Throughout my time in the military, I talked to a lot of people who were either getting ready to retire, or people who retired while I was serving.
To this day, I have never met anyone who was able to fully retire after 20 years of service. I know people do retire after 20 years but I’ve never personally met those people. It seems like every enlist retiree, and commissioned for that matter, need to work after their 20 years end.
Why is that? People who are retiring in 2022 are getting 50% of their base pay as retirement pay.
In 2022 as an E-6, that would be $4,413, 50% of that is $2,206.50 per month pay. You also get some of the other benefits of being a retired member, like free healthcare for life, which at a minimum is worth a few hundred dollars monthly.
For the rest of your life, you would receive about $26,478 dollars (which is slightly more than a full-time salary at $13 dollars per hour at $26k per year). That’s a lot of money to have coming in without having to work a single hour. But, it’s typically not enough for a retirement.
For people who are relying on their military retirement as their sole form of income after serving for 20 years, I would highly recommend starting investing.
50% of base pay without any other income will likely just not work. It’s a good boost to your annual income but you won’t be able to ‘retire’ unless you have very low expenses, or if you have other investments/savings.
The question then becomes, can you retire after 20 years of service?
If you plan to live just on retirement pay, for most people the answer is no you cannot retire.
If you take some steps during your 20 years of service you most certainly can retire. Here are a few examples of things you can do while serving in order to retire after 20 years of serving.
- Invest in TSP and a taxable account
- Buy real estate as you PCS
- Pay off your current home and vehicles prior to retirement
Invest in TSP + taxable account
The primary reason you need to invest in something in addition to TSP is because you get penalized if you withdraw money from TSP prior to a certain age, which is currently 59.5 years old.
If you are going to retire after 20 years of service, there is a good chance you are under the age of 50 and for most people they will be around the age of 40.
That means there is about 20 years of living you will want to do prior to taking money out of your TSP.
If I was to use this strategy, I would probably put about 10% of my base pay into TSP and invest an additional 10-20% of my income into a variety of index funds and maybe some alternate investments. Things like VOO, VTI, or SCHD is what I would personally choose from.
I would probably put about 70% into an index fund like VOO, VTI, or SCHD, around 20% into Bitcoin, and around 10% into wine. But that would be a ‘safe’ bet I personally would be willing to make. That’s not necessarily the best strategy for everyone and some people can just put 100% into VTI or VOO and let that build during their 20-year career, then diversify it once they retire, or not, the choice is yours.
The money invested in those index funds can be sold at any time, I would just need to pay taxes on the gains. Those are the investments I could use to pay for the additional expenses over the retirement pay amount.
There are many options so it’s best to contact a financial advisor who can help you plan for your specific situation.
Buy real estate as you PCS
This is a fun strategy I’ve seen a few people do.
This is for people who don’t want to mess around much with the stock market. I would personally still put 10% of my base pay into TSP and buy real estate in addition.
If you buy a home each time you PCS that will allow you to build equity in the property for the years you spend in each location. It will also allow you to rent out the properties once you move, which can give you both extra income (to save for emergencies, invest, or pay down the mortgages) and build equity in the house.
For example, let’s say your first property is $100,000 and you live there for 4 years. During that time, you pay off $10,000 of the loan. When you leave that location, you can re-finance the house and then in the new location you can use your VA loan once again.
You can also pull out that $10,000 in some situations and use that money to put a down payment on the new home, use it for home upgrades, closing costs, or even just keep it as cash as an emergency fund for that rental.
You can rent out the first house for $500 per month, and let’s say that mortgage is $400 you can set aside the extra $100 for repairs and other things that pop up.
You can buy a second home in the new location and repeat the process. This can be duplicated 2, 3, 4 or as many times as you’d like.
It would be quite easy to end up with 4-5 homes after a 20-year career which can bring in hundreds or thousands of dollars extra per month.
By the time your 20-year career is over the first 1 or 2 homes will be getting close to being paid off, plus you should have quite a bit of cash saved up from the rental income, and you will have a home that you are living in.
You can make the choice to keep the properties and allow them to make you income during retirement, or you can sell the homes and use that cash to live off.
This can be a risky strategy so make sure you know excatly what you are doing and research this greatly. It’s best to get in contact with an experienced real estate investor or agent.
Always be careful with debt. Talk to a professional who can help with your specific situation.
Pay off your house, cars and all other debts so you can live an inexpensive lifestyle
An E-7 after 20 years of service would receive a monthly payment of about $2,600 in 2022.
If you did not save and invest or pay off all your debts this will be quite difficult to live off. Going from getting double this pay, plus BAH (housing) and BAS (food) is going to be a huge shock to someone’s financial situation.
There really is only one option if you want to retire from working, with only this amount of income. You likely need to reduce you bills significantly. (Hopefully you saved and invested while you were in and don’t have to)
Some things that would reduce your cost of living greatly include:
- Paying off you house, so you have no mortgage or rent payment
- Paying off your vehicles so there are no monthly payments
- Have no credit card or other debt
- Cut back on travel, dining out, and other ‘unnecessary’ spending
- You can also move to a cheap country like Mexico, Thailand, etc.
There are also many other things you can cut back on, these are just some major expenses most people have. During retirement you will also continue to get healthcare benefits, which is worth a few thousand dollars per year at a minimum.
Including retirement pay and healthcare I’d say the effective income of an E-7 retiree is somewhere around $38,000 which is not too bad, but it’s not a ton if you have a family and are used to making more than double.
According to the BLS (Bureau of Labor Statistics) the average American spends 32.8% on housing and 15.9% on transportation in 2019 as well as 8.1% on healthcare.
Adding that up is about 56.8% of most people’s incomes that you would not be spending just based on having a paid off home, vehicles, and free healthcare for life.
You will still have some expenses because you will have insurance, repairs and other fixed costs on the home and vehicles, but the point is you will require much less income if those things are paid for.
Really the only option if you don’t want to work after retirement, and don’t want to invest while serving is to cut your expenses and the best way to do that is to avoid debts and reduce monthly bills.
Every situation is much more complex than this one, but it’s just imporatnat to note that it is possible to live off of this amount of money, you’ll just have to have a slighly different lifestyle than you’re used to. If you already were able to live off of half of your income, you would of had savings and investments, and you wouldn’t have to worry about living on a smaller income to begin with.
Can you retire off your military pay?
I personally believe that having paid for health insurance one of the most brilliant benefits because that can get expensive fast. Also, 50% of your base pay is still a sizeable amount of money and if you save even just 10% of your income while serving you should be able to retire comfortably.
Yes, you can retire off military pay. It just takes a little extra work.
There are hundreds of different ways to invest and utilize your money. These are just a few options that I’ve thought of and seen work. There is nothing wrong with working after you retire. Starting a business can be very fufilling and having a plan is essential.
I highly recommend talking to a financial professional to figure out your situation and if you are on the financial path you want to be during your time serving.
This is not financial advice, and this is also my opinion, not the opinion of the U.S Military.
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