Retiring without a military pension


By now you’ve noticed a trend in the chapters from the “simplest” type of military early retirement (staying on active duty for at least 20 years) to the most difficult (separating as soon as your obligation ends). Financially, the best early retirement choice is staying on active duty until eligible to retire.

But active duty is certainly not the easiest choice. When you’re two years into that 20 with 18 to go, the “bolting” option seems much more desirable. And if you feed a few frosty beverages to the typical military retiree, you’ll eventually hear that the final two years were in many ways even harder than the first two. It’s far easier to talk about making it to military retirement than it is to actually do it.

Just how hard could it be to stay for 20? If it’s the surest and even simplest path to early retirement, then shouldn’t everyone aspire to that goal? Yet after a few years in the ranks, you realize that there seem to be a lot more people separating from the military (even for the Reserves and National Guard) than retiring from it.

Statistics confirm that impression. If you’re ready to get out of the military– and not even stay in the Reserves or National Guard– then you have plenty of company. The vast majority of veterans don’t even stay for 10 years, let alone a career. Only 15% of all veterans qualify for a pension (that includes Reserves/NG as well as active duty) and some services have an even lower retirement population. The military’s retention experts succeed by persuading only a minority of the recruits (both enlisted and officer ranks) to serve past their first obligation.

So while resigning seems to be the most difficult path to retirement, it’s by far the most common one. Retention is much more highly correlated to career satisfaction and quality of life, although salary and bonuses can help. However only you and your family can decide what’s best for you, and at the end of the discussion you may find yourself saying “Well, it’s only money.”

The first chapter of “The Military Guide” describes the most powerful tools of a military retirement: cheap healthcare and an inflation-adjusted pension. How in the world can a veteran reach early retirement without either of them? It’s not as easy, but it can be done. Civilians may not have these military options, but there are solutions. Some companies still pay fixed pensions and many offer subsidized healthcare. Other retirees accumulate a larger investment portfolio (perhaps boosted by a lump-sum retirement account) and buy their own healthcare insurance until they’re old enough for Medicare. A few retirees depend on the “multiple streams of income” approach. Still others bridge the gaps with part-time employment or extraordinary frugality.

The Safe Withdrawal Rate (SWR)

Regardless of their retirement benefits, all retirees have to manage their assets and their spending. The essential financial tool for assessing a retirement portfolio is the safe withdrawal rate: the rate at which withdrawals can be made without running out of money. The “Recommend reading” section lists many references and planning systems, but here’s a brief summary of the four most popular financial options:

The 4% rule. Research by William Bengen and another project known as the Trinity Study were the first to show that a retiree’s portfolio would almost always last for 30 years if retirees started their first year by spending no more than 4% of that portfolio, and then raising each subsequent year’s withdrawals by the rate of inflation. Some principal is consumed nearly every year, and by the end of 30 years the portfolio may run out under extremely adverse conditions.

These studies spawned controversy and an entire industry of SWR analysis. What exactly is “almost always”? What about having enough assets to survive for 35 years, 40 years, or even 50 years of ER? Is it really 4% or lower? Higher? How much can inflation change from one year to the next, and how bad can it get? What if we decide to consume less principal, or try to have some portfolio left after 30 years? If we have better data and more powerful analysis techniques, what else can we squeeze out of this?

Almost all retirees use 4% as a starting point or a spending tripwire. The “Recommended reading” section lists many other references and approaches to determining your own SWR, from simple to extremely complex. While other retirees will spend the rest of their lives exploring all the subtleties of this approach, let’s move on to the other options.

