Want To Retire Early? Join the Military.

This post is dedicated — and highly relevant — to the United States uniformed services.
(The Fourth of July was two weeks ago.  Better late than never!)

Servicemembers have two powerful tools for retirement preparation: the US Military Pension and the Thrift Savings Plan.

The Pension

Members of the US uniformed services are eligible to receive a pension in retirement after 20 years of service.  For members who entered active duty after September 8th 1980, their pension pay is equal to:

(average of highest three years of base pay) x (2.5% x Years of Service)

At 20 years, the pension is 50% of the three-year average highest base pay; at 30 years, it's 75%; at 40 years, 100%.  At 19.5 years of service?  0%.  The system used to max out at 75%, but the 2007 National Defense Authorization Act removed this cap.  To protect retired servicemembers from inflation, the dollar value of the pension is subject to Cost Of Living Adjustments (COLAs) that are tied to the Consumer Price Index (CPI).

Pension-paying positions are getting harder to find these days, so having one is a major benefit. Imagine: if you maintained a 50%+ savings rate prior to retirement, the pension alone could 100% cover your expenses!  Additional income from the money you saved and invested would be icing on a rather incredible guaranteed early retirement cake.  Social Security should also kick in somewhere between 62 and 70, further sweetening the deal.

Is it possible to save 50% as a servicemember?  Honestly, I have absolutely no idea.  Servicemembers do have financial challenges such as frequent, unexpected relocations and deployments.  But how about 40% or 30%?  Even at those rates, the math works out very much in your favor.

The Thrift Savings Plan

There's more, and this applies even to those who don't stay in the service for 20+ years.

The Thrift Savings Plan (TSP) is a defined contribution plan, the uniformed services' equivalent of the 401(k).  I've written an overview of the TSP's benefits, terms and conditions and added it to the Investment Plans section of the site.

All servicemembers are eligible to participate.  The terms of this plan are incredibly good, offering a selection of high-quality investment options at a shockingly low 0.025% expense ratio (all-in annual fee).

Like an IRA, the TSP comes in both Traditional (contributions made with pre-tax dollars) and Roth (contributions made with post-tax dollars) versions; money invested in either version is never subject to tax on capital gains or dividends.

After leaving the service, money in the TSP can be left alone or rolled over into a (Roth) IRA.  If rolled over, the TSP principal will be available for tax- and penalty-free withdrawal to help cover expenses until the TSP investment earnings become available at age 59.5 and Social Security kicks in at age 62-70.

See the Thrift Savings Plan overview for more information.

Are you eligible or the TSP, and if so, do you contribute to it?

What are the financial challenges of being a servicemember?  What sorts of savings rates are feasible?