Understanding Your Entire Military Compensation

For any servicemembers who are transitioning out of the military or perhaps daydreaming about what that might look like someday, many of them have never considered the full impact that transition will have on their finances and total compensation.  Most of the servicemembers that I talk to are surprised after they separate and don’t have the same salary, benefits, or total compensation as they did in the military.  So what can you do about this if you’re set to separate or are thinking about it?

Every year, usually in early April, DFAS publishes the Personal Statement of Military Compensation (PSMC) with the intent to help make servicemembers’ full compensation more readily visible.  While DFAS states that this may be helpful in applying for credit or loans, the true benefit lies in understanding what your equivalent compensation would need to be outside of the military to maintain your same standard of living.

So what is compensation? 

In this context, compensation refers to the entire sum of salary, benefits, and other financial support that servicemembers receive.  The majority is “direct compensation” — money paid directly to you — while the rest is called “indirect compensation” — things that financially benefit you but aren’t a direct payment.  Indirect compensation can either be financial compensation or non-financial.

One example of indirect financial compensation is healthcare.  When an employer helps pay for your healthcare coverage, that’s indirect financial compensation since you otherwise would have to pay that amount.  Indirect compensation can also be non-financial like leave.

Direct compensation is readily apparent because these are clearly listed on your LES while indirect compensation might not be as immediately clear.  The goal of this post is to help you understand the full picture of all of your compensation.

It’s important to take a look at each detail of the PSMC since each analysis can differ based on personal circumstances.  You can access your PSMC through myPay right underneath where you can view your LES.  This article will probably be most helpful if you have your own PSMC to go through.    We will look at an example PSMC for this post and show you how to analyze your own.

Navy members should note they will have to visit the PSMC website calculator directly at:
https://militarypay.defense.gov/Calculators/RMC-Calculator/

Direct Compensation

DFAS pre-fills in your basic pay, special pay and bonuses, expense allowances (OHA, COLA, etc.), as well as an estimate of the added value of indirect compensation which is usually based on the federal tax advantage of BAH and BAS.  This provides the starting point for you to add in some personal analysis about all the indirect compensation and add your estimate back in at the end to get your total compensation figure.

To help illustrate some of these concepts more concretely, we will look at an example of a hypothetical O-3 compensation.

• Basic Military Compensation: $85,047.96
• Special Pay and Bonuses: $2,472
• Total Direct Compensation: $87,519.96
• Added value of Service-estimated indirect compensation: $3,275.21

Estimating Your Indirect Compensation

As you estimate the various forms of indirect compensation, don’t stress getting each figure down to the exact dollar amount.  The goal is to gain a more complete understanding of what that benefit might cost you if you had to pay for it yourself so estimating is OK.  It’s also usually best practice to estimate conservatively on these figures so you don’t have a highly inflated final compensation figure to compare against equivalent civilian compensation.

If you aren’t sure what a benefit is worth, ask friends or family for help especially if they aren’t in the military and they could give you a more realistic picture of what benefits are worth outside of the military.  Below is an explanation of how you can go about calculating each of the indirect compensation categories on the PSMC.

Military Taxes

In the PSMC example above, DFAS has estimated that based on the current BAH and BAS, this person is saving $3,275.21 a year by not paying federal income tax on those two allowances.

Another thing to consider here is combat zone tax exclusion (CZTE).  The PSMC doesn’t list this as part of the analysis, and it could easily be argued that this is a direct benefit to help offset some of the challenges of deployments.  For many servicemembers however, a deployment might mean going down one tax bracket from 22% to 12%, but more senior servicemembers or dual-military could really reap benefits here if they own more significant taxable investments and drop from the 24% tax bracket to the 12% and its equivalent 0% tax rate on long-term capital gains and qualified dividends.

Junior servicemembers could also drop below the income threshold to be eligible for the Earned Income Tax Credit (EITC) which could mean quite a bit of extra money at tax time.  For this example, we won’t consider CZTE in my calculation, but others might choose to do so, especially if you deploy on a more regular schedule.

