retirement

When to Retire From the Army

Does a bigger pension make it worthwhile to stay in the Army for ten more years?

OUR READERWho: Master Sgt. Jason Alexander, 35Where: Alexandria, Va.

Question: When should I retire from the Army?

For most of us, the advice to develop a retirement strategy three to five years in advance lets us wait until we're in our fifties. Not so if you're in uniform. Jason has served 16 years and is about to make a life-altering decision before he's 40: 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 says he loves the Army but wants to do what's best for his family financially. He works in administration at Fort Belvoir Community Hospital. Jason's wife, Allison, also 35, is a civilian federal employee. Their daughter, Anneliese, was born in April, and 10-year-old Kaitlyn, Jason's daughter from a previous marriage, lives nearby with her mother.

Uncertain future. The Alexanders' most pressing issue is that they don't know where their future lies, either geographically or professionally. 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 in finance. If he works in finance, Jason thinks he would make more over a ten-year period than he would in the Army. But salary isn't everything. He needs to factor in his military benefits and tax breaks against what he'd qualify for in the private sector.

For example, Jason pays no state income taxes on his Army pay. (In the military, you can claim residence in a state where you served, such as income-tax-free Texas, even after you move to a state with income taxes.) 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% of his base pay for life. For a master sergeant, that starts out as a monthly pension of $2,400 (plus annual inflation adjustments). But if Jason serves 30 years and gets promoted once more, financial planner Patrick Beagle estimates he would get about $31,000 more per year for life (in today's dollars) than if he were to duck out at 20 years.

So the pension side of the decision hinges on how big a pot of money Jason can build as a civilian using his MBA. Beagle, a former Marine helicopter pilot, estimates that Jason needs to save about $620,000 over ten years to take out 5% a year and offset the loss of the higher Army pension.

That could be a tall order. If he invested his 20-year pension for ten years and earned about 5% 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 with two children, that might be pushing things. Then again, finance does offer a shot at higher pay and more promotions than being a master sergeant. The decision may ultimately 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," says Beagle. "If you work for another employer, it puts the onus on you to amass that money."

Like to appear in Real Money? Write us at realmoney@kiplinger.com.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

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