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Can you live on your military retirement?

I’ve written before about the possibility that you could retire on a military retirement never worry about a job for the rest of you life. The fact is, of course, that if you work your budget based on your income you actually can live on that income alone, especially because your military retirement pay includes a cost-of-living adjustment, or COLA.

Let’s look at an example. Lt Col Jones is married, 46 years old, is about to retire after 24-years of service and currently serves at Dyess AFB, Texas. Here’s the summary of his pre-retirement benefit.

Base Pay: $8198.40
BAH: $1,788
BAS: $233
Total Compensation: $10,209
Col Jones plans to retire this July. He enters his information into the DFAS calculator to obtain his retirement benefit. He passed on the REDUX retirement, ensuring full retirement benefits including the full COLA benefit.

His benefit is $4,661 per month (before taxes). DFAS estimates his after tax pay at $3,961 (15% tax bracket).

Col Jones must decide is he will elect to take the Survivor Benefit Plan. This is basically an insurance policy that would pay Col Jones’ wife up to 55% of his benefit ($2564/mo) for the rest of her life if Col Jones dies before her. The current cost per month for this is $166 (Base amount * 6.5%).

In addition, Col Jones must pay the Tricare Prime enrollment fee. He’ll pay $460 per year for the first year (according to the TRICARE web site.) He’ll start deducting that amount monthly for the following year’s enrollment fee, or $39 per month.

So Col Jones net pay is:
Retired Pay after taxes $3,961
Less SBP ($166)
Less TRICARE ($39)
Total Net Pay: $3,756

Col Jones and his wife own their home in Abilene outright. They purchased the home in 1990 after they’d been on active duty for 5 years. They used a 15-year mortgage when they purchased the home, and so the note was paid off in 2005. From 2005 until today, they continued to make mortgage payments into a separate account for a renovation and remodel that they plan to do after he begins his terminal leave in May.

Total Payments: $1,400 x 60 months at 3% interest: $90,505

Throughout his career, Col Jones contributed 15% of his salary to savings, using IRAs, taxable accounts, and after 2002, the Thrift Savings Plan. He invested in stock mutual funds and averaged 8% on his portfolio. This nest egg is now worth about $250,000.

Col Jones’s children are enrolled in Texas public universities, which are reasonably priced, and he was able to sign up for the Post 9/11 GI Bill to help them with their college expenses.

Col Jones and his wife decide to spend $40,000 on their home renovation, and put the remaining house-fund money into a savings account for emergencies.

They visit a financial advisor who suggests that they can allocate their retirement nest egg to take a 4% distribution annually, and can use the IRS tax code 72T election to begin taking withdrawals from their IRA accounts without penalty.

So, they elect to take a withdrawal of $10,000/year, or $834/month, from this account. They pay 15% in taxes on this, and net $708 each month. Added to their net retirement pay of $3,756, Col and Mrs. Jones have a budget of $4,464 to work with to decide if they can fully retire or if they should continue to work.

Since they are going to stay in Abilene their housing expenses will remain low. They decide that they can live comfortably on $4,000 each month, and move the remaining $464 of post-tax money into their taxable investment portfolio.

Using the links in this story, you can work your own scenario to see if you too can retire on just your retirement income. The numbers are very different if you retire to a high cost area like Washington, DC, Los Angeles, or San Francisco. It also make a significant difference if 25-35% of your income is going to housing, or if you can pay off your home before you retire, like Col Jones and his wife did. They’ll pay just 10% of their income on their housing expenses (taxes and utilities).

Finally, your pay grade at retirement will, of course, make a significant difference in your ability to retire early. The budget for a retired E-7, for example, with the same 24-years of service, would be closer to $2,000 per month before deductions for the SBP and TRICARE. His or her standard of living would be significantly different that the example of the Jones.


5 thoughts on “Can you live on your military retirement?

  1. Great post. While a retired military member has much less to live on than when active duty, with proper preparation a very early retirement is possible!Great website!

    Posted by Karen | May 9, 2010, 9:18 pm
  2. Awesome scenario…thanks!

    Posted by GI Jane finances | May 15, 2010, 11:58 am
  3. The truth is so endearing. Actually, no plans, no gain. Whatever job it is, if it's military, or accountancy or teacher or whatever, planning is still the best key to a better retirement. Though there are certain key points to consider, like having savings and businesses, what's important is how you would like it to be planned. It's hard to delve in a battle without strategy, and doing it so would just end up to futility. But thank you for reminding us these ideas. Just for me, he can choose to live in some adult communities. Charlotte, New Orleans, or somewhere in the beach or farm. The key point here is still finding where your happiness is.

    Posted by Tom | October 19, 2010, 5:23 pm
  4. A number of North Carolina retirement communities including many Charlotte retirement communities are attempting to attract military veterans and are therefore offering irresistible veteran incentives. These communities are helping make ease of an otherwise extremely challenging and painstaking process.

    Posted by Wilson | December 24, 2010, 4:43 pm

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