Will Congress change military retirement?

February 28, 2011 by · 16 Comments

Brandi commented in the previous post:

I can’t wait to snag a copy of your book this summer, and I am looking forward to your post on asset allocation considerations when you are getting a military pension. I do have a question for you – with politicians in Congress in charge of our compensation, and the nation facing a large budget deficit, do you see any changes to the current retirement system in the future? I can’t see Congress making drastic changes without grandfathering people in, but I am 15 years and 3 months from collecting a pension, and that seems like plenty of time for something to change. We know changes could be coming to TriCare premiums soon, but what else do you see as possible? Eliminating COLA increases? Reducing the percentage of base pay given? Increasing the age at which you can start collecting the pension? A shift to a defined contribution plan? Just curious to see what theories are out there – and trying to keep my expectations low!

I can understand everyone’s concern that military pay and benefits could suffer yet again as Congress tries to balance the budget and maybe even cut the nation’s debt.  However I don’t see any major changes to the military’s pay or retirement systems– it’s been tried before and it didn’t work out so well. Here’s the background.

I’ve been retired for nearly nine years after a 20-year career, and I’ve seen a few pendulum swings. I was a midshipman when Ronald Reagan was elected president. At a morning formation shortly after the inauguration I learned that my pay had jumped by nearly 25%. Enthusiasm was running hot for a long time after that news. The “hollow force” post-Vietnam era was ending and the all-volunteer force began to improve.

I started my career under what became known as the “Final Pay” retirement system. A different kind of “enthusiasm” swept the military later in the 1980s when Congress tinkered with Final Pay. The new “High Three” calculation reduced the retirement system’s “base pay” about 5% by averaging the highest three years of pay before retirement. These changes were seen as typical adjustments to the federal retirement system, along with the federal government’s civil-service retirement changes and the nation’s growing 401(k) programs. Back then the military was still struggling to expand and confront the Soviet Union’s “Evil Empire”, and this retirement change wasn’t met with exactly the same sort of enthusiasm as the pay raises received. However the economy was still recovering from high inflation, jobs were scarce, and the military was hiring. The military was able to meet its retention goals by introducing more targeted bonuses for officers and by raising re-enlistment bonuses, so the personnel situation didn’t seem so bad.

Then Congress passed the REDUX retirement bill. The original version of this system encouraged longer career service by reducing the 20-year retirement to 40% of base pay (instead of today’s 50%). By the mid 1990s, however, retention had plummeted. Some of this was due to the end of the Cold War, the disruption of the DESERT STORM mobilization (for active duty as well as Reserves/National Guard), the subsequent “peace dividend” drawdown, and the roaring Internet economy. To make matters worse, DoD actually offered cash to some servicemembers to separate before their obligations ended. Many of the military’s best performers stampeded for the exits.

Unfortunately recruiting had been cut back under the assumption that retention would stay about the same as historical rates. Personnel shortages grew even more severe despite attempts to raise retention. Bonuses spread and grew, and targeted pay raises were applied to some ranks, but servicemembers still thought they could make more money as civilians than by hanging on for a REDUX retirement. By 1999 the Joint Chiefs of Staff, notorious for their interservice rivalries, actually appeared together before Congress to explain that retention could only be raised by eliminating the REDUX system.

Individual members of Congress may have a short institutional memory, but the nation’s military support groups and a number of think tanks haven’t forgotten what REDUX did to the services. Any proposed pay or retirement changes will be subject to intense media & lobbying scrutiny, and if retention suffers then Congress will take the blame at the next election. So it seems difficult to reduce the retirement system’s base-pay percentage or to raise the pension’s starting age.

However I believe there are some areas of military retirement that could be modified without provoking widespread outcry. Any changes to the Social Security system (such as a smaller Cost of Living Adjustment, or COLA) could be applied to federal civil-service retirements and the military pension system. Some skeptics and cynics already claim that the Consumer Price Index (CPI) is manipulated to reduce COLA adjustments. Delaying a retirement COLA or tying COLA to a percentage of the CPI (instead of raising it by the CPI) would reduce pensions without appearing to be a significant benefits cut.

