By Doug Nordman
Military Spouse Guest Writer and founder of

When you join the military, the straightest path to financial independence is staying on active duty until you're eligible to retire.

But active duty is certainly not the easiest choice. When you're just two years into that 20, the next 18 years seems like forever. After a few years in the ranks, you realize that more people are separating from the military than retiring from it. If you're ready to leave active duty-- and not even try the Reserves or National Guard-- then you have plenty of company. Only 15% of all veterans are receiving a pension, and some services have an even lower retirement rate. While separating seems to be a more difficult path to financial independence, it's by far the most common one.

But how in the world can a veteran make it without an inflation-fighting pension and cheap healthcare?
It's not as easy, but it can be done: civilians solve these challenges every day. The top three methods are the "safe withdrawal rate", living off dividends, and multiple streams of income.

The Safe Withdrawal Rate (SWR). Research by William Bengen (1994) and the Trinity Study (1998) were the first to propose the SWR. Withdrawals start at about 4% of the retirement portfolio and rise each year with inflation. Some principal is consumed nearly every year, and by 30 years the portfolio may run out under extremely adverse conditions.

These studies spawned controversy and more research. What's the real risk of running out of money? What if retirement lasts longer than 30 years? What if future investment returns are different from history? What if retirees change their spending habits? What's the best asset allocation, and will annuities improve the portfolio's survival?

Today the 4% SWR is recognized as a starting point. It's a thumb rule for estimating the assets you'll need to support your spending, but it's not a one-size-fits-all answer. Use USAA's retirement planning software and seek professional help for your questions.

The dividend rule. Many retirees take comfort in spending only their portfolio earnings. They may use combinations of dividend-paying stocks, high-quality bonds, rental real estate funds, CDs, and annuities (although some - or all - of these asset types may not be appropriate for everyone. Seek professional help for what is best for your individual situation and goals). Each year's budget may be limited by last year's dividend income or by a long-term average. To preserve the portfolio's purchasing power, dividends will have to rise at least as fast as inflation. Spending fluctuates with the economy and inflation but the portfolio never runs out of money because principal is never consumed. This safety margin requires a larger portfolio than the 4% SWR, which usually means saving more or working longer.

Multiple streams of income. This option also has many variations: financial independence from some combination of employment and savings. Veterans work part-time at their avocations (or develop new ones) for as long as they can. Others enjoy part-time employment in a corporate environment with enough hours to qualify for medical benefits. A few will work seasonally, or to earn a little for special occasions, or if their portfolio falls below a certain amount. Rental property can create income with fewer working hours. Finally, retirees combine their pensions and their savings into a spending plan to bridge the years to Social Security and Medicare.

Whichever method you choose, financial independence has to focus on expenses as well as assets and income. Start with a bare-bones survival budget and add in discretionary spending that depends on your portfolio's performance or your ability to work for extra income. A very few frugal spenders may cross the line into outright deprivation, but conscious spending is an essential survival tool for a harsh economy.

Financial independence can be split among all three options. Many early retirees still fondly recall the day when their spreadsheets showed that they had enough to meet the 4% rule. Others had a lifestyle epiphany and began aggressively cutting expenses, saving every spare penny, and carefully tracking their progress to live within their dividend income. A few have saved enough to pursue their chosen avocation and happily take whatever earned income they can. A very few will spend years visiting the world as expatriates or traveling the country on a bare-bones lifestyle before settling down to a more traditional retirement in their dream location.

There are many paths to financial independence. Tailor your journey to your preferences and circumstances. 20 years of active duty may seem like the simplest financial option, but the Reserves and National Guard offer a wide variety of options. Even "going civilian" offers transition benefits to make your years of training and practical experience valuable to any employer.

About Doug Nordman

I retired a decade ago after 20 years in the submarine force. My spouse spent 17 years on active duty and eight more in the Reserves. We've traveled the world, but we've enjoyed our Hawaii beach-bum lifestyle for over two decades. Our daughter is a junior on an NROTC scholarship.

I wrote "The Military Guide to Financial Independence and Retirement" to share the experiences of over 50 other servicemembers and veterans. Some left the military after one enlistment and others made it their career, but all are achieving financial independence to retire on their terms. All of the book's royalties are donated to military charities (over $1600 so far), and we're collecting more stories & advice for the second edition at Stop by to share yours, and to learn more about gaining your own financial independence!