The following is a terrific guest post from Spencer, a captain in the US Air Force, who gives a complete overview of the financial benefits of joining the military. Spencer has been publishing on Military Money Manual for the past three years, helping military folks achieve financial independence.
There are many different paths you can take in life. Blue collar, white collar, no collar – the jobs you do often reflect your upbringing. If you come from an affluent community or family, one path you might not have considered is joining the military. Military service has many rewards, some of which can be a free college education, an exciting non-standard job, travel opportunities, and the chance to do some amazing things around the world.
A college degree is a necessity to achieve substantial financial goals, unless you’re the next Mark Zuckerberg or Bill Gates. But college is getting more and more expensive every year, way outpacing inflation. Student loan debt only gets you a negative start on your journey to financial freedom. Alternatively, military service can enable you to get a free college degree, have a job lined up when you graduate, and make money while you go to school.
Slicing Through the Military’s Mysteries
At university I joined Air Force ROTC during my freshman year and eventually picked up a 2.5 year ROTC scholarship which covered my tuition for those last years. I graduated and commissioned as a second lieutenant in 2010.
In this post I’d like to explain a few facets of military life for the uninformed:
- Choosing between commissioning as an officer or enlisting
- Whether you should join the military or get a college degree
- The three main options for becoming an officer: Academy, ROTC, or OTS
- Enlisting and then using your GI Bill for college
- How service commitments work
- Financial advantages to military service you may not have considered
Here’s some of the benefits joining the military could have for you:
- Free college education at the school of your choice
- A rewarding and exciting job guaranteed when you graduate from university
- A pay scale that doubles your pay in just 5 years of working
- Tax free income and tax free investments
- Access to the TSP, the best retirement program in the world
- The chance to see and do things other people only hear and dream about
Join the Military as an Officer or Enlisted?
Here’s a quick guide to military rank and hierarchy. In the military you have E and O paygrades, which also translate to rank. (There’s also warrant officers, or “W” paygrade, but we won’t get into that in this post.) Es are your enlisted force, ranked E1-E9. Os are your officer corps, ranked O1-O10.
Lower rank enlisted are your lowest members of the totem pole. These are your privates, airmen, seamen, and marines. These are your blue collar, entry level positions. However, many of the jobs young recruits perform take a lot of training and are highly specialized. Crypotologists (code makers and breakers), drone sensor operators, and cargo aircraft loadmasters are all young enlisted personnel. Many of these recruits only have a high school diploma and tend to be fairly young as well. These are E1s (recruits) to E3s.
Next you have the non-commissioned officers. These are your middle managers, promoted out of the enlisted ranks. They are skilled at their job and have years of experience doing their job. They lead the lower ranked enlisted and prepare them to become NCOs one day. These are your E4s and 5s, your sergeants. A strong, knowledgeable, and professional NCO corps is one of the principle reasons the US military is the best in the world.
Above NCOs you have the SNCO, Senior Non-Commissioned Officers. These are the E6-E9s, the Master Sergeants (in the Air Force) and higher. These are your most senior enlisted personnel, who have worked years to get to this rank and have thousands of hours of cumulative experience in getting the job done. Most have at least a bachelor’s by this stage in their career and many have master degrees as well.
Above all the enlisted force you have the commissioned officers. These are what civilians would consider white collar professionals. Doctors, lawyers, pilots, – all of them are officers.
At the bottom, the lieutenants and captains (O1-O3) are the workhorses of the officer corps, often directly leading dozens if not hundreds of troops. These young officers are also usually the most technically proficient members of the officer corps. They fly the planes, launch the missiles, and analyze intelligence from our assets around the world.
Your middle managers are your majors (O-4) and your directors are lieutenant colonels (O-5). Your civilian Vice-Presidents loosely translate to colonels (O-6) and CEOs translate to generals (O7-O10). In the entire DoD, with over a million employees, there are only 400 generals. Generals are your Presidents and CEOs. Many of them have much more power, more employees, and larger budgets than any Fortune 500 CEO.
Enlistment or Commissioning
If you have a college degree or are thinking of getting one, commissioning and becoming an officer is what I recommend. There are amazing jobs on both the officer and enlisted side. Both enlisted and officers get to be leaders, managers, technical experts, and contribute mightily to the war effort.