• Formula: (Projected) State Income Tax x Current Basic Pay = State Income Tax Benefit
• CZTE Formula: # of Months Deployed x Monthly Federal Tax Deduction = Benefit

Military Medical Care

Tricare is undoubtedly the biggest indirect financial compensation for most servicemembers and their families.  For servicemembers who haven’t had a full-time job outside the military, most are insulated from what almost everyone else in the country has been going through over the last several years.  Medical insurance can be incredibly costly for many Americans so this area of compensation is critically important to understand.

As a financial planner who helps people find and evaluate health insurance on their own through the federal and state exchanges, I just cannot stress how amazing this level of medical coverage is!

How much is Tricare worth to you?

One way to measure this is to see how much it would cost you to buy Tricare Standard coverage without the military paying for any of it.  This option exists as the Continued Health Care Benefit Program (CHCBP)  provided by Humana.  Similar to COBRA, this plan can give you temporary health coverage for 18-36 months when you lose eligibility for Tricare.  Basically, it means that you pay 102% of the total insurance premiums which in this case were previously all paid for by the military.

In FY20, CHCBP premiums would be $1,599 per quarter for individual coverage and $3,605 per quarter for family coverage.  In addition to these premiums, there will be yearly deductibles and cost-shares similar to Tricare Standard.  That comes out to a minimum of $6.396 (individual) or $14,420 (family) respectively a year.  Plus, consider that is also a tax-free benefit while on AD so it’s worth even more than just an equivalent cash payout.

Another way to compare the value of Tricare is to see what health insurance coverage would cost you on the healthcare.gov exchanges.  This gives you a very good example of how much you could otherwise be spending given your specific family circumstances as healthy, young individuals can acquire more minimal coverage much cheaper than CHCBP while families might see some major sticker shock.

Many of my military clients who get out and suddenly have to pay the full costs of tens of thousands of dollars a year towards healthcare they purchased on the exchange experience DRAMATIC sticker shock. Even employer-provided health insurance will almost always be far more expensive than anything they paid on AD.

Practice expectations management prior to separating and don’t expect your health insurance to offer as much for as little as Tricare costs.  The bottom line is this: don’t undervalue your Tricare coverage!

Pro tip: consider switching from AD to the Reserve Component to still have access to subsidized medical insurance through Tricare Reserve Select at still a low personal cost.

• Formula: Expected Civilian Annual Health Insurance Cost – What You Currently Pay Annually for Tricare Prime/Standard = Your Benefit

Military Pension + BRS Match

The legacy military retirement benefits only consist of the High-3 system as an all-or-nothing pension that requires vesting at 20 years of service. As such, it’s a little harder to directly value compared to the Blended Retirement System (BRS) direct matches which are more straightforward.

For the BRS contributions and match, just add those percentage amounts based on the basic pay rate right into your calculation. The BRS matching rate is comparable to many civilian employers’ 401(k) matching.

One of the good friends of MFAA, Doug Nordman, has done a great job giving some estimates of what that military pension is worth. The trick of course is that the pension is still worth “nothing” until you actually vest in it so there’s no real way to say you’ve earned half of the pension’s value just because you have served 10 years.  To quote Doug, “Stay in the military if you’re challenged and fulfilled, but don’t join just to stick it out for a pension.  If the pension is your only motivation then you won’t last past the first obligation.  When the fun stops then you should leave active duty for the Reserves or National Guard instead of grimly clenching your jaw and gutting it out for 20.”

Still, it is critical to understand just how incredibly valuable an active duty military pension can be as an E-7 pension can be worth around $1.4 million at the time of retirement and an O-5 pension could be worth as much as $2 million!

This part of the PSMC analysis doesn’t produce a number to add into your overall compensation, but it does help you think through the calculus of staying in or getting out.  The more years of service that each servicemember has should also weigh heavily in this consideration as it’s easier to make the decision to get out after only 4 years vs. 15 years.

