I had a recent question that I'd been meaning to address as a blog post. By the time I had the email answered, most of this post was written. Just about every military physician contemplates this question multiple times during his career. You're basically weighing the lower salary and additional hassle of military practice against losing the extremely valuable retirement pension (with Tricare for Life) available after 20 years of service.
It's Not A Financial Decision
Before moving on to the financial implications of this decision (that you're all so interested in), I'd just like to emphasize that this is not primarily a financial question. Many, perhaps most, military doctors get out as soon as their required educational debt is paid off, often after 3-8 years. They do so not just because they desire higher pay but because they don't enjoy the frequent deployments. They also don't want the military telling them where to live or moving them frequently, or they hate the unique hassles of military life and medical practice. Those were certainly my motivations when I separated a couple of years ago. I often came home back then saying “I hate my job”, and never do so now. I get to live where I want and never get someone calling me up at 11 pm letting me know I'm deploying halfway around the world tomorrow (a call I actually did receive while in the military.) Likewise, people stay in the military for non-financial reasons. They are motivated by patriotism, opportunities for leadership, unique medical opportunities, job security, and the opportunity to have a practice composed nearly entirely of patients who have made a commitment to put their country first. But, if you're still interested in a financial discussion of this topic, read on.
What's the Pension Actually Worth?
Too few doctors actually understand what they're giving up by separating. In fact, once you do, you would have to absolutely hate being in the military to separate at any point after earning 8-12 years toward the retirement pension. The pension a doctor receives after 20 years in the military is equal to 50% of his base pay, averaged over the three years prior to retirement. Most docs retire as O-5s or O-6s. An O-6 with 18 years of service currently makes $8938 per month or $107,236 per year, and it goes up just about every year. 50% of that is $53,628. Also, consider the value of having health insurance covered for the rest of your life. That's hard to put a price on, but a reasonable amount to spend on health insurance premiums, co-pays, and deductibles is $1000-2000 per month, or $12-24K per year. Let's use $18K. Add that to your $53,628 and that's a value of $71,628 per year, adjusted each year for inflation. How much would it cost me to purchase that pension as a civilian from a private insurance company? It depends on your age, gender, and health, but assuming a 50-year-old healthy male, you could purchase that annuity from Principal Life Insurance through Vanguard's site today (7/20/2012) for $2.489 Million. Yes, you read that right. That's a pretty valuable pension, no? It would be a little less as an O-5, and who knows if Congress will change the rules on the pension in the future, but I wouldn't expect this very popular pension to go away anytime soon, especially for those currently in the military. It could also be significantly less if interest rates go up. But even if somehow inflation-indexed annuities that paid 5% at age 50 (they currently pay 2.88% or so) became available, that pension would still be worth $1.43 Million.
Break-Even Point
In order to come out ahead separating from the military, you not only need to make more money as a civilian, you need to make a LOT more money AND be disciplined enough to save it. How much more do you need to save each year to have an additional $2.489 Million by the time you would have otherwise retired? (This obviously is in addition to anything you're putting in Roth IRAs or the TSP currently.) I'm assuming a pretty decent 5% after-inflation, after-expense, after-tax return on these savings as well, which is not necessarily easy (my own portfolio over the last 8 years is clocking in at about 4.5%.)
Years Left To Retirement | Required Annual Savings |
16 | $100,000 |
12 | $150,000 |
8 | $249,000 |
4 | $550,000 |
Pretty sobering isn't it. Now you see why I think someone who's anywhere near the halfway mark would be pretty dumb to bail out now.