The dividend rule. Many retirees take great comfort in only spending what their portfolios earn. Their portfolios use various combinations of dividend-paying stocks, high-quality bonds, rental real estate, and CDs instead of depending on growth equities or commodities. Each year’s budget may be limited by last year’s dividend income, or CDs might be spent during a recession while stock and bond dividends recover. To preserve the portfolio’s purchasing power, dividends will have to rise at least as fast as inflation. The SWR is less than the portfolio’s total dividend rate and almost always less than 4% per year. Spending may fluctuate with the economy or inflation but the portfolio never runs out of money because principal is never consumed. However the lower SWR requires a larger portfolio than the 4% rule, which usually means saving more or working longer.

Multiple streams of income. This option has almost as many variations as the 4% rule. Some retirees work part-time at their avocations (or develop new ones) for the rest of their lives. Others take great comfort in a more structured corporate environment with part-time employment, and the money certainly doesn’t hurt. Some have planned to work a few mornings a week (or to qualify for healthcare benefits) as long as they’re able. A few will only work seasonally, to earn extra for special spending occasions, or when their portfolio falls below a warning line. Rental real estate is a popular way to create a stream of reliable income with fewer working hours. Finally, many veterans combine a military pension with civil-service or civilian pensions and their savings to bridge the gap to Social Security.  For more details, read the previous post on “multiple streams of income“.

Frugality. These retirees focus on expenses, not assets or income. They’ll start with a bare-bones survival budget and add in various “luxuries” that depend on their portfolio’s performance or their willingness to work for extra income. Before they’ll go back to work, however, they’ll happily devote a majority of their time to cutting waste or reducing expenses. They’re more focused on the challenges of their lifestyle than its luxuries (or lack thereof). While a very few frugal early retirees may occasionally cross the line into outright deprivation, nearly every ER practices some aspect of this technique. It’s also a very handy survival tool for a harsh economy, which we’ll discuss more in an upcoming post.

Early retirement finances will almost always be split among all four options. Many retirees still fondly recall the day in their working years when they updated their net worth spreadsheet and realized that they had enough to meet the 4% rule. Others had a lifestyle epiphany and began aggressively cutting expenses, saving every spare penny, and carefully tracking their progress. A few have saved enough to pursue their avocation and happily take whatever payments come their way. A very few will spend years or decades traveling the world’s bargain countries or living a bare-bones lifestyle before settling down to a more traditional retirement in their dream location.

Chapter 6 of “The Military Guide” profiles two early retirees who represent both ends of the bell curve of military-transition experiences, and in two different centuries, but they share many common aspects. Both started their military careers intending to go all the way to a pension, but both became progressively disillusioned with the military and more focused on their families. Unlike many civilian careers, both of them were forced into a transition decision by an impending transfer. They used the final months of their service to make their plans and then executed them. Once they’d made the transition they continued to control their expenses, save as much as they could, and grow their wealth.

One ER’s retirement is still based on the 4% rule, although he appreciates the value of dividends during a recession.  The other ER may use those systems someday, but for now he’s living on multiple streams of income and a frugal lifestyle. If both continue to grow their portfolios then they could attempt to live only on dividend income, but both have already won the game. Neither has any need to try to run up the score by taking on more risk to pursue greater wealth. Instead, they can continue to enjoy their lives amid the security of knowing that they have enough.

Their examples can help you tailor your own transition to your preferences and circumstances. Finishing 20 years of active duty may seem like the simplest financial option for a COLA pension and cheap healthcare, but lifestyle and priorities may dictate otherwise. The Reserves and National Guard offer a wide variety of options for work-life balance, but success depends on having complementary military and civilian careers that allow switching between the two for mobilizations or for lengthy, complicated projects. Completely quitting the military is another option. It offers transition benefits and the GI Bill to build on years of training and practical experience that is valued by all employers.

There are many paths to retirement. They involve different career choices, different investment assets, different budgets and lifestyles, and even different withdrawal methods during retirement. You will find your own path. And when you do, you can share your wisdom with the future retirees who read this blog!

Related articles:

The biggest obstacles confronting all retirees
The biggest benefits of a military retirement
When should you stop working?
Military retirement spending: how much will I need?

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I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers and veterans.

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