Another retirement-change possibility would be raising the “Career Status Bonus”. It’s been $30,000 since REDUX was repealed, and if the CSB was doubled then a number of math-challenged servicemembers would volunteer for a reduced retirement. This might actually be hailed as a benefit, but there are a number of reasons why REDUX is a bad deal. I’ll cover that analysis in a separate post.

With less than five years of service, you certainly could be affected by these changes. However I suspect that they’d only be applied to new recruits, not current servicemembers. You’d be subject to more traditional methods of reducing the military’s retirement expenses: giving targeted pay raises and bonuses only to high-demand occupations, or even “force shaping” by discharging members before they’re retirement eligible.

Changes to the military’s retirement system are a big concern to all, but you have a more important issue to consider at this stage of your career: whether or not it’s fulfilling and “fun”. (It’s probably already “challenging”.) No matter how attractive a military retirement seems from your perspective, it’s not worth 15 years of misery. If you enjoy what you’re doing now then you should keep doing it, just one obligation at a time. But you should also make sure that you’re qualifying for promotion while making your skills even more valuable through college courses (funded by tuition assistance) and advanced training. This is hard when you’d rather be enjoying liberty, but stay motivated by studying subjects that interest you and could benefit you in the military or out of it. Learn everything you can about the Reserves and the National Guard and consider whether you’d rather stay on active duty. Then when the fun stops you can make your retention decision with the confidence of your skills, not just hoping to find a job.

Speaking of higher Tricare premiums, here’s the latest DoD proposal: a much more modest 13 percent increase for retired TRICARE Prime enrollees for FY2012, with no enrollment fee or deductible changes for TRICARE Standard or TRICARE For Life.  Specifically, the plan calls for:

  • Raising the 2012 Prime enrollment fees by 13% — from $230 single/$460 family per year to $260/$520
  • Indexing those fees in 2013 and beyond to a medical inflation index (based on a measure of Medicare cost growth projected to rise at 6.2% per year)
  • Minor changes to TRICARE pharmacy copays.

Although a defined contribution plan seems as unlikely as a return to REDUX, DoD may still add some version of Roth 401(k) legislation for the military’s Thrift Savings Plan. This would not only allow servicemembers to contribute $16,500 of their pre-tax pay to the TSP (even more under certain conditions) but would allow them to contribute after-tax pay as well. The TSP is the nation’s largest collection of index funds, with the lowest expense ratios, and this would give a great tax-deferred savings boost to any retirement portfolio!

Low expectations are a great plan for never being disappointed.  But as long as you’re having fun then spend as much time as you can maximizing your education & training opportunities.  When the retention decision is at hand, you want to be confident that you’ve done everything possible to be ready to leave active duty if necessary.

And no matter how long you stay on active duty, keep saving as much as you can!  Financial independence means that you can choose a retirement on your terms.

Related articles:
Proposed Tricare fee hikes
How many years does it take to become financially independent?
Tailor your investments to your military pay and your pension
Where to put your savings while you’re in the military
Simple ways to start saving
Start saving early
Reserves and National Guard: Tricare Reserve Select and Tricare Retired Reserve health insurance

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Retiring without a military pension

December 16, 2010 by · 6 Comments

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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Comparing an E-7 active-duty pension to an E-7 Reserve pension

December 9, 2010 by · 5 Comments

Consider two 18-year-olds who join the military on the same day.  One stays on active duty for 20 full years to retire as an E-7. They’ll base their pension on 2.5% x 20 years = 50% of their High-Three retirement system. Under the current High-Three* rules, their pension would be 50% of the average of the highest 36 months of base pay.

The second 18-year-old serves eight years on active duty while advancing to the E-6 pay grade, and then separates for a Reserve billet. Over the next 12 years as a drilling Reservist they complete their “weekend a month, two weeks a year” of drills and active duty, while also mobilizing for two separate year-long deployments. They promoted to E-7 at about the same career point as their active-duty counterpart. Upon reaching 20 years of total service (eight years of active duty plus 12 “good years”) they request retirement awaiting pay.

