The personal finance gurus, far and wide, all agree on one thing, you should be contributing 15% of your paycheck into a retirement account. Being in the military is no different.
The reason is simple, you will have money socked away for the glorious day you decide to never to work again. Wouldn’t retirement be wonderful if you had millions waiting for you once you got there?
But, is obtaining millions even possible with your military paycheck? Convincing Soldiers it is possible, even with an Enlisted income, was the constant struggle I have faced with those of whom I have counseled.
To prove to you it is possible, I have put together an Excel Spreadsheet which does the calculations for you. Feel free to download the spreadsheet and play with the numbers yourself.
Assumptions Made in the Calculations
The calculations presented below represent a Service Member who joins at the age of 20 and retires after 20 years of service. Since you can not withdraw your Thrift Savings Plan (TSP) or Individual Retirement Account (IRA) funds until the age of 59.5, I have added what the value would be every 5 years since leaving service until you would be 60.
In addition to contributing 15%, the calculations also assume you are receiving a 5% matching from the Military. This would hold true for those who are under the Blended Retirement System.
Another assumption is that you joined as an E-3. I am not sure about the other services, but anyone can join the US Army as an E-3 without much effort. (For those of you considering joining, talk with your local recruiter about how to get 2 promotions prior to going to basic.) I have also assumed promotion for our fictitious Soldier as well.
The last assumptions made is that there is a 12% growth from your investment in a retirement account. Why 12%, because that is the average of the S&P 500 Index. You can read more about that here.
Let's Get to the Calculations!
For our fictitious Soldier, after 20 years of service, they would have contributed a total of $159,225.36 toward their retirement. This value reflects their contribution as well as the government matching.
If you look at the last column, you will see the Soldier has amassed a total value in their retirement account of $567,255.14. Not exactly a Military Millionaire, but that is a growth of $408,029.78 over what they contributed.
But let’s look back at the assumption that the Soldier was 20 when they joined and served 20 years. That means they have 20 more years of accumulating interest. So now assume those 20 years from age 40 to 60 no more money is contributed.
The below image reflects how much the retirement account has grown to the time it takes until you can withdraw from your retirement account.
As the table reflects, you are now retired and not making any new contributions beyond the $159,816.48 you had while you were serving. It only took another 5 years for the account to grow to its first million.
At the time our Soldier turned 60, the account has grown to $6,207,374.30. That is right, your contribution of $159,816.48 has earned our Soldier over $6 million of interest.
If the Soldier were to have invested with the Roth TSP over the Traditional TSP, they would have already paid the income taxes on their contributions. That means two things. You paid income tax on the $159,816.48 over a span of 20 years and, in return, you enjoy the millions your investment account has grown all tax-free.
That’s right, you would be a multi-millionaire with no tax bill.
The Obvious Error in the Table
This table was made by using the monthly pay for Service Members as per the 2018 pay chart found on the Defense Finance and Accounting Service site.
I chose to do this as no one knows what the future pay will look like. Sure, there is a 2.6% pay raise for Soldiers in 2019, but until the chart is formally released by DFAS I didn’t want to use their number.
This approach of being conservative means the actual contributions would be higher, and as such, the actual value of the account would also be much larger.
But face it, an estimate of $6 million is one that anyone could get behind.
2019 Military Pay Chart
Play with your own Numbers
The images above only represent one set of numbers and possibilities. I couldn’t begin to provide every combination of pay and time. But, I can provide my Excel Spreadsheet for you to play with on your own.
Have fun with the numbers. If you already have 5 years of service and haven’t started investing yet, just drop $0 for your monthly pay those first few years. This will highlight the huge risk of not investing early.
If you do not receive any matching contribution, change the employer contribution at the top to 0%. If you want to contribute more or less, change those numbers as well.
Are you an Officer or believe you will have different ranks at different times? Go ahead and change the monthly pay column to match your pay. I only chose the Enlisted pay here to reflect that yes, even and Enlisted Service Member, can become a millionaire with their military pay. If you aren’t even in the military, just change the monthly pay column to whatever you bring home.
You can even change the average interest rate returned. If you think 12% is too high, drop it to something else. I know some people like to use 10% or even as low as 8%.
Have fun with the calculator. So that you don’t change the values of cells with equations in them, I have highlighted the cells that are safe to change. Besides, if you completely mess it up, just come back and download it again.
Saving for your own retirement is a must. No one is going to save for you. Luckily, anyone can become a millionaire from their military income.
The chart above reflected how an average Enlisted Service Member could have a Net Worth of millions by just making a small contribution to their retirement plan every month.
Take note, the earlier you start, the more money you will have. Just delaying a few years could have a huge significance on your ability to grow your nest egg.