Don't Forget About Current Consumption
Now I had 16 years left to retirement when I got out. I certainly make more than I would have been making in the military, but I also pay more of it in taxes, and I don't save $100,000 more than I was saving. I save perhaps $50,000 more. But I also spend a lot more due to a much-improved lifestyle and give a lot more to charity. Overall I'm probably coming out slightly ahead. But that's in a pretty good job, in a reasonably high-paying specialty, and I got out at only 4 years towards retirement. Change any of those factors and you're almost surely coming out behind. Perhaps you can stomach one or two more deployments, no? There is some value in having the money now, of course. I probably wouldn't own my current home on a military physician salary, at least not given my current savings rate (although I could probably lower that dramatically if I had a military pension coming). Nor could I afford to do lots of the other things I enjoy. Putting all that off for 16 more years to live in townhomes in cities I don't want to live in was a pretty unappealing prospect. Many doctors would prefer having an extra $100K now to spend on whatever they want than some “valuable pension” 16 years down the road, but they probably shouldn't.
Calculate Out the Difference in Tax-Adjusted Salaries
So, will this fancy civilian job you're considering getting out of the military for pay you enough additional money to save up the equivalent of that pension? Maybe, but probably not. First, calculate what you'd get paid to stay in. Since your educational commitment is now up, you should get some kind of Multi-Year Special pay in addition to all the pays you were getting before- Basic Pay, BAH, BAS, Additional Special Pay, Variable Special Pay, Board Certified Pay, and Incentive Special Pay. Add it all up. Now, adjust for taxes. This is so personalized, it is hard to apply a rule of thumb. But I can tell you that when I was in the military I had no state tax and my federal tax was 5-6%. Now I pay about 12% between Federal and State and it'll probably be higher than that this year and significantly higher next year. Many doctors tell me they pay between 20 and 30% just in Federal and State Tax. You also probably pay a little more in payroll taxes outside the military. So let's discount the military salary by say 10% and the civilian pay by 23% for taxes. Now compare the two. Are you really going to be able to put away an additional $100-$550K? Perhaps if you're a back surgeon, but almost surely not if you're a pediatrician.
Let's do an example using my specialty, emergency medicine.
An O-4 with greater than 6 years toward pay (what I had when I got out) makes the following salary in 2012:
- Basic Pay $68,137.20
- BAH $26,400 (obviously varies by location)
- BAS $2879.52
- VSP $12000
- ASP $15000
- BCP $2000
- ISP $26000
- MSP $40,000 (plus another $4000 in ISP once you sign the MSP contract)
- Total: $194,416.70
Now, I participate in two surveys of emergency medicine salaries each year. One said the average salary is now $237,000. The other said the average salary was $330,000. Salary.com says it is $250,000. I think a partner in a private emergency medicine group, working as hard as I did in the military (far harder than I work now) should probably be able to find a job making at least $350,000 in most areas of the country (although who knows what's going to happen in the future.)
Let's adjust both for taxes. We'll subtract out 23% of civilian salary and 10% of the military salary:
- Military: $174,975
- Civilian: $269,500
You don't make an additional $100K, so how are you going to save an additional $100K+? Well, you could do it if you had some good tax-protected accounts that also lowered your tax bill. But the point is that it would be hard to do, and pretty much impossible once you start getting close to the 10-year mark no matter what your specialty, especially if you consider the fact that most civilian physicians believe they'll actually be making less 5 years from now. How many military physicians believe that? Pretty much none given the regular guaranteed raises.
Conclusion
Staying into the 20-year mark is probably the right move financially for almost all military physicians, especially since many of them who did military residencies may have 6, 8, or even 10 years toward retirement by the time their educational commitment is up. An exception can be made for very high paying specialties, especially if interest rates rise, but not once you approach that ten-year mark. As I mentioned at the beginning, this is not primarily a financial decision. Hopefully you didn't join the military primarily for the money, and hopefully, you're not staying in primarily for the money. But if you do decide to serve for a few more years, you can at least feel good that you're being compensated well for it.
What do you think? Did you leave military service early, at the mid-point, or stay past the 20-year mark? How did your decision to stay or separate affect your finances? Comment below!
As a USUHS student, I thank you. That was an excellent analysis. Great blog.
