Welcome back, FIRE aficionados!
Today's post should convince you that serving 20 years on active duty is one of the best ways to make your FIRE dreams happen. This doesn't mean it's right for everyone -- I'm a big advocate that you should only stay in as long as you love your job and feel like you're making a difference. BUT.... the military pension you will receive (on top of the almost free healthcare) for serving 20+ years has a HUGE impact on how much money you need to achieve FIRE.
Why is the military pension so special? Well, first a little history. The first private pension plan was established by the American Express Company in 1875 with the goal of creating a more stable and career-oriented workforce. The idea was to provide an incentive for people to stay with the company for decades by taking care of them in retirement. The popularity of pensions grew rapidly, and for more than 100 years, pension retirements were the norm for almost all sectors of society. It wasn't until the 1980s that 401ks (probably what you hear most about now) even existed. Today, pensions are almost extinct, and with them the security blanket of a lifetime monthly paycheck arriving in your bank account.
So, back to the military pension. Technically there are two types of pensions: defined contribution and defined benefit. The latter one is what we most associate with the word "pension" and best describes the military offering. It's a system where you get guaranteed automatic payouts in retirement based on a formula that usually takes into account your salary and years of service. Basically, the longer you serve and the more you make, the more money you get every month in retirement.
The military pension system has two benefits and one big catch. First, payments are increased over your retirement to keep up with inflation. So the $3,000 a month that you receive the year you retire may well balloon to $10,000 decades later just to ensure you have the same purchasing power. Second, the military pension is guaranteed by the U.S. government.... which may not seem important until you start reading news stories of private or state and local pension plans going bankrupt! Arguably, as long as the U.S. government stays in power, military pensions are pretty secure.
So what's the catch? Ah yes: the 20-year cliff vesting requirement. No matter which retirement system you are under (High-3 or BRS) you have to stay in at least 20 years in order to receive your monthly paychecks for life. The reasoning behind this requirement goes back to American Express Company's innovation over 100 years ago: the military wants to attract talented people and keep them in service for an extended period of time. Constantly retraining new soldiers or pilots is expensive and time-consuming, and the military needs seasoned senior officers and enlisted to fill leadership positions and help grow the ranks below them. Notably, we can't hire directly into those leadership roles like the private sector. When Microsoft needs a new CEO, they go poach a leader from another firm; when the Army needs a new Chief of Staff, they have to have been growing him or her for decades. That means we need people to stay in uniform.... and the pension system is part of the incentive package.
Okay -- now on to the FIRE side of things. Seasoned FIREers can probably already see how a lifetime monthly paycheck can be like winning the lottery for financial independence. It's the ultimate passive income: money you get for doing nothing (or in this case, technically for all the work you already did over 20+ years). But let's break down the numbers.
Let's say you've calculated that you'll need $10,000 per month to live (very) comfortably in retirement. Using the typical formula of 25 x annual expenses, that means you'd need to save $3 million before you can retire. That's A LOT of money! Unless you have a rich aunt or the cure to cancer, you probably aren't going to be able to save that on a military salary.
But, an O-5 retiring at 20 years and a day automatically makes almost $5,000 per month in pension payments (High 3). Now you only need enough savings to cover $5,000 per month, or $60,000 per year.... and using the same formula, you now only need to save $1.5 million to achieve FIRE. And though $1.5 million is a lot of money, it IS achievable on a military paycheck. Plus, you're retiring at age 42 -- that's 20 years before the most common retirement age in the U.S.!
Once you've established your FIRE requirement, you can use the retirement calculators as tools to help your decision-making. If $10,000 per month is your goal, you might notice that an O-5 makes exactly that in monthly pension if they stay in 26.5 years. Theoretically, that could mean no savings required.... though I don't recommend relying entirely on that plan!
Of course, there are a lot of reasons people leave active duty and staying until 20 years and beyond may not be right for you or your family. More importantly, money shouldn't be your only motivator for continued service. But understanding the profound impact the military pension has on your FIRE goals can help your decision-making... no matter how long you choose to serve!
Comments