Thrift Savings Plan (TSP)

The TSP offers incredible cost savings as it is dramatically cheaper than the average expense ratio of traditional mutual funds or many employer-sponsored 401k plans.  In 2021, the TSP had a net expense ratio of only about 0.05% while the average expense ratio of the civilian TSP equivalent of a 401(k) and average mutual funds are much more expensive!

That means that if your TSP balance is $1,000, you are only paying about $0.50 a year in fees while that same $1,000 in an average 401(k) would cost you $5 – 10 (per $1K) a year based on plan administration or investment expense ratios.  Over time, that fee differential becomes a huge drag on investment returns — to the tune of tens of thousands or even hundreds of thousands of dollars — which you can see for yourself using this Vanguard tool.

• Formula: (Amount Currently in TSP x 0.01) – (Amount Currently in TSP x 0.0005) = Benefit

Life Insurance (SGLI), Dependency and Indemnity Compensation (DIC), and Survivor Benefit Plan (SBP)

Let’s analyze SGLI, DIC, and SBP in the context of the actively serving member to apply this to the PSMC, but understand that these concepts also apply to retirees albeit with some differences.  Many companies offer some type of group life insurance that is tied directly to employment and SGLI functions just like this.  Although individual servicemembers pay for SGLI, this guaranteed insurance is still pretty low-cost, but most importantly helps ensure servicemembers can stay insurable post-military with VGLI should something happen to them while in the military.  These are the other benefits broken out:

1. Should you pass away, your family or designated beneficiary will also automatically receive a death gratuity payment of $100,000 regardless of whether you have SGLI coverage or not.
2. If your death is determined to be in the line of duty and if you are married, your spouse will also receive monthly non-taxable Dependency and Indemnity Compensation (DIC) payments of at least $1,357.56 and an additional $336.32 for each surviving child are payable. DIC is generally adjusted annually for inflation.
3. The family will also receive one year of BAH based on the current rate they were previously receiving.
4. If you die while on active duty in the line of duty, your family is protected by SBP at no cost to you. The formula for this looks like this:  SBP = 0.55 x (2.5% x YOS x average of the highest 36 months basic pay).
5. Due to some recent changes to how DIC and SBP work together, you should research the most current status to determine how much if any offset is given between these two payments.
6. For our example here, we will just assume a surviving spouse and one child at $20,316 a year.

So how much life insurance would you approximately need today in order to provide a $20,000 a year inflation-adjusted annuity for the rest of your spouse’s life?  I plug the requirements into the calculator here (I used ~3% for the interest rate as inflation) which says that annuity is worth about $509,000 in today’s dollars given a spouse’s age of 30 and IRS expected life span.

That means I would need to carry an additional $609,000 ($509K + $100K death gratuity) in life insurance today to provide that same level of benefit to a spouse.  For the sake of estimating, we’ll use the SGLI rate of $0.07 per $1,000 of coverage at $609,000 x $0.00007 = $42.36 a month or $511.56 a year. [Note: You could potentially get a lower term life insurance rate than this rate given underwriting characteristics]

The equivalent costs of term life insurance vs. SGLI are usually easy to compare and many servicemembers often carry life insurance through companies like AAFMAA, USAA, or Navy Mutual.  Many people though don’t think about pricing out the income streams that their families could also earn through DIC and SBP when considering their life insurance needs.

Pay Raises

The PSMC next has you calculate the value of annual pay raises, longevity increases, and promotion raises.  While the annual raises haven’t always tracked directly with inflation, the longevity increases, and promotion raises both offer standardized opportunities for increases in pay.  This one is a lot more difficult to measure though and depends on you remaining in the military so we will skip it for this analysis. 

One important consideration for you though might be the comparison here between regular raises in the military and whether or not your civilian career offers the same chances to regularly grow your pay.

Commissary and the Exchange

This category is very dependent on how much each family uses the Commissary and Exchange.  Recent PSMC estimates list out that the average Commissary benefit is about $4,600 a year for a family of four with most people saving about 30% of their grocery purchases.  Take into your purchasing habits to fully analyze this one for you.