In my view, the USUHS students, b/c of the increased obligation, should seriously consider both doing a fellowship and staying for 20. The fellowship for someone staying 20 is probably the best financial deal of the training obligations.
Great analysis. Now, how about a financial analysis of joining the reserves? Or, instead of staying in the armed services, switching to the VA? You know, if you get bored or something. Thanks for your great posts.
I think joining the reserves is a bad decision at this time. Too easy to lose your shirt when you are called to active duty but still have the overhead of your practice.
I don’t know much about the reserves (or the VA), but I do know at least one surgeon who lost his practice when activated for Desert Storm.
This is a really well written and informative article. Thank you for your contribution to the internets, White Coat! 🙂
Thanks for the comparison. From a financial standpoint, you are absolutely correct. But as you mentioned, this is not just about finances. Does it make sense for anyone to put off living their “dream life” for 5, 10 or 15 years just so that they can get this retirement? We don’t ride a motorcycle for 20 years in hopes of being able to afford that Porsche one day, we buy the car we need when we need it. What I’m trying to say is that there are more intangibles than just money. I can’t see enough patients, operate enough, or take the best care of my patients with the current military health system (mostly due to our terrible electronic medical record system). So what price do you put on these things? For me, I will be faced with leaving after 13 or 14 years, and for every reason except money, it makes sense to leave.
Remember that the article is about the “financial” implications of the decision. I agree that may not be the primary motivator to either stay or go.
This. Despite all their proclamations to the contrary, military medicine is not motivated to take care of people. They actively discourage Medicare patients from using their services. And the amount of effort it takes to overcome the inertia in the system so you can take care of patients the right way is too much to take after a while. I am SO MUCH MORE professionally satisfied since I left (after 16 years of service) and don’t look back on that decision with any regret. The difference can be summarized simply in the reaction of the OR when you want to schedule a case:
MILITARY: There’s no time. We’d have to call in the backup team. There are no unit beds available. We’re having training that day. The equipment you would need has been broken for the past month and is still not fixed. You have to call the anesthesiologist, circulating nurse, scrub tech, recovery room nurse, and bed manager to ask for permission. We ran out of supplies. The tech that knows how to do this operation deployed and never trained anyone else before they left. Can’t you do it next week instead?
CIVILIAN: Yes, doctor. Thank you.
I’m retired, 12 years into my second career, which I got and is lucrative mostly because of my military experience. I traveled the world in my 24 year career and always was well provided for. I have friends all over the globe – good friends with whom we served. Now, when I travel, I stay on bases, have medical benefits to die for (ha,ha) and will enjoy those the rest of my life. I’m still in great shape at 57 because of the culture and habits I formed (and we’re expected/promoted) while on active duty. Thanks for the article and analysis…just thought it missed some of the “other” considerations, like the safety and security we felt living on a military instillation, the constant feeling of healthy pride for serving those who put their life on the line for our freedom – you can’t put a price on that. We live with the reality that we did sacrifice some of what we wanted for what we considered a higher calling, but really, giving is better than receiving and the life we have now would never be possible without the all we learned and experienced through our service years.
Remember the post is titled FINANCIAL implications of military separation. I try to always be careful to mention that with these types of decisions the financial aspect shouldn’t be the most important factor.
wow that was awesome. Thank you 🙂 I totally agree with the comments here as well, but I think I can stomach the military crazy for a while longer with everything you said in mind.
I do want to ask about the reserve portion (FINANCIAL implications only 😉 ) ….if at 13 years if service you switch to reserves (with it’s attendant salary) and get a lucrative job, and retire from there (getting benefits at age 60) …how does that stack up financially?
The main difference is that you go 10 years or more before you get Tricare and the pension. Plus, your pension is lower. So it isn’t a terrible option, but I think the active duty retirement is far better, especially since you’re still eligible for most the downsides of military service (like deployments) in the reserves.
