401(k) vs. pensioning
Published on February 7, 2007 By greywar In Current Events

     The Army needs to find ways to keep it’s costs under control and replacing the current retirement system with a 401(k) system is one that should be done right now.

*WARNING* : Long and number filled article ahead!

      For those that don’t know the military has been reducing and restructuring it’s retirement benefits for some time. The programs offered vary but the  most common for military who entered service after 1986 are High-3, Redux, and Redux-2. The details of each are not terribly important here but suffice to say each basically offers a method of retirement which will garner a retiree a permanent paycheck equal to roughly 40-60% of their pay-grade’s paycheck when they retired.

Example (simplified (Don’t bother writing with exact corrections… this is just an approximation)) :

     A Sergeant Major (E-9) (the highest enlisted grade) retiring this year with enough years of service to qualify for 50% of their active duty pay would receive :

$5,512 per month *.50 = $2,756 per month (not bad for not working) (Pay charts are here)

(Don’t bother writing with exact corrections… this is just an approximation)

A General (O-10) with the same:
$14,000 per month *.50 = $7,000 (Jesus H. Christ!)

     Not a bad deal eh? Well most retirees do not make it quite that far up into the ranks. Lets try it with more modest careerists:

Sergeant First Class (E-7)
$4,204 per month * .50 = $2,102 (also not bad but not huge either)

Lieutenant Colonel (O-5)
$7,373 per month * .50 = $3,687 (Tidy… but not extravagant)

     Keep in mind that this just uses base pay and doesn’t figure in all the additional pays you receive on active duty. Active duty folks make quite a bit more than these numbers might imply. My highest paid year in the Army as a Sergeant E-5 with a bunch of years of service topped out at around $50,000 counting language pay, housing allowances, free health care, combat pay, imminent danger pay etc… My base pay though was less than $30,000. the other allowances add up too :

A General (O-7 or higher) living in Maryland is allotted almost $28,000 per year just for housing costs. Nice.

     If our General leaves the military at age 50 and lives until he is 70 the Military will end up paying him in excess of 1.7 million dollars over the course of his retirement (allowing for annual raises).
    SGM: Over $700,000
    SFC: Over $500,000
    LTC: Over $900,000

     This system isn’t terrible by any means but it is terribly inefficient as far as spending goes. The entire cost of the payments is footed by the taxpayer for the life of the soldier. With a 401(k) program the taxpayer’s commitment ends when the soldier leaves the military.
     401(k)’s (in simplified fashion) work like this as a general rule:

     Employees (soldiers) make a monthly contribution to an account which is tax deferred. A portion of the contribution is matched by the employer. Usually this amount ranges from 5-15% of the employees salary.  Thus an employee making $30,000 per year with a 5% match can have up to $1,500 in matching contributions made by their employer (This is a major factor as compared to simple IRA’s). The employee is not entitled to the employers matching amount until after a few years (generally the longer you stay the more of it you get). 
     This money is then usually invested amongst a host of options chosen by the employee or by a financial management company. The money earns interest or dividends depending on how the employee elects to have it invested.
     Since the contributions are tax-deferred this reduces the employee’s current taxable income (very nice) while saving for retirement (even nicer).

A low-ball example of the results:

The soldiers sucks and doesn’t get promoted very well capping out with an average of E-5 pay for her career (either they are stupid or stubborn).

Stingy Congress only gives 2% per year in raises

Base salary average: $22,248 per year (crappy for a 20 year career)

Annual rate of return: 4% (horrible!)

Average Monthly contribution: 5% (~$93)

Yearly Taxpayer contribution: 5% (Very low, ~ $1,112/yr)

Total Taxpayer cost = $22,240 (Would be 2 years of current retirement cost)

Payout = $80,708 (this is enough to start a small business easily)

    The alternative is the soldier “retiring” on ~$11,000/year that the taxpayer could well end up paying for 40 years at a cost of over $500,000 (adjusting for inflation and raises).
     I know $80,000 isn’t a ton of cash but that is the worst of worst case scenarios and it still isn’t bad for a 38 year old!

