Money Power: Young soldier may do better financially to retire later
BY KIMBERLY LANKFORD Money Power
Saturday, August 11, 2012
8/11/12 at 3:58 AM
For most of us, the advice to implement a retirement strategy three to five years in advance lets us wait until we're in our 50s. Not so if you're in uniform.
Jason Alexander has served 16 years and is about to make a life-altering decision: Should he quit the Army after 20 years, when he can qualify for retiree health care and a pension, or stay for 30 years and get a larger pension?
Jason, 35, says he loves the Army but wants to do what's best for his family financially. His wife, Allison, also 35, is a civilian federal employee.
As a master sergeant, Jason can be promoted only once more, so his pay won't rise much if he stays in the Army to get to 30 years.
To keep his options open, Jason earned an MBA online last year and is completing a master's degree in finance. If he works in that field, Jason thinks he would make more over a 10-year period than he would in the Army.
But salary isn't everything. He needs to factor in his military benefits and tax breaks. For example, Jason pays no state income taxes on his Army pay. He also gets a tax-free housing allowance of $2,600 per month.
Then there's the pension. If Jason leaves the Army after 20 years, he'll immediately get 50 percent of his base pay for life. But if he serves 30 years and gets promoted once more, he could get about $31,000 more per year for life (in today's dollars).
Financial planner Patrick Beagle estimates that Jason needs to save about $620,000 over 10 years in order to offset the loss of the higher Army pension. That could be a tall order.
If he invested his 20-year pension for 10 years and earned about 5 percent per year, he'd need to save about $1,600 more a month - or $19,200 per year - from his new job to make up the difference. Some of it could come from an employer match to a 401(k). But that might be pushing things.
Ultimately, the decision may boil down to how much risk Jason and his wife feel comfortable taking.
"If you're not a risk-taker, the safe path is to stay with the government pension," Beagle said. "If you work for another employer, it puts the onus on you to amass that money."
Original Print Headline: Soldier weighs retiring at 40
Kimberly Lankford is a contributing editor to Kiplinger's Personal Finance magazine and the author of "Ask Kim for Money Smart Solutions" (Kaplan, $18.95). To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.