Military pension -- Q for Slowguy

The Coffee Shop
1

This Q is for Slowguy, or any career military.

My son is a pilot in the military and nearing the 20 year cliff vesting for the pension.

He was promoted again recently and we were discussing his options. He plans to stay at least 3 more years because the pension is based on your highest 3 years pay. That makes sense to me.

He explained that his options are to stay in the military and his pension will be increased by 2.5% each year.

Or he can leave and his pension starts the month after and he receives 50% of his pay for life, along with lifetime medical benefits.

He is in his early 40’s. He makes over $100k. He is inclined to stay.

My CPA brain immediately said “if you stay, your pay is cut by 50%”. He was confused. I explained the way I see it. If he stays he gets his normal pay of >$100k. If he leaves, he gets >$50k. So staying only gets >$50k over his retiring and 2.5%. But it will take 20 years after retiring to make up the 50% he would give up in any year.

While I am astounded at how generous the military pension is, I am shocked at the structure. You are incentivized to retire. In his case, it would be easy to change to pilot for one of the major airlines, with less work and substantially more pay (I have a neighbor who was an airline pilot and he flew roughly 12 to 14 days a month and made >$250k). He loves the military life and has not embraced the idea of leaving it.

So my Qs to Slowguy … am I understanding this right? How do career military view it?

2

Are you sure it’s not?

50% year 20

52.5% year 21

55% year 22

57.5% year 23

4

"You are incentivized to retire. "

22 year US Marine here. I retired in 2013. Your above statement is very true, at least from where I came from, for a couple reasons
A younger, healthier force is an objective. Sure, us dinosaurs have an almost immeasurable amount of knowledge, but at the same time, we have to move out of the way to encourage growth in the junior ranks.
That second bullet was especially true in my occupational field. My field was exceeding small compared to others, and I assume pilots are similar. Just looking at the senior most officer ranks in my old occ field, there were 3 O-5’s and 6 O-4’s, 1 CWO-05, 2-3 CWO-04’s. Unless you see these old farts retire, no one else moves up, and that trickles down to the junior officer ranks. Where it hit me, I retired as a Major (O-4), the 3 Lt Col’s (O-5) were all about the same time in service and all planning to stick around for a full 30 years. That meant I wouldn’t even have a chance to get a look at LtCol until I was at 25-26 years in service, assuming I got selected for LtCol, the pay back would have taken me to 30 years as well, which I wasn’t interested in.

5

His retirement is based on his base salary. He also receives a housing allowance, and depending on where he is stationed possibly a cost of living allowance, and also flight pay. So in actuality of his total compensation probably 25-30% is BAH and other payments that wouldn’t be considered for his retirement. That said I generally agree with your statement about reasons to leave earlier than later but all depends on your passion. Retiring/transition is scary to some and it’s easier to stay.

6

You’ve received some good input already.

I did 24years (time at the military academy does NOT count). Guaranteed middle class income just sitting around the house. Sure i got beat up; blown up; and shot at repeatedly along the way but what a cushy deal huh?

I’ll just point out that as a retiree you son does not receive ‘free’ health care. If he wants Govt retiree healthcare he will have to pony up and pay for TriCare Prime Retired coverage. It is waaaay better deal than almost any civy health care deal but you do have to pay for it.

Congrats to your son and thanks for his service

/r

7

To me, just on a numbers perspective, the financial decision should come down to if he’ll actually remain unemployed vs get another job after retirement. The first, he’ll have to live of 50% pay the rest of his life. The second option, he’ll get the new job income + pension to clock in at around 150% of his current salary.

.

8

"You are incentivized to retire. "

22 year US Marine here. I retired in 2013. Your above statement is very true, at least from where I came from, for a couple reasons
A younger, healthier force is an objective. Sure, us dinosaurs have an almost immeasurable amount of knowledge, but at the same time, we have to move out of the way to encourage growth in the junior ranks.
That second bullet was especially true in my occupational field. My field was exceeding small compared to others, and I assume pilots are similar. Just looking at the senior most officer ranks in my old occ field, there were 3 O-5’s and 6 O-4’s, 1 CWO-05, 2-3 CWO-04’s. Unless you see these old farts retire, no one else moves up, and that trickles down to the junior officer ranks. Where it hit me, I retired as a Major (O-4), the 3 Lt Col’s (O-5) were all about the same time in service and all planning to stick around for a full 30 years. That meant I wouldn’t even have a chance to get a look at LtCol until I was at 25-26 years in service, assuming I got selected for LtCol, the pay back would have taken me to 30 years as well, which I wasn’t interested in.

Thank you. That perspective is very helpful.

9

This. You get 75% if you retire at 30 years.

You and Windy are correct in what you get if you stay. 2.5% more for each year when you do retire.