Let do a more reasonable scenario:

Congress is moderate and allows 4% annual increases in salary

Averages E-6 pay for 25 years

Base salary average: $36,516 per year (decent but not huge for a 25 year career)

Annual rate of return: 6% (still very modest over 25 years in the USA)

Monthly contribution: 7% (~$213)

Taxpayer Contribution: 7% (~$2,556)
Taxpayer cost = $63,900

Payout :  $438,230 for a 43 year old at a cost to the taxpayer of less than 3.5 years of current retirement pay. That is a massive shift folks.

Last scenario (a moderately successful enlisted career):

Congress sticks with 4% increases

Soldier averages E-7 pay for 27 years to retire at age 45.
(Why no Officers? Cuz F*ck em! That’s why!)

Base salary average: $42,142 per year

Annual rate of return: 7% (most 401(k) use 8% as a starting point)

Average Monthly contribution: 9% (~$316)

Taxpayer contribution : 9% ~($3,792)


Taxpayer cost = $102,384 (Less than 5 years of retirement pay)

Payout: $902,909. (If this isn't a significant amount of cash then I don't know what would be)


     Frankly the 401(k) not only saves the taxpayer massive stacks of money, but it also changes the soldier’s post-military status by an order of magnitude. The retiree wouldn’t just be a middle class person on a stipend but rather they would be in the position to become business owners, home owners, and entrepreneurs if they wanted to be.
     It is also plain to see that even if taxpayer matching was higher than my last example it would still be cheaper than paying for 10+ years of retirement pay.
     I would rather have a class of 40 something business people than a class of 40 something pensioners living in my neighborhood! Let’s set up our soldiers for success and not mediocrity.

* I will be happy to provide the links to the tools I used for these calculations on request.

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on Feb 07, 2007
On a whim I did the 0-5 result using the same inputs as the last scenario and it comes out to over $1.7 million. Sheesh.
on Feb 07, 2007
Most retirees die after 10 years of retirement. Most people don't get to retire because the military purges people at the 12 year mark and to get any retirement you have to reach the 20 year mark. I was wounded and booted out after 12 years all I get is my disability pay. when I got out of the military I went from 1600 a month to 75 dollars a month. over the last 20 years my disability has skyrocked up to about 140 a month. Thanks from a grateful nation. Sure if I live another 20 years it is projected to be 300 a month. The people that survive to 20 years earned their pay. I had a Seargents Major who was with me in recon. He retired with 30 years, he was totally deaf in his left ear, had three heart attacks and died five years after he retired. This is the normal life span of 30 year people while 20 year people live an average of 10 years. Sure they can make as much as a million dollares but most don't live that long due to injuries received in service.
on Feb 07, 2007
Most retirees die after 10 years of retirement.

I'd like to see statistics on this, for two reasons:

1) I doubt your claim is entirely accurate.
2) I can either tease SSG Geezer about his life expectancy upon retirement (what was it, 173 today?) or attempt to lure him into staying in.

I do understand your point about those soldiers who don't make 20 and your point about those soldiers who don't live for very long after retirement. However, take a look at greywar's last example: the amount the taxpayers put into the 401k for that SFC is still less than 5 years of current retirement pay. The example of the SGT has them footing a bill of less than 2 years of retirement pay. Even with the assumption that the average 20 year soldier dies 10 years after he gets out (are there really that many 20 year soldiers dropping dead before they're 50?), greywar's numbers still run better than the current system.
on Feb 07, 2007
1) I doubt your claim is entirely accurate.

Sorry I can't help you here I read it in the Navy times 1985.

I can either tease SSG Geezer about his life expectancy upon retirement (what was it, 173 today?) or attempt to lure him into staying in.

I have no idea what you are talking about.

Milatary retirement is all or nothing
on Feb 08, 2007
A lot of people seem to think that retirees die shortly after retirement. Many even believe further that military retirees usually take their own lives within 2 years of retirement. Some nonsense about living the lifestyle for 20+ years and then not having anything left to live for when they only have their flower beds to boss around. I don't know, sounds hokey to me. Plenty of people die before 50 and if you could look at the percentages, I'd wager that the military retirees did not hold an unusually large piece of the pie. The VA probably has the data, whether it's open for public analysis, I don't know.

I will say this, though. In all the funerals I've done in the past 3 years, not a one was for a retiree that didn't live well beyond his 10 year post retirement mark. Not a single one. Every one of them was well over 50, many well into their 80's.

