Can I Count On A Military Pension?

A reader asks:

“Thank you for your words of wisdom in your blog and being a source of motivation. I have a quick question and I would appreciate your advice. I have 18.5 years towards my military retirement and plan to go another 10 years or so. That would put me at 50 years old which is my goal retirement age. Unfortunately along the way I have not saved quite as well as I should. I am debt free but only have about $150,000 saved in several Vanguard index funds. I also have $20,000 cash in a money market. That’s it. I do place $1500/month into my TSP and Vanguard index funds (some of which are Roth IRAs) and plan to do so until I retire from the service in 10 years. My current plan to be able to retire is completely reliant on my military pension. My question is this: if you were in my shoes would you trust having this military pension for the rest of your life or would you continue to work past 50 in order to have the actual assets in your portfolio to retire without having to rely on this pension? Basically, how solvent is the military pension in your opinion? Thanks!”

It’s interesting that you ask these questions after Congress tried to whittle down the military retiree COLA. It’s the worst attack on retirement benefits since REDUX, and it took over a decade for the military to persuade Congress that REDUX wasn’t working. This COLA controversy was totally unpredictable (political risk) and changes to the military compensation system might still return someday to bite future military recruits.

Personally, especially after the COLA controversy, I’d trust the military pension for the rest of my life. (Nearly 12 years so far, so good.) It’s an entitlement in federal law. Military pension payments come from a special-purpose Treasury bond that DoD is required to fund, and it’s probably more financially secure than Social Security. (It’s definitely more stable than Medicaid or Medicare.) The other side of your question is that if DoD stopped paying military pensions, then other aspects of life in America would have become so bad that you’d no longer be concerned about the pension.

As we’re learning, benefits are more negotiable than entitlements. MOAA and other military advocacy groups are constantly educating our elected representatives on how a “small” benefits cut will affect readiness and trust. Keep yourself informed– subscribe to their website and e-mails for news that could affect your pension and other benefits. Join the national organization or a local chapter and help keep legislators aware of the effects of their budget votes.

However we also need to watch out for our own finances and have alternate plans. If a retirement plan can be derailed by a single failure, then the plan needs to be stronger. During the next decade our Tricare Prime fees will continue to rise, some bases and commissaries may shut down, and federal long-term care insurance premiums will go up. As the military draws down, senior servicemembers who have not promoted may be voluntold to retire. Nobody wants to spend their entire retirement worrying about a part of our finances that we can’t control.

Take a look at your “worst case” minimum retirement assumptions. For example, you may decide that the fun has stopped and you’d like to retire at exactly 20 years of service. Calculate your pension for that rank. If your spouse elected full Survivor Benefits Program then your pension income would drop by 6.5%, and after federal taxes it would drop by another 10%-15%. If you’re not ready to retire this year then you can estimate your future High-Three 20-year retirement much more precisely if you assume that the military will have a 1.0% pay raise in 2015 and 2016, and manually average your highest 36 months of pay.

Once you’ve reached the 20-year point, you can decide whether you’re still having fun in uniform or whether you want to start your bridge career. If you’ve pushed hard for financial independence, you may determine that you don’t even need a bridge career. Maybe you’ll pull down a six-figure income in a defense industry related to your military skills. Maybe your military pension covers your expenses, and you’ll find a totally different (yet still fulfilling) way to spend your time. Take a harsh look at your expenses and make sure that you’re spending your money where you feel it has the most value. If you’re happy with your spending then you’ll be willing to work for it (either in uniform or in civilian attire). Don’t cross the line into deprivation, but cut spending on the things you’re not willing to work for. The more you can boost your savings today then the quicker you’ll compound the investments to financial independence.

Ideally you’d find work you love while it delivers a huge income. Until that happens, financial independence is your top priority. As you continue to optimize your spending and maximize your savings, at some point your military pension will fund a bare-bones lifestyle. It’s an inflation-adjusted annuity which serves as your safety net, and later it’ll be augmented by Social Security. Once you reach a safety-net level of annuity income then you can keep growing your other investments until they fund the rest of your lifestyle. You could certainly go with a 4% safe withdrawal rate by accumulating assets that are 25x the annual spending shortfall between your military pension and your budget. Statistically that works over 90% of the time (for at least 30 years), and the worst case is that you’ll have to live on “just” your pension & Social Security. In practice your retirement spending will vary, and that will cover any gaps in the 4% SWR’s future expectations.

There’s no magic number at which you’ll be able to declare your financial independence. Instead you’ll reach the point where one or two unpleasant surprises (like shrinking military benefits) will not bankrupt your planning and force you back into the workplace. Until then, if your plans can be derailed by a single point of failure like a smaller COLA, then you should keep working or finding more ways to cut expenses.

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