Both E-7s are the same age, the same rank, and subject to the High-Three rules.  However the active-duty E-7 retires and immediately starts drawing a pension. If they retired in 2010 then this calculator sets their pension at $1957/month or $23,489/year.

Their pension includes annual cost-of-living adjustments that are roughly equivalent to the Consumer Price Index, the government’s official measurement of inflation.  These COLAs will continue for as long as they (and their survivors, if they chose a survivor benefit plan) draw their pension.

When the second servicemember joined the Reserves, their active-duty time was credited to their Reserve point count at the rate of one point for each day. Each year-long mobilization would earn at least another 365 points. By serving “a weekend a month, two weeks a year” over their other 10 “good years”, they can conservatively be expected to average another 75 points each year.  These are average numbers– some Reservists will earn more points, some will earn less.

At retirement the Reservist would have a point count of eight years of active duty, 10 years of drills, and two one-year mobilization periods.**  Their total would be at least 8×365 + 10×75 + 2×365 = 4400 points. The current instruction converts points to equivalent years by dividing into 360 (not 365). The percentage earned toward a Reserve pension would be 2.5% times the point count divided by 360, or 30.5%. Although they were mobilized for two of their 12 years in the Reserves, at this point the Reserve E-7′s pension eligibility is only about 60% (30.5%/50%) of the active-duty E-7′s pension.

The Reservist’s pension also doesn’t start until they’re age 60– another 22 years. The good news is that because they “retired awaiting pay” instead of “resigning” from the Reserves, their pension will be calculated using the E-7 pay scale and maximum E-7 longevity in effect at age 60.

It’s very difficult to predict how E-7 pay will change over the next 22 years, but it would be nice to have some numbers to refer to before making a decision to stay on active duty or to transfer to the Reserves.   One pay assumption would be that it would keep pace with the civilian equivalent of their E-7 specialty.  In that case the military’s E-7 base pay scale would rise by roughly the Employment Cost Index. Hopefully in 22 years, Congress and the Department of Defense will agree that an E-7′s salary should have about the same purchasing power that it has today. In that case the ECI would roughly keep pace with inflation and the Consumer Price Index.

The reality is that it’s impossible to confidently predict future pay scales, the ECI, the CPI, or pension COLAs. However since the all-volunteer force began in 1973, the only proven way to retain servicemembers has been to keep military pay competitive with its civilian equivalent.  (Otherwise we wouldn’t have volunteered!)  Congress has attempted for several years to raise military pay at the same rate as the ECI (even greater for some ranks) and the pension COLA calculation closely tracks the CPI. Despite the uncertainties of predicting the next 22 years of pay raises and pension COLAs, it’s reasonable to assume that future E-7 pay will have roughly the same purchasing power as today’s pay.

While awaiting retirement pay for those 22 years, the Reservist will also be credited with the maximum longevity in that E-7 pay grade– 26 years– even though they only served for 20 years.  In the 2010 military pay tables, the pay for E-7>26 is over 13% higher than E-7>20.  So although the Reservist’s pension eligibility only had about 60% of the equivalent active-duty pension when they retired awaiting pay, by the time they’re drawing that retired pay their longevity pay scale has risen another 13%. The result is that by age 60 the amount of the Reserve E-7 pension has risen to nearly 70% ([30.5% x (1+13%)]/50%) of the active-duty E-7′s pension.  If all of the pay assumptions are reasonably correct (and that’s a mighty significant “if”), then in today’s dollars they’d receive about $1350/month or $16,217/year.

Now that we’ve gone through the calculations the hard way, you could build your own spreadsheet to tinker with various ECIs and CPIs.  Or you could try out your own assumptions with one of the pension calculators here or here.

The biggest difference between active-duty and Reserve pensions is that the active-duty E-7 immediately started drawing their pension at age 38 at 50% of their High-Three pay average in effect at retirement. The Reserve E-7 would have also retired at age 38 but had to wait 22 years for their pension, calculated at the maximum longevity and pay table in effect during the year they turned 60. If their pension at age 60 preserved its purchasing power at least as well as the active-duty E-7′s pension, then their first pension payment would be almost 70% of the active-duty E-7′s pension payment– even though the active-duty E-7 has been receiving a pension for over two decades.