But, even if there is some truth to the rumor, greywar's idea is not without a solution to the "what do I do with my life now that I don't have Soldiers to lead" problem. By changing the plan to allow for a return on an investment, he points out that not only does it save tax payers money in the long run, but it also allows for retirees to move on to something new in their life that allows them to continue to lead, rather than take a new job somewhere, that might require them to follow. Standing in front of a business they run may just fill some of the hole left by the formations they no longer hold.
on Feb 08, 2007
Sorry I can't help you here I read it in the Navy times 1985.

Well, I further doubt that any statistics published in 1985 remain entirely applicable today.

I have no idea what you are talking about.Milatary retirement is all or nothing

Yes, military retirement is "all or nothing," after a fashion: either you hit 20 years or you don't. That isn't what I was referring to.

Greywar and I have a mutual friend who occasionally posts in these forums, SSG Geezer. He's up for retirement in just about 170 days (I'm sure he has an accurate count). I was joking that, if your claim were true and he were likely due to die within 10 years, that I could either make fun of him ("Haw haw, you're gonna DIE!", which really isn't my style) or attempt to coax him to stay in to prolong his projected lifespan.

After all, if a 20-year soldier dies within 10 years of getting out but a 30-year soldier dies within 5 years of retirement... then serving the extra 10 years means you live longer (35 years after initial enlistment instead of just 30).
on Feb 10, 2007
Also, you usually get to take your 401(k) assets with you when you leave, regardless of the number of years of service (at least all of the capital you individually invested, plus the percentage of the employer's contributions that you are vested in at the time). If this same scenario carried over to Greywar's scenario, then you wouldn't have to do the full 20 to get something. Sure, you'd have to do 20 to get your "full" benefits, but you could roll your 401(k) assets over to an individual account upon separating, or into a new account for those who only do one or two tours and then go into the private sector. They may not be paid out until full retirement, but at least you walk away with more than an honorable discharge and a pat on the ass....
on Feb 10, 2007
Most retirees die after 10 years of retirement

I don't doubt you may have read this somewhere, but I highly doubt it's accurate.

My father retired from the Army with 22 years in 1990. He then did 15 years in the private sector, and socked away enough loot to fully retire at the ripe old age of 55. He now regularly golfs most of his time away, amazingly with several of his former Army buddies - all of whom are also over 50, retired for well over 10 years now, and all still going strong.

Also, as I still work in the Defense industry, I work with literally hundreds of retired military guys, many of whom are well over a dozen years into their second career following their military retirement. I just don't buy the assertion that few make it past 10 years post-retirement.
on Mar 05, 2007
I certainly hope I won't die within the next Ten years and 101 days!

All of the funeral details I have done here have all been for WWII vets with a good portion of them having served through to retirement at between 20 and 30 years of service.
on Jan 10, 2009


For the personnel who say this is to much to pay your military, I don't. 20 years in the military is hard, ask most people who don't do 20 years. If it were easy everyone would do it.

1. We are constantly deployed, and we are in the field when we are home. Every soldier I know has had to miss aniversarys, holidays, birthdays, childrens births etc... multiple times. We are always on duty, and sometime work 24 hour days(Staff duty, patrols and after radio watch, Field exercises, schools, etc......). We also move constantly, and never really set up roots, like 20 years at the same place paying a mortgage on a house while working.

2. The military is very hard on your body, ask any paratrooper with more than a few jumps. Ask any NCO who has to keep up with there younger soldier and run harder, and push harder. The living conditions when you are deployed and in the field are horrible sometimes. A tent for a year with an inch of water on the floor during the Iraqi rain season. We are also guinea pigs for drugs(anthrax vacination, small doses of nerve agent in the gulf war.....) Many soldier have died in combat, and in training.

3. Retention of our military will suffer, in a poll just conducted of 15 soldiers under 10 years who were asked would you stay in if you had to wait till you were 50 to collect a retirement, I mostly received a F no, but all said no.

The military is not your average job, if you weren't in the military ask some one who was active duty. If you were in and got out, why did you get out, because it sucks sometimes. I think we earn our pay, and we raised our right hand to do what we are told, when we are told, where we are told. I love my job how many jobs can I repel out of helicopters, jump out of planes, shoot guns, and help people. I am greatful for the pay check I receive, but also this would not be my career if I had to do this for free. I think enjoying some of our younger lives as a civilian is a good reward for answering our nations call for 20 years, and never saying no no matter the situation, is a good reward.