Most enlisted personnel get their bachelor degrees very early in their career or come in with one, so don’t for a second think that just because you’re an officer you’re the smartest guy in the room or have all the right answers. It doesn’t go well for the brand new second lieutenant who tells the experienced NCO how to do their job. Respect goes both ways.
There are advantages and disadvantages to either an enlisted or officer path. While there is more responsibility and career BS to deal with as an officer, I think the increased pay and job opportunities make up for it. However, you have many amazing job opportunities as an enlisted member. So it’s
Joining the Military versus Going to College
Serving in the military and getting a college degree are often viewed as two separate activities. This couldn’t be farther from the truth. Today’s military is a well educated professional fighting force. To be an officer, a bachelors degree is required as a minimum. To be competitive for promotion to executive level (O-5 and higher) you need a master’s degree at a minimum. Many senior leaders have PhDs from top universities.
There are several ways to get the military to pay for your education. They require varying levels of commitment and pain. In my opinion, the most painful option is to attend a service academy. There are four major service academies in the US:
- US Military Academy (Army) in West Point, NY
- US Naval Academy in Annapolis, MD
- US Air Force Academy, Colorado Springs, CO
- US Coast Guard Academy, New London, CT
At these academies you’ll go through an initial summer course of a few weeks similar to basic training. You’ll have a tough year your first year where you are harassed by upperclassmen and have many more restrictions placed on you than your friends at normal universities.
The Academy admissions process is crazy. When I went through it took months of interviews, tests, physicals, medical waivers, and a nomination from my US Senator. It’s much more in depth than a regular college application. Just a few of the requirements include:
- A rigorous physical fitness test
- A military physical evaluation
- Top SAT/ACT scores
- Class rank
- Letters of recommendations
- A nomination from a US Congressman or Senator
The nomination from the US Congressman can be the hardest, as they only have a certain number (usually less than 10) slots to give out every year. Your entire package is scored and weighted and then you are ranked against your peers. The top several hundred get acceptance letters and then the rest are put on a waiting list in case the top candidates don’t accept.
Your reward for enduring all this pain and annoyance is a FREE top notch education, especially in the engineering fields. You’ll even get paid a few hundred dollars a month while you are a cadet or midshipman. Definitely better than graduating with $60,000 in debt like I did.
At the end of the day you get to commission as an officer in the US military. Not too bad. You’ll pin on the rank of 2nd Lieutenant (Army, Marine Corps, Air Force) or Ensign (Navy) (O-1).
Reserve Officer Training Corps – ROTC
The Reserve Officer Training Corps or ROTC is offered at hundreds of major universities around the nation. There are three flavors: Army, Navy, and Air Force (Marines fall under the Navy ROTC). If you don’t have a scholarship, you don’t need to commit to the service until summer before your junior year.
ROTC usually consists of a 1-3 hour class for your year group taught by a military instructor, a 2 hour weekly leadership course, several physical training or PT meetings a week, and usually a special event once a month or so. It takes up about as much time as a junior varsity sports program would, 10-15 hours a week depending on committed you are.
If you’re smart (unlike me), you’ll apply for a four year scholarship in high school. You can try ROTC for the first year with no obligation and then sign your paperwork sophomore year. Four year scholarships cover room and board, tuition, books, and pay a monthly stipend.
ROTC was the option I chose. I joined up in my freshman year and picked up a 2.5 year scholarship my sophomore year. This paid for the rest of my schooling, a book stipend every semester, and a monthly stipend as well. Amazing how much fun you can have in college on just $450 a month! When you graduate, you’ll be the same rank as someone who graduated from the service academy and the same job opportunities.
Officer Candidate School OTS/OCS
Your last option for becoming a commissioned officer is Officer Training School or Officer Candidate School (OTS/OCS). This is an intensive 10-17 week (depending on the branch of service) course that produces commissioned officers rapidly. OTS/OCS consolidates four years of basic officer training that the Academies and ROTC teach into a few months.
This program is usually a gap filler when there’s a time of war and the military needs more officers than the ROTC or Academies are producing per year. OTS/OCS can be even more difficult to get into than the service Academies and spots can be extremely limited at times. The same bachelor degree requirements apply.
Upon graduation you’ll receive a commission in the US military and the same rank, pay, and privileges as an ROTC or Academy graduate.
Enlisting and Then Using Your GI Bill for School
One way of getting your college degree and serving your country requires a bit more thinking ahead. If you were an extremely bright high school student, you could follow this plan of delaying college and using your GI Bill to get a free education.