When the 60-year-old Reserve E-7 finally starts drawing their pension, that income stream will continue to rise with the same annual COLA as the active-duty E-7′s pension. Their pensions will be one component of a retirement made up of tax-deferred accounts, taxable accounts, and any pensions from other (civilian or civil-service) careers.

The next post will show how to plan a retirement with multiple streams of income.

[*A couple of final notes for the expert reader: we could make this post a lot more complicated by having these E-7s choose the REDUX retirement plan, but I'm saving that analysis for a separate post.  For now let's just say "Don't do it."]

[** This post assumes that the Reservist's deployments did not make them eligible for an earlier retirement.  Under current legislation if those deployments had happened in 2008 or later then they may have been eligible to start receiving their pension as early as age 58.]

Related posts:
The Reserves and National Guard
Mobilizing with the Reserves and National Guard
Retiring from the Reserves and National Guard

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Reserves and National Guard: Tricare Reserve Select and Tricare Retired Reserve health insurance

December 8, 2010 by · 10 Comments

TRICARE health insurance is one of the military’s best benefits for active-duty servicemembers and their families. Depending on the duty location and the specific plan, a family’s out-of-pocket expenses are among the world’s lowest costs for healthcare systems.

What about the Reserves and National Guard? Well, not so fast.

For decades, Reserve/NG members only rated military healthcare when they were “on duty”. This meant that medical care could be obtained during drill weekends (for a limited number of issues or questions), or during the annual two weeks of active duty, or when mobilized.  Except for mobilizations, families weren’t covered at all. The services conducted physicals and other reviews of mobilization readiness, but routine care was considered to be the servicemember’s responsibility. Reserve/NG members and families were depending on the American healthcare system provided by civilian employers or by self-employed programs.

During the mobilizations after 9/11, however, nearly 20% of drilling Reservists had no health insurance at all. This is catastrophic enough if a serious disease or condition occurs, but it also meant that some mobilized Reserves and National Guard members had not obtained care for conditions which were later found to make them medically unfit to deploy. Since Reserve/NG units were supporting nearly 40% of the war effort, medical issues were a serious drag on readiness. If servicemembers couldn’t find affordable healthcare for their families then it would also become a retention issue.

The first solution to these readiness and benefits issues was Tricare Reserve Select, which was authorized in 2005. The program has gone through a number of changes during the last five years and has expanded its coverage.

Tricare Reserve Select

Tricare Reserve Select is available for Selected Reserve members of the Ready Reserve and their families. In addition to being “drilling Reservists”, they cannot already be enrolled in the Federal Employees Health Benefits plan. Enrollment is completed online or through the unit.

Premiums, deductibles, and cost shares are reviewed annually. Most of the program is subsidized so members pay only about 28% of the actual costs. The current premium for TRS is under $50/month for Reserve/NG and under $200/month for member & family coverage. There are additional deductibles and cost shares for treatment, so the premiums do not cover all healthcare costs. However this program can literally be a lifesaver for those who are without health insurance, and it may be competitive with employer insurance and self-employed insurance programs. When Reserve/NG members mobilize, they (and their families) are eligible for active-duty Tricare programs with no interruption in coverage or service.

This Tricare pamphlet summarizes program features and costs.  Tricare’s FAQ page also has more details about Reserve/NG healthcare and TRS.  Other questions about TRS can be answered through individual service’s points of contact at this link.

Tricare Retired Reserve

TRR coverage began in October. It’s only available to Reserves/NG below age 60 who have elected to retire, not resign, so it’s one more incentive for Reservists to retire awaiting pay while remaining subject to the remote chance of a mobilization. Like TRS, coverage is not available to Reservists who are already enrolled in the FEHB.

Not only is TRR available to retired Reserve/NG members and their families, it’s also offered to their survivors. Like SBP, this is an important benefit intended to bridge the gap between the time a member becomes eligible for retirement (perhaps as young as their 30s) until they start drawing retired pay at age 60.