But that does not factor in what you gave up. Retiring at 30 years gets you 75% of your base pay vs. at 20 years it is 50%. But you gave up 10 years of the 50% pay. Hence, I see it as taking 20 years to “break even”. Assume year 20 pay is $100k. The pension would be $50k. If he stays for 30 years the paychart shows a roughly 15% pay increase. So his pension would be $86k. So $500k ($50k for 10 years) divided by $36k (pension increase) is a 14 year breakeven, not the 20 I did with a simplistic calculation.

When we were discussing it, my first thought was “if you stay you are then working for half pay”. He did not like that comment.

But as Greg_n_sd mentioned they have lots of other income, so staying may not be as financially punitive as I thought.

That is why I asked for the military perspective.

10

To me, just on a numbers perspective, the financial decision should come down to if he’ll actually remain unemployed vs get another job after retirement. The first, he’ll have to live of 50% pay the rest of his life. The second option, he’ll get the new job income + pension to clock in at around 150% of his current salary.

.

For military pilots, there apparently is high demand by the airlines. If he chooses that route, the typical hours are less and the pay is substantially higher. For other military occupations, that may not be the case.

He views it as having good options (in 3 years) either way. I’m just trying to get an understanding of how the military pension works so that I can advise him on the financial impacts of his options. Until recently, I did not realize that it started immediately upon retirement.

11

This Q is for Slowguy, or any career military.

My son is a pilot in the military and nearing the 20 year cliff vesting for the pension.

He was promoted again recently and we were discussing his options. He plans to stay at least 3 more years because the pension is based on your highest 3 years pay. That makes sense to me.

He explained that his options are to stay in the military and his pension will be increased by 2.5% each year.

Or he can leave and his pension starts the month after and he receives 50% of his pay for life, along with lifetime medical benefits.

He is in his early 40’s. He makes over $100k. He is inclined to stay.

My CPA brain immediately said “if you stay, your pay is cut by 50%”. He was confused. I explained the way I see it. If he stays he gets his normal pay of >$100k. If he leaves, he gets >$50k. So staying only gets >$50k over his retiring and 2.5%. But it will take 20 years after retiring to make up the 50% he would give up in any year.

While I am astounded at how generous the military pension is, I am shocked at the structure. You are incentivized to retire. In his case, it would be easy to change to pilot for one of the major airlines, with less work and substantially more pay (I have a neighbor who was an airline pilot and he flew roughly 12 to 14 days a month and made >$250k). He loves the military life and has not embraced the idea of leaving it.

So my Qs to Slowguy … am I understanding this right? How do career military view it?

I don’t know how the pension works, but from your description your math is wrong. You have not accounted for the increase in the base salary. That increases all pension payments. So, after 3 more years, his pension is not only 57.5% (vs 50%), but it’s applied to a higher base salary (his top 3 years).

12

I don’t know how the pension works, but from your description your math is wrong. You have not accounted for the increase in the base salary. That increases all pension payments. So, after 3 more years, his pension is not only 57.5% (vs 50%), but it’s applied to a higher base salary (his top 3 years).

Thank you. I agree. My initial simplistic calculation is inaccurate. I think it is a 13/14 year break even point when you factor in the pay increases, which would be in his 50’s. So very reasonable to consider.

13

I could write a thesis on this, so I’m going to do my best to keep it pertinent to your question. I retired just over a year ago with 20.5 years of military service. Like your son, I am a pilot. I retired to pursue commercial flying (airline pilot).

Your basic mechanical understanding of the military retirement is correct, with the caveats already pointed out in posts prior. Bottom line from a monetary standpoint, my retirement pay is about 1/3 what I took home in the military because of BAH, BAS, and pilot bonuses which do not carry into retirement. If he is an O-5 with 20 years, he could retire right now at ~$50K per year. To contrast, he could retire at O-6 with 30 years at nearly $100K. Only your son would know if he has a reasonable shot at the advancement and his ability to stick around for a full 30yrs+

For me, and most others who make it to 20, retirement is not primarily a monetary issue. Does he like flying more than leadership? Does he truly believe in the jobs he is doing in the military? Is he happy with his duty stations and peers? What about family issues, like medical needs? Does he WANT to pursue flying as a second career, or does he want to stay in the defense industry or similar (contractor, GS, pentagon, etc.)? Personally, I was on the fence because I loved serving in the military (my childhood dream). I most liked the operational flying and team I worked with, but after O-5 (in the Navy), actual flying jobs are scarce. I wanted more than anything to stay in the plane, and my wife and kids wanted the final say on where we lived.