The Post 9/11 GI Bill covers 100% of in-state public tuition at any university, pays a book stipend, and gives you 36 months of BAH (Basic Housing Allowance) entitlements. You can transfer the benefits to a spouse or a child as well. Itís an amazing benefit for our veterans.
- Enlist out of high school, serve 3-4 years on active duty, save as you go.
- Separate, use your GI Bill benefits to go to university for free. You’ll be much older and wiser than your fellow students and probably actually learn something, rather than just be a typical 18-22 year old.
- Get the degree you want, the job you want, and start your life with no college debt.
Do not do this just for the free education. Military life is not easy and if you join simply to get GI Bill benefits, you will probably struggle at boot camp, struggle while you serve, and you may not get the experience you thought you would.
If you already plan on serving and want a great way to kickstart your adult life and get a free college education, the GI Bill option might be for you.
Service commitments are a legal contract between you and your military branch. They are usually incurred at enlistment or commissioning, when you get training, when you receive certain benefits, or based on your job.
For most officer career fields, you’re committed to 4 years after you commission and then can re-enlist for 2-4 year chunks. Enlisted service commitments are usually less than officer, usually because the training and cost of producing an officer is more than producing a new enlisted service member. For Air Force pilots, the commitment is 10 years. And the clock doesn’t start ticking until your training is complete, which could take up to 2 years. Imagine committing yourself to a job that you have very little idea how it works or what it will be like for 12 years. Not an easy decision to make. Not many people sign contracts for that many years of their life.
Most people will serve these periods completely. Sometimes the DoD offers early retirement (called TERA, or Temporary Early Retirement Authority) or separation bonuses (VSP – Voluntary Separation Pay) to incentivize troops to get out early if the service is overmanned. These overmanning situations are usually caused by Congressional downsizing.
Military Officer Promotions
The military is not a meritocratic society. Promotion is primarily based on years in service, not performance. For a young officer fresh from commissioning, you’ll promote in 18-24 months from 2nd Lieutenant (O-1) to 1st Lieutenant (O-2). That promotion rate is almost 100%. Usually it takes a DUI or a criminal conviction to not make that promotion. Sad but true.
After 1st Lieutenant you’ll make Captain (O-3) in another two years. Now you’re four years since you graduated college and you’ve moved up two ranks! And so did everyone else. At this point in your career rank doesn’t differentiate the top performers from the bottom.
It’s not until O-4, or Major, that the services really start differentiating between the top and bottom performers. You usually meet your first promotion board for major around 6 years of being a captain, or 10 years of total service. Promotion above O-4 becomes much more difficult and the rate drops to below 50%.
Usually about 80% of those captains who stick around long enough to meet their major’s boards promote. The other 20% who are passed over will eventually be forced to separate, due to the up or out culture in the military. As soon as you get good at your job, the military will make you move on to the next one! It doesn’t create many efficiencies. See Tony Carr’s John Q. Public blog for a more detailed discussion on the angst amongst the Air Force officer corps.
How Much Can You Make in the Military
If you join the military thinking you’ll be living fat off the government gravy train, think again! Your benefits packaged may be fair after a few years, but your pay for your first few years of service will be low. A young enlisted service member could be making as little as $20,000 their first year of service. A freshly graduated lieutenant will be making less than $40,000.
Your pay consists mainly of:
BASIC PAY + ALLOWANCES + SPECIAL PAY = TOTAL PAY
Basic pay, for 2014, is calculated off of that table above, and is set by Congress every year in the National Defense Authorization Act (NDAA). Basic pay is subject to income tax.
Allowances are tax free pay for specific needs, like housing, food, or clothing. Most service members receive BAH (Basic Allowance for Housing), unless they live in military housing. BAH is paid either with or without dependents, so there is an economic incentive to get married when you work in the military.
Most service members also receive BAS (Basic Allowance for Subsistence), unless they’re on a government meal plan. These allowances can make up a substantial portion of a soldiers income.
Special Pays are usually subject to income tax and are paid for special duty or skills. Pilots and aircrew receive flight pay, submariners receive submarine pay, and bomb squad guys receive Hazardous Duty pay. When you’re in Afghanistan or any war zone you’ll receive Hostile Fire or Imminent Danger Pay, which is about $225/month. If you deploy to Africa or other remote locations, you’ll usually receive Hardship Duty Pay, depending on the location.