As a 13 year separator, SDN poster from the same era and GI doc reservist, I did the math and decided I couldn’t leave without doing the reserves. There are practices that make the reserves an acceptable risk (kaiser, va, some other large systems). Kaiser, for example, pays 3 months of salary to deployed reservists. The reserve retirement is worth about half an AD retirement and tricare reserve select is a good deal.
Enjoyed your book.
Ok one more question …given the 1% cut in the COLA for pensions is it still better financially to stay in?
It depend on so many factors that changing just one doesn’t change the answer for anyone really.
I’m currently an Air Force GMO, with a minimum 2 year assignment in that position. That means I make, with all things considered, one third of the salary you made when you separated. I am currently deciding whether or not I should finish my 4 year obligation as a GMO (then go on to civilian life), or go to a military residency, then finish my obligation. Would a military career still make sense financially, in my case?
While I always advocate you make any decision about the military primarily on non-financial reasons, I think if I were you I’d try to do active duty residency. I look at it like this: You owe 4 years. You already did an internship. You now do 2 years GMO. After that, you do a 3 year residency (just guessing here, as you didn’t mention specialty.) You now owe 2 more years for med school, and 3 years for residency, but they run concurrently, so you’ll do 3 more years after residency. Total 5 year payback, instead of the four you would have gotten if you had matched the first time. So only one lost year. Meanwhile, you make a heck of a lot more money as a resident.
If you hate the military, however, the quickest way out is to do a couple more years as a GMO and save up a few bucks, do a civilian residency and move on with life.
A quicker way out of the federal service is to do 5 VA years and buy the time at the end of your obligated service. A federal retirement plus a reserve retirement basically evens out the loss of the AD retirement for the intervening years. This can cut 3-5 years off of the total. Plus no deployments.
Interesting angle. Thanks for sharing.
Please tell me more about the VA buyback. Are you saying that after 5 years with the VA you will be getting a retirement?
Great read.
Re: Bailed to the VA–Could you please tell me more about this? (Or someone else?)
I agree that we can’t base the decision on purely financial reasons. Regardless of whether you stay in or get out, you will continue to work into your 60s and not retire in the 40s, so the apples to apples comparison is comparing how much you’ll need to have saved by actual retirement age to equal what you’ll get from the military at that point. (I hope that was clear).
Thanks again.
Would your advice change if the healthcare coverage weren’t a part of the equation? That is, my husband is AD as well and will retire. The kids and I will be covered by his Tricare benefits. I am also an ED doc and will have 9 years in by the time I can ETS. Thoughts?
Thank you for this article; it’s VERY helpful.
I’ve reread this post a few times but wonder if anyone could answer a simple question that I’ve been wondering about in reference to staying in for a full 20 years: can an MSP (multi-year specialty pay) contract be broken or is it iron-clad like the HSPS or USUHS service commitment? I’m debating signing a 4 year contract to bring me to twenty but I don’t want to move and would be willing to walk and pay back my MSP bonus to do so but I haven’t been able to find out from a credible source if that is possible.
I would assume it is ironclad.
Here’s my public service announcement to those interested in this particular discussion. If you don’t do 20 years your active duty time can be applied to both a government (GS or VA) and a reserve retirement-legal double dipping!
This is what I’ve been wondering about. I just started my HPSP repayment…Peds, so the civilian salary difference isn’t that great and there is no way I can make up the extra difference in annual retirement savings on a 160k annual civilian salary without living like a resident for my whole career. So my debate has been whether to stay in for the retirement benefits given that my annual salary will be the same or better in the military and deal with less choice in my career or get out in 4 and do Guard, Reserve, or GS to continue time towards retirement. I haven’t been able to find good info on what those non-AD retirement numbers would look like. Any resources you can point me towards?
So, I just got out of the AF after 11.5 years of AD. I know, that according to what’s written above, this is a dumb move financially (and they’re probably right) but it was the right move for other reasons for me. Because I’m leaving with only 8.5 years to go, I’ve decided to finish out with the Guard.