You seem to want him to be a commercial pilot. I get it (I am). Your neighbor’s pay and time-off is a possibility, but it is not as simple as it seems and sometime down the road in any case. If he is current, he MAY get hired by a legacy airline (about the only place your neighbor’s lifestyle is realistically available). If not, he will have to spend time getting current at smaller airlines. Life there is tough, work rules are abysmal, and pay is shit (can be close to the poverty line, depending). Then you get to your legacy airline. It is not a meritocracy there - it is seniority based. The longer a pilot is there, the better his pay and quality of life. First year pay can be eye-wateringly low depending on the airline. He will likely sit reserve for some time or fly the shit lines nobody else wants until he is senior enough to pass those on to someone else.

Finally, job security in the airlines is finicky. Right now, the airlines are hiring at a never-seen-before pace. They will do that until the day they furlough a quarter of their pilots. That might be 10 years from now, or it might be tomorrow. Massive layoffs have occurred in every decade (sometimes twice) since the 1970s. With a looming recession and economic uncertainty, he has likely already missed the best opportunity to get higher on the seniority lists. Of course, the boom could last longer. Who knows - FedEx and UPS are already slowing or stopping hiring. Coming from a job with a reliable, consistent check on the 1st and 15th is mental leap many are not comfortable with.

That said, I love flying commercially, but it is far less interesting than military flying. I don’t have to deal with any of the extra administrative crap that really started to take up most of my time later in my career. I miss the satisfaction of military missions, and especially working with my team (squadron, crew, co-pilot) to do some meaningful, important, cool stuff. Now, the most exciting part of my flight now is the approach and landing, which usually just an administrative formality in the context of a military mission.

All this to say the you son is not solving a mathematical equation. There are positives and negatives to every decision, and he must weigh what is the most important to him. You should know that he is in a great place with a solid foundation, and it is likely that any decision will have an acceptable outcome and should leave him financially comfortable.

If you (or he) have questions, I’d be happy to take some time to answer.

  • Dave
14

This is not or should not be a CPA money call. I am assuming his last promotion was to the rank of 0-5. The military is an “up” in rank and responsibility or “out” (high year tenure) structure. There is some wiggle room with exceptions thrown in such as needs of service (time of war) and skill sets owned matched to billets needing to be filled. If he stands in good chance of promotion to 0-6 and he and his family are as one with his call, then as you say, he might elect ( be wanted) to remain on active duty for the rewards provided – experience/adventure/ challenge-- and honor of serving.

I retired as an 0-5 at 20 years knowing further promotion was not in the cards. Choice billets were not to be forthcoming and any billet offered was going to be framed as their choice and not mine. The Navy was downsizing. The writing was on the wall. I put in my request to retire and it was granted. Retirement at 41 can be a sweet gig with near unlimited choices for a “second” career.

There is no better retirement system than that offered to the DoD. Regardless of his call ( and his service’s) on when to execute, he will be fine.

As for free health care and retirees. When I turned 62 and took Medicare, the free treatment that I had been eligible for and offered at Military treatment facilities, Walter Reed, Ft Belvior and then National Naval Bethesda, was no longer an option. I do not know if this pre-medicare option remains for retirees. There always is the Veterans Healthcare system and hospitals as a choice for treatment. For a good 20 years if I was injured or sick I could/would simply show up at Bethesda, flash my ID, sign the log at the ER and get my xrays, stitches, meds and other treatments.

15

You also aren’t taking into account inflation. Regardless of if he gets promoted, his pay will increase roughly slightly below inflation (probably lagging). Wasn’t a big deal before, but now it is an important consideration.

16

Seems like your questions have mostly been answered, but I’ll chime in a little.

Yes, he is maybe giving up a little bit of potential money if he stays in the military, if you assume he is sure to get out and get a good job that pays well right away. For many people, that isn’t a given, and the job security of military or federal employment is a big plus.

As described, assuming he’s on the High 3 retirement plan, his pension will continue to increase the longer he stays in, and then increases roughly with inflation after he retires. I’m retiring later this year, and my pension value will be roughly $85k/yr next year, would be estimated as around $125k/yr by the time I’m 65.

If he can get a job paying the same amount that he’s making as an O5, then yes, he’s leaving a little bit of money on the table. But he’s keeping a bunch of other “perks” both tangible (health care, dental, life insurance, relatively generous vacation and sick day policies, exchange and commissary privileges) as well as non-tangible (comradery, job satisfaction, etc).

It’s definitely a trade off he should be considering. His situation (pilot) is not the same as mine (naval mine warfare officer), for example, as well as other considerations like family situation.

There’s a calculator tool to see what the pension looks like (not including VA disability benefits). It can be helpful to estimate the situation.

Military Compensation > Calculators > High-3 Calculator (defense.gov)

17

When I turned 62 and took Medicare,

How did you get Medicare at 62?

18

When I turned 62 and took Medicare,

How did you get Medicare at 62?
I stand corrected. I just consulted my managing partner, aka wife, and she confirms Social Security at 62 but medicare at 65. My bad!

