How To Retire At 38 Years-Old And Replace Your Income

by Hank

What do you want to do when you retire from the military after twenty years of service to the government? For most members of the military, they feel compelled to find another job right away. Most of them are backed into a corner starting a second career because many enter the military at the age of 18 directly after high school and are eligible for a 50% pension at the ripe old retirement age of 38 years-old. So, take a look back at the original question that I asked. What do you want to do in your retirement years? For me, it is not work more. I want to play golf, travel, maybe start my own business, and rebuild a 1966 Ford Mustang. I do not want to work anymore. Here is a blueprint for young members of the military to follow to retire at age 38 and never work a day in your life again if you do not want to.

Members Of The Military Retire At 20 Years With A 50% Pension

Throughout this article, I will look at the two average ranks for retirement in the Army, an E-7, Sergeant First Class, and an O-5, Lieutenant Colonel both retiring after twenty years of active federal service. In 2010, an E-7 earns $49,572 per year in base pay, the pay used to calculate retired pay, and an O-5 earns $95,508 per year in base pay. After twenty years of service, a member of the military retires with a 50% pension. So, for our hypothetical E-7, he or she would earn $24,786 per year and the Lieutenant Colonel would earn $47,752 in retired pay per year.

Members Of The Military Need To Replace 30% Of Income With Retirement Assets

Almost every financial planner uses the planning factor of 80% when calculating how much income a person needs to replace to have enough money to live a comfortable retirement. There are a lot of assumptions built into this rule of thumb, but it is derived from the idea that a person’s cost of living will be less in retirement and less income will be needed than the amount the person lived on during his or her working years. In theory, a retiree is hopefully close to paying off his or her home mortgage, has fewer or no children living at home, and other living expenses will be diminished. Retired members of the military have the added bonus of not having to pay for their healthcare as well which saves a significant amount of money during retirement. So, if most experts suggest that retirees need investments that distributed income in the amount of only 80% of their pre-retirement income and military retirees already earned a 50% pension, then military retirees only need to have a large enough investment portfolio saved to produce 30% of their pre-retirement income to close the income gap.

How Much Income Do You Need To Have In Retirement?

How big of a nest egg do you need for it to produce an income stream that equates to 30% of the military member’s pre-retirement income? Sergeant First Classes (E-7) needs to replace $14,871 per year, and a Lieutenant Colonel (O-5) needs to replace $28,652 every year which are 30% of their pre-retirement incomes. How much capital will produce that amount of income? The Sergeant First Class will need a nest egg of approximately $180,000 invested in an annuity in order to produce about $1,240 per month assuming an annual return of 8% for 40 years of retirement. The Lieutenant Colonel would need a nest egg of approximately $345,500 in an annuity for 38 years of retirement under the same circumstances to produce $2,387 per month in income.

How Do You Get To That Retirement Number?

Okay, now we have figured out how much a Lieutenant Colonel and a Sergeant First Class need in order to fund the income shortfall they have. So, how do we get to those figures during your working life? By investing in a Roth IRA or the Federal government’s Thrift Savings Plan, a member of the military can save a nest egg of those sizes. Saving $5,000 per year, the maximum allowed for a person to contribute to a Roth IRA, a person’s investment can grow over twenty years to a value over $228,000 thanks to the wonderful power of compounding interest. A yearly investment of $3,933 or just $327 per month will give a young enlisted Soldier the $180,000 he or she will need when they retire as an E-7. A Lieutenant Colonel would need to save and invest approximately $7,550 per year or $630 per month in order to hit the nest egg goal of $345,500 by retirement.

You can retire after twenty years of service in the military and not work another day in your life. You can retire by the age of 38. It is possible. You have to have a little bit of vision early in your career and start saving and investing now, but it can be done. These calculations show how an investor can close the income gap after earning a 50% pension. By diligent investing and saving, a member of the military can stockpile enough money that will produce an equivalent to the 30% needed to fund an adequate retirement with 80% of your former income.

Disclaimer: These calculations were made with assumptions using the average member of the military. Everyone’s situation is slightly different than the average of course. You should double check your personal situation and savings needs with a certified financial planner or other professional.


Mark L. Fox September 28, 2010 at 9:30 am

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They can plug in retirement and pension numbers and see what their future looks like.

It is a free service

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Ryan September 28, 2010 at 9:37 am

Great article, but I think it’s a strong assumption to think most people would be able to do it. Some? Possibly. Most? Probably not. The 80% income rule is very aggressive for for someone around age 38-42 (42 assuming the 4 years of college required to become an officer). Most people at that age still have financial obligations such as a mortgage, children, school, etc. which aren’t addressed in the article. An important thing to remember is to control expenses as much as controlling income.

That said, military retirees are in a great position to set themselves up for an early retirement, especially with the generous pension plan and the *essentially* free health care for life.

Lee October 2, 2010 at 1:20 pm

You’re absolutely right that if you plan early and save wisely that you could “retire” after a 20-year career. Do remember, however, that your Base Allowance for Quarters and Subsistance add a significant amount to your income. If you live on active duty like you’re not getting this income, you should do fine after you retire.

Hank October 2, 2010 at 5:30 pm

Ryan – I can see your point. Assumptions are just that assumptions. The article just shows that it IS possible.

Lee – You’re absolutely right. You make some great points in your argument about BAS and BAH. A retiree who has a paid for house might be alright on retired pay that is not calculated with BAH factored in there.

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