Unlike TRS or gray-area SBP, however, the program is not subsidized by the military. Members pay the full premium costs as well as annual deductibles and cost shares for treatment. Premiums are reviewed annually, so next month they’ll rise to $408/month for members and $1020/month for member & family. However once again this program is literally a lifesaver for families without any other health insurance, or for those with pre-existing conditions which may make civilian insurance unaffordable.

This Tricare pamphlet summarizes TRR program features and costs.  Tricare’s FAQ page also has more details about TRR.

Related posts:
Reserves and National Guard
Mobilizing with the Reserves and National Guard
Retiring from the Reserves and National Guard

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Mobilizing with the Reserves and National Guard

December 2, 2010 by · 1 Comment

When you’re trying to balance the Reserves/NG with a civilian career, an extended deployment can be a crippling drawback– or a unique opportunity. For active-duty servicemembers, deployments are just another part of the lifestyle that includes extensive support and assistance for both the deployer and their families. During the Cold War, Reserves/NG rarely deployed and family support (if any) was arranged by their unit instead of being a part of the active-duty system. Since 9/11, however, the Reserve and National Guard have been heavily mobilized to support worldwide operations. It’s now expected that the old system of “one weekend a month and two weeks a year” will also include “deployments every five years”.

12-15 months away from family and civilian career can be managed– or it can wreak havoc on the unready.  Families may not be aware of the support offered by the military, or they may not understand the best way to tap into the resources. Civilian medical insurance may be disrupted by shifting to military healthcare. Employers are required by federal law to protect Reserve/NG pay and seniority, but a prolonged absence may still affect their working conditions and career opportunities. Servicemember’s skills can decline while projects move on without them and clients find other support. It’s particularly difficult for entrepreneurs to keep their customers.

A relatively new benefit encourages Reserve/NG deployments with an earlier pension. (Note that veteran’s groups and some members of Congress are lobbying to backdate this benefit to 9/11 or even earlier.) With a year or two of deployment for every decade of service, the result is that a Reserve/NG member could start their pension (and their healthcare benefits!) in their late 50s.

Avoid these other civilian-military pitfalls

You can balance a civilian career with the military commitment, but both sides have to make accommodations. Sometimes the arrangement is harmonious, especially if your career is in federal/state civil service or a military-support field. Other times you’ll be tugged in different directions– particularly if you’re a small business owner or a self-employed entrepreneur. Federal laws (and many states) protect your veteran’s rights to employment and job status but there are subtle variations of cooperation, compliance, and enforcement. When your upcoming National Guard deployment may impact your civilian career’s opportunity to manage a special project, it’s important to let your coworkers know. You don’t want your occasional absence to cause a disruption and leave behind feelings of confusion or betrayal. If an adversarial relationship develops, everyone is on the losing side.

The most important aspect of balancing the two lifestyles is a detailed knowledge of your civilian-military leave policies. Your military chain of command will know what you rate but your civilian boss will probably need your constant support and education. You may be able to take a leave of absence from your civilian job, or meet your military requirements on weekends and holidays. You may also be required to use vacation days to complete your Reserve duties. It’s an awkward compromise and it won’t always seem fair.

You and the Reserves/NG can also support your employer. Schedules and deployments are usually set months in advance and can help you coordinate with your civilian staff. If your employer is particularly supportive of your Reserve commitments, then put them in for an award! Advertise every win-win situation. Show off your military skills whenever they can be applied to your civilian job, and look for opportunities to use your civilian skills in your military leadership and management. Your experience in each world may help you get promoted in the other.

Family life is another challenge. If you’re drilling then you’ll miss a family weekend every month, perhaps with travel, and you’ll be working at least two weeks a year in uniform– perhaps with more travel. National Guard units occasionally go on travel to train for weeks and then deploy for months. If you’re raising young children or spending extra time with aging parents, then you may have to transfer to inactive status for a few years until you can be flexible and mobile again. While you’re deployed, spouses may have to deal with the military and healthcare bureaucracies on their own. It’s important to make sure you both know how to find the information, assistance, and benefits that you’ve earned.

