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|
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
|Annual Pay After 20 Years of Service|
|Enlisted: E-7||Warrant: W-3||Officer: O-5|
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.
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.
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.