19

I could write a thesis on this, so I’m going to do my best to keep it pertinent to your question. I retired just over a year ago with 20.5 years of military service. Like your son, I am a pilot. I retired to pursue commercial flying (airline pilot).

Your basic mechanical understanding of the military retirement is correct, with the caveats already pointed out in posts prior. Bottom line from a monetary standpoint, my retirement pay is about 1/3 what I took home in the military because of BAH, BAS, and pilot bonuses which do not carry into retirement. If he is an O-5 with 20 years, he could retire right now at ~$50K per year. To contrast, he could retire at O-6 with 30 years at nearly $100K. Only your son would know if he has a reasonable shot at the advancement and his ability to stick around for a full 30yrs+

For me, and most others who make it to 20, retirement is not primarily a monetary issue. Does he like flying more than leadership? Does he truly believe in the jobs he is doing in the military? Is he happy with his duty stations and peers? What about family issues, like medical needs? Does he WANT to pursue flying as a second career, or does he want to stay in the defense industry or similar (contractor, GS, pentagon, etc.)? Personally, I was on the fence because I loved serving in the military (my childhood dream). I most liked the operational flying and team I worked with, but after O-5 (in the Navy), actual flying jobs are scarce. I wanted more than anything to stay in the plane, and my wife and kids wanted the final say on where we lived.

You seem to want him to be a commercial pilot. I get it (I am). Your neighbor’s pay and time-off is a possibility, but it is not as simple as it seems and sometime down the road in any case. If he is current, he MAY get hired by a legacy airline (about the only place your neighbor’s lifestyle is realistically available). If not, he will have to spend time getting current at smaller airlines. Life there is tough, work rules are abysmal, and pay is shit (can be close to the poverty line, depending). Then you get to your legacy airline. It is not a meritocracy there - it is seniority based. The longer a pilot is there, the better his pay and quality of life. First year pay can be eye-wateringly low depending on the airline. He will likely sit reserve for some time or fly the shit lines nobody else wants until he is senior enough to pass those on to someone else.

Finally, job security in the airlines is finicky. Right now, the airlines are hiring at a never-seen-before pace. They will do that until the day they furlough a quarter of their pilots. That might be 10 years from now, or it might be tomorrow. Massive layoffs have occurred in every decade (sometimes twice) since the 1970s. With a looming recession and economic uncertainty, he has likely already missed the best opportunity to get higher on the seniority lists. Of course, the boom could last longer. Who knows - FedEx and UPS are already slowing or stopping hiring. Coming from a job with a reliable, consistent check on the 1st and 15th is mental leap many are not comfortable with.

That said, I love flying commercially, but it is far less interesting than military flying. I don’t have to deal with any of the extra administrative crap that really started to take up most of my time later in my career. I miss the satisfaction of military missions, and especially working with my team (squadron, crew, co-pilot) to do some meaningful, important, cool stuff. Now, the most exciting part of my flight now is the approach and landing, which usually just an administrative formality in the context of a military mission.

All this to say the you son is not solving a mathematical equation. There are positives and negatives to every decision, and he must weigh what is the most important to him. You should know that he is in a great place with a solid foundation, and it is likely that any decision will have an acceptable outcome and should leave him financially comfortable.

If you (or he) have questions, I’d be happy to take some time to answer.

  • Dave

Your post is valuable to me. It helps me understand him. Thank you.

20

Seems like your questions have mostly been answered, but I’ll chime in a little.

Yes, he is maybe giving up a little bit of potential money if he stays in the military, if you assume he is sure to get out and get a good job that pays well right away. For many people, that isn’t a given, and the job security of military or federal employment is a big plus.

As described, assuming he’s on the High 3 retirement plan, his pension will continue to increase the longer he stays in, and then increases roughly with inflation after he retires. I’m retiring later this year, and my pension value will be roughly $85k/yr next year, would be estimated as around $125k/yr by the time I’m 65.

If he can get a job paying the same amount that he’s making as an O5, then yes, he’s leaving a little bit of money on the table. But he’s keeping a bunch of other “perks” both tangible (health care, dental, life insurance, relatively generous vacation and sick day policies, exchange and commissary privileges) as well as non-tangible (comradery, job satisfaction, etc).

It’s definitely a trade off he should be considering. His situation (pilot) is not the same as mine (naval mine warfare officer), for example, as well as other considerations like family situation.

There’s a calculator tool to see what the pension looks like (not including VA disability benefits). It can be helpful to estimate the situation.

Military Compensation > Calculators > High-3 Calculator (defense.gov)

Thank you. I value your opinion and insights.

21

How does the up or out process affect the ability to stay in the military post 20 years?

I was hiking a few years ago with a retired 4 star who retired at 37.5 years. If I understood him correctly, you generally needed to advance in rank or have special skills the military wanted to retain to get that many years.