Let’s take a married, four year Air Force Captain living in Las Vegas, Nevada. Her Basic Pay is $5168, BAH (with dependents) is $1449, and BAS is $246. So in total sheís making $6,863 per month, or $82,356 per year. Since the BAH is untaxed, her taxable income looks like $65,000 to the IRS, which saves her some money at tax filing time.
If she deploys to a combat zone, her entire income is tax free. If she moves her stuff into storage and breaks her lease (allowed under military lease clauses) at her apartment, she could bank most of that income. Deployment is an excellent time to top off your Roth TSP, Roth IRAs, and any other investment accounts.
Financial Advantages for Military Personnel
First off are the tax advantages. Allowances are untaxed and can be substantial (20-40% of your income). If you deploy or go TDY to a combat zone, your entire paycheck for that month is tax free. Once you hit a certain number of tax free months, youíll actually drop below the poverty level and probably qualify for the earned income tax credit. What a crazy tax system we have!
I believe the Thrift Savings Plan (TSP) is the best retirement program available in the world, and it’s only available to federal government employees and the military. The super low cost funds (10% of what Vanguard charges, or 0.03% on average) mean that you keep more of the money you make in your pocket. Passive, low-cost index funds beat 80% of actively managed funds over 20 year time horizons. The TSP offers every service member access to the cheapest passive index funds around.
With the Roth TSP and Roth IRA, you can put away your low tax or non-taxed income in tax free, watch it grow tax free, and then enjoy it tax free in retirement. The funds available are limited, but I don’t think you should be trying to hit home runs with your TSP/401k. The limited choices actually forces you to diversify and invest in a smart asset allocation and not bet it all on one or two stocks.
When you deploy, there is a special savings vehicle offered by the Treasury called the Savings Deposit Program (SDP). The SDP gives you a federally guaranteed 10% return on your money while you’re deployed and up to 90 days after you return. You can deposit up to $10,000 in the program. Earning $1000 extra per year isn’t going to make you a millionaire, but it is a great place for your emergency fund cash that would otherwise be making 1% in a savings account.
Another tremendous benefit is the access to VA Home Loans. These are loans guaranteed by the US Department of Veterans Affairs and offered to active duty, reservists, guardsmen, and veterans who served honorably. These loans do not require PMI and can be for 100%+ of the value of the property. A down payment is usually not required. This can be a great tool to achieving home ownership or building a real estate empire around the world every time you PCS (move)!
The Golden Ticket: A Military Pension
Military pensions are rare. Only about 15% of the total force makes it to retirement. Even then, the pension is calculated only off your Basic Pay, not your total income. If you get out right at 20 years, you’ll collect 50% of the average basic pay for the last three years, which usually works out to $40-50,000 for an officer and $25-30,000 for an enlisted member. Not exactly a lavish income that demands Stealth Wealth.
Congress has recently targeted military pensions so don’t count on it to be completely unmolested while you receive it. Congress recently tried to change the way pensions were adjusted for inflation to save money, which would have taken thousands of dollars away from veterans. With just a little savings you could have $500,000 to $1,000,000 in the bank easily when you pull the trigger and retire from the military.
Now you’re somewhere between 38 and 42 and if you invested wisely, you might be able to retire early like Doug Nordman. A military pension would make a great slice of income to add to your financial independence portfolio.
If you’d rather keep your nose to the grindstone, you can get started on the second career or starting that business you always thought about on those long deployments overseas. And you’ll have a little bit of income to support you while you get started.
I hope this primer on military life, enlisted vs. officer, how to get to the military to pay for your college, and military financial benefits was helpful. The military can be a great place to get a free college education, start your working life, serve your country, or make a career of it and earn that pension check. If you want to learn more about military personal finance and my own journey to financial independence while I serve in the Air Force, check out my site Military Money Manual.
* Start your own business: If you plan to join the military, consider starting your own business online on the side! It used to cost a fortune and a lot of employees to start your business. Now you can start it for next to nothing with Bluehost. Brand yourself online, connect with like-minded people, find new consulting gigs, and potentially make a good amount of income online one day by selling your product or recommending other great products. Not a day goes by where I’m not thankful for starting Financial Samurai in 2009. I have maximum freedom now thanks to working on my side-hustle while working for 2.5 years. You never know where your journey will take you!