The good news about the higher deployment tempo of the Reserves and National Guard is that the active-duty military units have learned how to integrate more closely than ever with their counterparts. The military’s active-duty family support system is also much more attuned to bringing the Reserve/NG families onboard for the deployment, and showing them how to optimize their military benefits. In addition to your service’s websites, Military.com also maintains a large archive of benefits guides, recommended links, and discussion forums.

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Reserves and National Guard

December 1, 2010 by · 4 Comments

Another way to get to 20 years for the pension & TRICARE

Everyone who approaches the end of a military obligation has a tough decision:

Stay in or get out?

The decision is even tougher after the first 10 years:

Stay in for retirement, or get out while it’s still easier to transition to a bridge career?

Servicemembers aren’t the only people grappling with that dilemma. Assignment officers are keenly aware that 15-year veterans are unlikely to leave before their 20th. As retirement gets closer the choices get narrower… and the nasty, difficult tours are more likely. Some hardship assignments may seem interesting at the beginning of a career. After the halfway point, it’s bad enough to contemplate a hardship assignment without noticing that your seniors are having even less fun.

When your head’s down in the trenches, doing your best for the mission while preparing for promotions, it’s nearly impossible to contemplate your alternatives. It’s also scary to think about giving up a familiar career and a steady income. The uncertainty of starting over (and perhaps no paycheck for a few months) keeps many servicemembers on active duty for far longer than they may desire.

It’s very easy to serve a decade of active duty in blissful ignorance of the Reserves or National Guard. Some commands never even work with the Reserves or Guard, and there’s little reason to teach active-duty personnel about those careers unless it’s part of their mission. Each service’s Reserve and National Guard units vary widely in duties, operating tempo, and policies. For those who don’t know the system, here’s a very broad summary.

Members of the Reserves and National Guard can serve on active duty, drill status, or inactive status. (The details are more complicated than this overview.) Drilling is generally one weekend a month with two annual weeks of active duty, but there are many opportunities for longer periods of active duty. Some Reserve and Guard units may deploy every few years, requiring members to serve on continuous active duty for 6-15 months. Other Reservists manage their individual careers and deploy every 5-6 years with or without their unit.

Every drill is worth a point of credit toward retirement, and every day of active duty is worth another point. Members have to earn a minimum annual number of points, generally 35-50, for a “good year” toward retirement. Retirement eligibility is reached after 20 good years (including any active-duty years) and the amount of the pension is determined by the number of points.

Unlike an active-duty retirement, Reserve/NG pensions start payments at age 60. In general, Reservists and National Guard members will earn enough points during their career for a pension of about 15%-40% of an active-duty base pay scale. Some may earn more, and a few will earn quite a bit more. It’s not uncommon to accumulate 3000-4000 points over 20 good years, and you can use this calculator as one example of determining your pension for your rank.

Although retiring from the Reserve/NG means that the pension doesn’t begin until age 60, it’s adjusted for both pay raises and inflation. When a retired veteran begins drawing retired pay, the base pay used for their first pension payment is taken from the latest pay charts. Even though a Reservist may have filed for retirement in 1990 at age 40 and spent 20 years awaiting the start of retired pay, in 2010 at age 60 they’ll use the latest pay scale in effect that year. Two decades of pay raises will hopefully have kept up with historic inflation, just as a pension with a cost-of-living-allowance increase will hopefully keep up with future inflation.

An even better benefit is that the pension is based on the pay chart’s maximum longevity in that pay grade. A retiree may only have 20-25 years of service but when the retirement payments begin, they’re paid at the maximum longevity of service in their retirement rank– the numbers under the 26-30-year columns.

This seems to be a suspiciously good deal– waiting 20 years for a pension is no surprise, but why would the military adjust it for years of pay raises and longevity?  Why are “they” being so nice to you?  The reason is that a member of the Reserves or National Guard has the choice to “retire” or “resign” after their 20 good years. If they retire awaiting retired pay at age 60 then they’ll get the pay raise and longevity benefits. If they “resign” then they still get a pension at age 60, but it’s not adjusted for pay raises or longevity. It’s the exact same amount of pay in effect the day they filed for retirement, and with only their qualifying good years of service. The years they wait until they turn age 60 will subject that amount to decades of erosion by inflation. The only “good” thing about resigning instead of retiring is that the veteran is not subject to emergency mobilization in time of war. The Department of Defense is willing to hand out the “retire” pay/longevity benefits in the hope that Reservists/NG will retire awaiting pension (and possibly be subject to wartime mobilization) instead of resigning.