• Formula: [(Average Monthly Commissary Spending x 1.24) x 12] – [(Average Monthly Commissary Spending x 12] = Average Benefit
• Note: To get a more accurate estimate, an older Stars and Stripes article breaks out the average savings by region and can range from around 19% to over 44% for OCONUS.

Federal Long-Term Care Insurance Program (FLTCIP)

This benefit primarily offers long term care insurance for those looking to help cover the cost of nursing home and other end-of-life care.  The goal of FLTCIP is to help preserve your retirement savings should a long-term care need arise.  Those eligible for the FLTCIP include all Federal Employees (Uniformed Service members), their spouses, adult children (including natural, adopted & step), parents, parents-in-law, and stepparents.  Given my current age, current and projected savings rate, and expected financial independence long before my 60s, I don’t have a need for this.  Your situation may be different especially if your parents could purchase through this benefit program.

Note that this benefit is not as good as it once was and is not necessarily something I would automatically recommend.

• Formula: Other Annual Long Term Care Insurance Cost – FLTCIP Annual Cost = Benefit

Education Benefits

The military offers some pretty incredible education benefits through Tuition Assistance (TA), the GI Bill, ROTC scholarships, Academy appointments, job certifications, and numerous other opportunities.  I’ve written about that using my own example here where I figured out how I turned $80,000 of education benefits into more than $2.1 million in lifetime value!

The primary education benefit to account for here is TA or service-specific associate degree program since it is a function of remaining on active duty whereas the 9/11 GI Bill vests after 36 months of qualifying service (ROTC scholarship and Academy grads take note that you must first finish your education commitment before starting to earn credit towards the 9/11 GI Bill).

If you are currently still serving towards the 36 months to earn 100% of your benefits or are still serving an ADSC because you transferred the benefit to a dependent, include a pro-rated portion in the calculation below.  There will be lots of variation about how much the 9/11 GI Bill education benefits can be worth so you can personalize this to your own unique situation.

Service Activities

Everyone’s use of the services provided by their base will differ greatly so this is another highly personalized analysis.  Among the most financially impactful is the child development center (CDC) since this cost is subsidized based on rank.  For those that utilize the CDC, you can try to determine the cost of a similar daycare off base and compare the CDC cost to add up your benefit.

Other things to consider include the fitness center, auto facilities, hobby shop, outdoor recreation rentals, etc.

Counseling and Assistance Programs

The PSMC helps provide some figures here ranging from $30 an appointment up to more than $5,000 for transition assistance services to help you analyze the costs for free personal financial management counseling, relocation services assistance, transition counseling, spouse employment consultation, and assistance from a wide range of services available from their services’ community centers.  Again, each individual circumstance will differ here. Note that some of these are given as an estimated hourly rate.

• Personal Financial Counseling/Education: $ 250 – 375
• Spouse Employment Counseling: $ 585 – 990
• Transition Assistance Services: $ 5096
• Non-Medical Counseling: $ 30 – 100

Legal Counseling

Military members and family members can get free legal assistance in a wide range of areas, including consumer law, landlord-tenant law, family law, estate planning, and tax assistance services.  The PSMC again offers their estimates for costs associated with everything from notarization or powers of attorney to tax returns preparation and consultations with an attorney. Note that some of these are given as an estimated hourly rate.

• Consultations with an Attorney: $ 150 – 175
• Wills: $ 250 – 3,000
• Notary: $ 10 – 20
• Advance Medical Directives: $ 100 – 250
• Client Correspondence: $ 125
• Powers of Attorney: $ 60 – 250
• Tax Return Preparation: $ 147 – 273

Space-A Travel

Space available travel for Uniformed Services members can provide substantial savings over commercial airline fares.  Space available travel is defined by DoD policy as a privilege (not an entitlement), which accrues to servicemembers as an avenue for travel.  This is again a highly individual element likely based on how close you are to frequent space-a travel opportunities.