Here’s more or less how ANG/Reserve retirment is calculated: You get 1 pt per day you serve in AD = 365/year (366 on leap years). A full AD retirement would be 365×20 = 7300pts which works out to be 1/2 of your base pay (20yrs x 2.5% = 50%). If you do more years, you get a higher percentage. Your base pay is determined by final rank in which you served at least 3 years, so for most LtCol.
In the ANG/Reserve you have to get 50pts/year to have a qualifying (good) year toward retirement and you need 20 years to do so. So if you have 4 years AD and 16 years of minimum ANG points you’ll end with 2260 pts (or 31% of what you would have gotten in AD retirement which is 15% of your base pay). You will collect beginning at age 60.
A couple interesting facts: for each good year served in the ANG/Reserves, you can get one of your HPSP years credited back to you towards retirement with points. Also, you can get points for CME.
Drill weekends earn you 4 pts in 2 days of work, so you get paid for 4 AD days those weekends.
In my case, I’ll be delaying my retirement benefits by 12 years (from 48 til 60) and reducing my amount by about 35%. I figured it will be about 1.2 mil less than if I had stayed in until 20. My current job averages over 130k more than what I would have gotten in AD (pre-tax), so I still don’t think I will come out ahead financially for this, but I didn’t separate for financial reasons.
Hope that helps.
Adding another layer to the mix here. I have read that some ROTC/Academy graduates are able to buy back their service time when hired to a GS/Federal job. These grads have a longer payback than HPSP and USUSH (typically 5 for academy, 4 for ROTC) bringing their total payback to ~8-9yrs. Assuming they leave after their payback, they can buy back 4 (undergrad) + 3-4 (residency, if AD) + 8-9 (HPSP/ROTC payback) = 15yrs. That would leave just 15yrs of federal service left before being eligible to retire (and likely around the MRA 55-57yrs). Or did I do the math wrong?
For another curveball, what happens if someone is medically retired from the service prior to completion of their payback? From what I’ve read, members are medically separated if it’s 20%. Medically separated gets a one time payout based upon years of service and base pay, whereas medically retired gets lifetime benefits.
Regarding the medical retirement, in the AF medical retirment is based entirely on the condition, job requirements, and provider/commander recommendations. There is no associated percentage. For example, you could have OSA which I believe currently has a 50% disability rating, but this condition is almost always retained in service with an assignment limitation code. Retention standards vary by service, so you could be correct for another branch, but that’s not the case for the Air Force.
Great article. One question that I may of missed somewhere – if a military ophthalmologist with 10 years of service decides to stay in and retire at 20 years, does anybody have any guidance/basic rule of thumb for how much of a military gross salary should be saved for retirement? In the WCI book, it says for a civilian doc, 5-10% is probably not enough, 15-25% is probably closer. With a military pension, 20% seems high. There is a pension calculator at MOAA’s website which suggests 10% might be a better estimate, but just wondering what people think …
I guess like everything it depends. I mean, the 20% is just a rule of thumb. Yes, with a pension you would adjust downward. How much downward? Well, if you care enough to know you probably care enough to run your numbers yourself with your own assumptions rather than relying on a rule of thumb. Try using something like FIRECalc.
Thanks for the reply … definitely going to run the numbers myself but my engineering years taught me it’s good to have a vague sense of what the correct answer might be ahead of time, hence, a good rule of thumb. My estimate is somewhere in the 10 – 12% range. Love FireCALC … those models are right up my alley.
One thing not mentioned is the benefits of the VA loan and GI Bill. As a civilian resident I would likely not be able to afford a house. I currently own a house in southern California and using the VA loan, refinanced to 2.25%. Also, my daughter has been transferred the GI bill and she will be able to go to a variety of universities for free. Also consider that there are many programs for retired military children to go to state university systems for free.
I disagree that VA loans are awesome, but the GI bill sure is!