australia where our Defence Force pensions are structured differently. Even so, I enjoyed reading your article.

    The common point is your general advice to plan ahead and learn to maximize the retirement pension.

    I don’t think anyone who joins the military in any country will think they are doing so for a million-dollar retirement. There is always the question whether one will live to enjoy it.

    Looking back, the question becomes: Was it worth it?

    I’d say each individual will have a different answer. it will probably depend on their own experiences and battle scars.

    Thanks for the great read.

    ~Jude

    1. Jude,

      Thank you for your perspective from abroad! Every individual is different whether they think it’s worth the sacrifice or not. But you’re right. The message is universal. We don’t have to think of investing as something that only the rich can afford to do. We all have the means to do it and it’s actually simple to do. If we’d only put half the amount of effort that we do in making consumer purchases, we’d all be set financially. By the way, I did mention the 401K and Vanguard information so that my message also applies to the non-military folks.

      Thank you for stopping by to comment. I appreciate it!

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