Tricare Dental Program (TDP)

Tricare dental provides fairly good coverage, but is not quite the comparison as Tricare health insurance is compared to civilian counterparts.  Based on equivalent quotes for comparable coverage, most people could be covered by a similar plan where you live for about $30 – 80 a month.

Other Military Benefits

The PSMC stops its analysis here, but there are a few other benefits to consider.

Leave

The average civilian job has much less paid time off (PTO) than the annual 30 days of leave a year each and every servicemember receives.  Although I’ve never met someone who only uses that leave to take a month straight off each year, one way to think about it is that you are getting paid 12 months’ worth of salary for 11 months of work.

Military life demands many more sacrifices on your time (TDYs, deployments, long shifts, etc.) and there’s certainly no such thing as overtime so perhaps this issue ultimately is a wash.  However, don’t discount the amount of paid time off you do get lest you be surprised when your civilian job starts out with only around 5 days a year.  Expectant or future mothers should especially value the longer military maternity leave as it outpaces most companies in the country as this is a rarer benefit. 

Disability Insurance (DI)

At most other jobs either your company offers some small level of disability insurance or you can purchase this on your own.  While most people might not know what disability insurance covers, they have probably seen this product advertised somewhere thanks to a famous quacking duck.

Disability insurance is coverage that will help pay a reduced portion of your previous salary if you were to get hurt or otherwise be unable to work anymore.  In the military, this is provided by the VA if you were to become seriously injured or disabled while serving in the military.  You would be evaluated and given a disability rating which would then be used to determine how much you get paid.

You would otherwise have to purchase a DI policy on your own to provide this coverage. The average cost for a disability income insurance policy is around 1% – 3% of your annual income (take note that most policies will only allow you to purchase around ~60% of your previous salary).  You would have to get a personalized quote from an insurance agent to get more details.

VA Benefits

Outside of the VA benefits specifically mentioned already, there are a host of other benefits available such as the VA loan, education and career counseling, VA medical resources, and other support.  Evaluate what services you already use or might expect to use when you separate for an estimate here.

Military Discounts

You may never have considered this one, but this perk can really add up as long as you remember to ask about it wherever you shop.  This benefit again is highly dependent on how much you spend and if the places you shop offer it.

Invaluable Camaraderie and Leadership Experiences

This consideration isn’t here to try and put a financial number on this one.  However, one of the biggest trend items from separating veterans is how they miss the close bonds of friendship that are often more like family for most.  You need to have realistic expectations that your average civilian employer will have a different (not inherently bad) culture in this area. 

Summary

Let’s add up some example numbers to see what the total estimated annual compensation is:

• Basic Pay = $85,047.96
• Special Pay = $2,472
• Total Direct Compensation = $87,519.96

PSMC estimate of indirect compensation (federal income tax benefit of BAH/BAS) = $3,275.21

• State Income Tax = $2,000
• Tricare = $16,000
• TSP = $310
• DIC and SBP = $511.56
• Pay Raises = $0
• Commissary and Exchange = $800
• Federal Long-Term Care Insurance Program = $0
• Education Programs = $180
• Services Activities = $400
• Counseling Assistance = $300
• Legal Help = $400
• Space-A = $0
• Tricare Dental = $216
• Leave = $0
• Disability Insurance = $1,740
• VA Benefits = $0
• Military discounts = $2,000
• Total Indirect Compensation Estimate = $24,857.56

Example Total Estimated Compensation = $87,519.96 + $24,857.56 = $112,377.52

Service in the military can bring with it quite a lot of financial benefits that are often underappreciated or not considered when evaluating total compensation.  In fact, most servicemembers earn more in total compensation than their civilian counterparts when you consider similar levels of education and experience.  After this article, I trust you are better able to understand and analyze your PSMC.  This can then help you evaluate equivalent civilian employment opportunities or perhaps even come to the realization that you’re better off staying the military for now.  In any case, make sure to appreciate each of these benefits now whether you’re getting out soon or will stay for a whole career.  In this case, it’s pretty interesting to realize that the total compensation is significantly higher than what the LES says!