As attractive as the pension may seem, there are additional privileges with very substantial financial benefits. Reservists/NG are eligible for low-cost healthcare while on active duty. Medicare doesn’t start for most civilian retirees until age 65, but military Reserve/NG retirees are eligible for Tricare at age 60 and Tricare For Life after age 65. That’s five extra years of military medical insurance for only a few dollars a month, and it makes a big difference in states where a private insurer’s premiums are as much as $2500/month. During the years when a Reservist/NG member is retired awaiting retirement pay, they’re still eligible for access to the base and its commissary, exchange, fitness, and recreation facilities. They can still use benefits like a VA loan and the GI bill. Some of these benefits may be subject to time limits or space availability but they’re a potent way to bridge the gap between a paycheck and a pension.

Healthcare got even better in 2010 for members of the Reserves and National Guard, as well as for those retired awaiting retirement pay. I’ll cover those in a later blog post, or you can Google the terms “TRICARE Reserve Select” and “TRICARE Retired Reserve”.

No one joins the military to get rich, and that’s especially true of the Reserves/NG. Some Navy Reserve components don’t even pay for some forms of drilling or training and your pension doesn’t start for years after you’ve retired. But you’re not in it just for the money– you’re improving your quality of life! The Reserves/NG can be a vast improvement over active duty because you’ll have much more control over your assignments and better choices for work/life/family balance.

Active-duty members are at the constant beck and call of the assignment officer. Even after years of service they’re still subject to hardship locations, unaccompanied duty, disrupted tours, and reassignment at “the needs of the service”. If the assignment officer calls, it’s probably not good news.

In the Reserve/NG, though, you can decide how much time you want to devote to the military. You can do the minimum required number of drills and mobilizations. You can go on active duty for months at the same command. If other life events make it difficult to balance your military career, you can apply for inactive status– the military’s version of unpaid leave. You can apply for schools and extra training or complete online work or correspondence courses for additional retirement points. You can complete a minimum assignment with a unit, “homestead” for years, or switch among different billets in the same geographic area. You can be your own best assignment officer with your career and your interests at heart.

It’s easy to transfer to the Reserves from active duty. (A short Reserve commitment might even be required after an active-duty obligation.) Active-duty service is credited toward the Reserve/NG retirement system. Veterans might even choose to live in the same area and drill at the same command, but the Reserve obligation is also a great chance to travel the world while working part-time. You can re-invent your life and your career, and you have far more control over your assignments.

Veterans can apply to rejoin the Reserves/NG months or even years later, and civilians can join without any prior military service.

Here’s another advantage of leaving active duty for a Reserve/NG career: It’s a fresh start. When you’re unhappy on active duty, it may be extraordinarily difficult to switch career tracks. You’ll have to apply to your current career field’s personnel mangers to leave, and you’ll have to apply to another career field’s personnel managers to join theirs– where you’re not always greeted with open arms and cries of joy. You’ll be under the gun to learn a new system and to stay competitive for promotion. You might even be expected to start at the bottom of the new ladder, despite all your years of experience (and rank) in your former community. If for some reason you were actually passed over for promotion, it’s next to impossible to recover from it and to remain competitive.

The Reserves/NG allows a do-over and maybe even a clean slate. It’s a chance to not only change your lifestyle but your military specialty, your rating, your location, your duty station, and your environment. Instead of working hours of overtime for months to stay ahead of the pack, you can find a niche where you’re more competitive. Reservists who don’t promote will continue to be considered at subsequent selection boards and may even be permitted to remain in a drilling status, accumulating retirement credit even though they may not be paid for their drills.

I have several more posts about the Reserve and National Guard, and perhaps we’ll finish with a personal sea story. It may be worth your time to subscribe to the blog for the next couple of weeks to make sure that I cover all your Reserve/NG questions. If not, then post a comment or send me an e-mail and we’ll get you the answer.

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