Military Pilot Retirement – Active Duty

Dear Fellow Pilots,

Don’t ever take a job based entirely on pay. From tradition, to tax advantages, to social consciousness, most employers offer an overall “compensation package” that is far more valuable overall than just the hourly wage or salary they offer. One of the most important parts of any compensation package is funding for some type of retirement plan.

One of the best benefits that the military offers is its retirement package. Most civilian employers abandoned traditional pension plans years ago because they represent huge financial burdens. Thankfully (for us), the military’s pension plan is backed by tax dollars and isn’t likely to declare bankruptcy and disappear any time soon.

This article covers retirement for an Active Duty military pilot. Part 2 will discuss retirement for pilots serving in the Guard or Reserve.

Table of Contents

1. The Old System
2. The New Blended Retirement System (BRS)
3. TSP Investment Options
4. Maximizing your TSP
5. Conclusion

The Old System

Until just a few years ago, the military pension was an all-or-nothing proposition. Many people still serve under this system, so we’ll cover it. Under this system, your monthly retirement check is 2.5% of your monthly base pay multiplied by the number of years you served before retiring. If you serve a full 20 years on active duty you receive 50% of your base pay, every month, for the rest of your life. You’ll also be eligible for Tricare Retired Reserve, some of the best and cheapest health insurance in the world.

Most corporations have abandoned pensions because they’re just too expensive to support. The US military has the luxury of funding this pension plan with tax dollars, which is a great deal for us. (Be sure to thank and apologize to your parents next time you see them.)

Let’s put this into practical terms by looking at the annual pay for an O-5 with at least 20 years of service. We’ll assume he or she is assigned to Eglin AFB, has a family, and is earning the maximum amount of flight pay allowed by law. The first part of our chart assumes our pilot receives a $35,000 per year retention bonus, though we’ll consider the case without any bonus as well. Here’s what this pilot’s pay would look like:

O-5 - 20+ Years	Monthly	Annual
Base Pay	$9,243.60	$110,923.20
Flight Pay	$1,000.00	$12,000.00
BAS	$254.39	$3,052.68
BAH	$1,968.00	$23,616.00
Retention Bonus	$2,916.67	$35,000.00
Total	$15,382.66	$184,591.88
Without Bonus	$12,465.99	$149,591.88

This is some pretty amazing pay for any job. I put $184K into an income percentile calculator and found that this average military pilot has an income in the top 4% of all Americans.

Unfortunately, the military pension only considers base pay when running its calculations. This pilot will receive a monthly check equal to 50% of the average of the highest 36 months of his or her base pay. This yields

	Monthly	Annual
Old Retirement System	$4,458.05	$53,496.60

Personally, I wouldn’t refuse $53K per year. A human being incapable of living a wonderful life on this income needs to reexamine his or her priorities in life. However, it’s important to note that this is a far cry from the $184K he or she was making the year before. This $53K per year drops our pilot to just the top 35% of Amercians by income. Although we associate this pension with retirement from the military, most pilots will choose to continue working when they leave active duty.

Thankfully, airline pay is higher than its been in decades. Even if a pilot has to do a Regional Airline Touch & Go (see the four-article series on that topic in this issue of TPNQ), the military pension should be able to make up much of the difference between first year airline pay and final year military pay. (Look for a more detailed post on airline pay here on BogiDope in the near future.)

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The New Blended Retirement System (BRS)

Although the military gets access to tax dollars to fund its pension obligations, Congress has realized that this is a huge drain on our country’s resources. As a result, they’ve devised a new Blended Retirement System. If you plan to stay in the military for at least 20 years, the BRS is a slightly worse deal for you. However, if you leave Active Duty (for the airlines, the Guard/Reserves, or both) with fewer than 20 total years of service, the BRS is a huge benefit.

The BRS changed the pension portion of a military retirement to pay out 2% of base pay, instead of 2.5%. For 20 years of service this now equates to 40% of your base pay, instead of 50% under the old system. (You still get the same great deal on healthcare.) Here’s the difference for the pilot in our previous example:

	Monthly	Annual
Old Retirement System	$4,458.05	$53,496.60
BRS	$3,566.44	$42,797.28

This difference of just under $10,700 is a lot of money. If a pilot retired at age 43 and lived to be 80, the pension portion of the BRS would pay nearly $400,000 less than the old pension system. Even by age 60, the pension portion of the BRS would have paid out $181,888.44 less than the old pension system.

Thankfully, the BRS adds one more element. Under the BRS, the US government will match up to 5% of a pilot’s contributions to the Thrift Savings Plan (TSP.) There are some silly rules for specifying how much of his or her own money a pilot has to contribute to maximize that match. The bottom line is: you are a fool unless you contribute at least enough to get the government’s full 5% match.

Assuming that the TSP earns an average of 5% interest, after inflation, a pilot who receives the maximum TSP match for his or her entire career should end up with a total of $121,285.74 in government match dollars in his or her TSP at 20 years.

Since the TSP works like a 401k, IRA, and other similar retirement accounts, the owner isn’t allowed to withdraw any of the funds until age 60 (at least not without a significant financial penalty). If we assume that those funds continue to earn interest at 5% from age 43 to age 60, these government match dollars should grow to $277,989.15.

We can compare this to a pilot under the old retirement system who received $10,700 more per year than a pilot on the BRS. Assuming that this pilot invested that annual $10,700 difference at 5% interest after inflation, he or she would end up with $300,997.39. Although a difference of $23K probably seems like a lot today, it won’t seem like much difference when you’re 60. Many variables could influence this comparison, but the overall takeaway here is that in the long-run the BRS pays almost as much as the old pension system did.

The best thing about this new system though is that if a pilot leaves Active Duty service before the 20-year mark, he or she gets to keep the government TSP match dollars! For a pilot who separates after 11 years those funds will probably only have grown to $43,629.35, but that’s a lot better than the $0 that this pilot would have received under the old system. Put another way, the BRS is equivalent to a $4,000 per year raise for a pilot who leaves Active Duty at 11 years.