Author Topic: Chasing a Pension vs. Early Retirement  (Read 4538 times)

mikewanders

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Chasing a Pension vs. Early Retirement
« on: August 10, 2015, 09:25:52 AM »
Hey Iíd love to get your thoughts on my financial situation.  I consider it a little unique compared to most because I have a pension plan.  It seems one of the general themes of the blog is to stash as much money as fast as you can so you can walk away as fast as you can.  In my case Iím sort of locked in until I can plan on this pension.  Let me give you some raw details and then hit you with my question.

Iím 33 years old and work for the federal government (military).  At 49 years old I will be able to retire from federal service and have a pension that will pay me about $50k a year for the rest of my life to include a cost of living adjustment.  In addition to that I will have access to very inexpensive healthcare for the rest of my life for myself and my wife.

My wife and I have three children ages four, three and one.  We plan to have another (our last) in a couple years.

My wife does not work and likely wonít for the foreseeable future as she plans to homeschool our children.

My current salary is $75K and will get bumped up to about $87k next year and plateau there for about six years, then it will jump to about $105k and stay there for another six years before going to about $120k for the last three years of my working life until I hit 49 years old.  (These are all 2015 dollars).

In addition to the salary I am lucky to have free healthcare for myself and family.

I plan to give each of my children about one year each of college from my GI Bill, additionally we save $60/month for each of them in individual 529C accounts.  Anything beyond that they can pay for themselves.  I feel like itís extremely generous of myself to save for their college anyway, but if I can help Iíd like to.

Debt Ė  about $14k on a car and $252K on our mortgage, we are one year into a 30 year mortgage.  Itís not likely Iíll pay my house off before 30 years as I move around with the military a lot and will likely sell this house soon anyway.  As such it will be tough to own a home and just pay it off, unless I want to deal with the hassle of renting it out but never being around to check on it or maintain it.  No credit card debt.

Savings Ė currently about $45k in Roth IRAs and Roth TSP, accessible at 59 years old.  We put $1000 a month total into these vehicles.
Iím about to start throwing $500 a month into a Betterment account, to plus up any retirement savings that we could access between age 49 and 59.  Iíd like to grow it to about $200K.

All these things considered I feel like my wife and I are doing pretty well.  We operate on a frugal budget using ďYou Need a BudgetĒ software.  After taxes, charitable donations to our church, retirement savings, and mortgage our yearly family expenses are about $32k.  This goes to home maintenance, phones, food, fuel, utilities, etc.

Iíd like to have more than that $32k in retirement since Iíll still be paying on a mortgage, and charitable donations, and taxes.  Even with the $50k pension, if Iím no longer investing in retirement at that point the expenses still hover somewhere around the $30k/year mark, hence the reason Iím starting to throw some money into a Betterment account.  With a taxable account at about $200k and the pension Iím projecting that at 49 years old Iíll have about $70K a year until Iím 59, when my betterment fund runs dry (doesnít account for the fact that that taxable Betterment account will continue to gain interest over that 10 year period).  After that, at age 59, I can draw out of my Roth accounts.

That, in my opinion, is a ridiculous retirement (like, wrath of God money) and still relatively young at 49 years old. Certainly better than the normal 65 years old (or whatever it is, absurd).  Thatís probably more than Iíll need in retirement, but I like to plan for the worst.  And given our modest lifestyle that $70k/year retirement number seems very doable to achieve with our current savings rate (if you include that pension).

So, after all that, here is my question.  I donít see a way to get to a retirement before 49 years old.  By then my kids are 20, 19, 16 and letís say 14 on that still unborn child.  Iím basically hitting my life of leisure when my kids are out of the house or almost out of the house.  Do you see a way to get there sooner?  Isnít it just worth holding on for the next 16 years and getting to that pension?  Or is there another way to get to a comfy retirement before the age of 49?

Iíd love your thoughts, thanks.

Mike

nereo

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Re: Chasing a Pension vs. Early Retirement
« Reply #1 on: August 10, 2015, 09:45:58 AM »
Hi Mike

Your question and situation seem tailor-made for Nords - perhaps he will respond (or you can search through his threads).
Retiring at 49 is still extremely early from the perspective of the broader population.  There are certainly ways that you can cut this down.  The trick for you will be to determine whether you can retire earlier and still receive a reduced pension - and if so to make up the difference with other investments.  You mentioned that you want $32k in retirement but that your pension will be ~$50k with COLA.  Can you retire earlier from the military and still get close to your $32k/year pension?

First, you can access the principle on yoru ROTH IRAs (and I believe the TSP) at any time - you do not need to wait until you are 59.5.  That can be one source to draw from before your retirement kicks in.  Beyond that you can continue to save in normal (post-tax) investment accounts like the Bettement account you referenced.  With your pending salary increase next year and then in ~6 years you have the potential of increasing your savings by $10k/year if you can avoid lifestyle creep.

Finally, you can always help yourself out by optimizing your current lifestyle.  $14k remaining on a car loan is a red flag - are there other areas you can do better on to increase your savings?

mikewanders

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Re: Chasing a Pension vs. Early Retirement
« Reply #2 on: August 10, 2015, 10:01:18 AM »
Good stuff, thank you.  I'll reach out to Nords.

That 14,000 I owe on the car is borrowed at I think about 3%.  I could defer retirement savings to pay it off in the next 6 months or so, but at 3% id rather throw money into retirement than retire that car debt.  But no doubt itd be nice to be rid of it,  Its a $300/month payment.

I'd like more than 32K a year in retirement.  My current path has me at about 70k a year starting at 49 years old, assuming i get to that pension. without that pension I could probably swing something like 40k a year but only by the time i get to 59... as such it just makes so much sense to work toward that pension.

nereo

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Re: Chasing a Pension vs. Early Retirement
« Reply #3 on: August 10, 2015, 10:20:01 AM »
That 14,000 I owe on the car is borrowed at I think about 3%.  I could defer retirement savings to pay it off in the next 6 months or so, but at 3% id rather throw money into retirement than retire that car debt.  But no doubt itd be nice to be rid of it,  Its a $300/month payment.
...or "option number 3!" - sell the vehicle and buy something gently used and fuel-efficient to have no car payment at all.  There are LOTs of options under $10k.  An additional savings of $300/mo could be >$22k* compounded over the next five years.  Just sayin'

Quote
I'd like more than 32K a year in retirement.  My current path has me at about 70k a year starting at 49 years old, assuming i get to that pension. without that pension I could probably swing something like 40k a year but only by the time i get to 59... as such it just makes so much sense to work toward that pension.

Ok - I may have misunderstood your numbers.  Still, with $1000/mo currently going into your ROTH-IRA and ROTH-TSP, and the ability to put another $1000k/month in savings with your pending promotion next year, your contributions over the next 10 years could be worth >$350k*... plus whatever you already have saved.  Get rid of the car loan and find another $200/mo that you can save and you could have $540k* before you turn 45 (including your current $50k). 
Regardless, saving as much as you can now will only increase your financial freedom in your 40s, 50s and beyond.

Finally, consider what you might want to do in your post-military career.  A part time job could bridge the gap between your savings and your pension, and allow you to spend a lot more time with your growing family. 

*assuming 7% real-adjusted returns over stated time period.  YMMV.

Cassie

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Re: Chasing a Pension vs. Early Retirement
« Reply #4 on: August 10, 2015, 11:01:30 AM »
That 16 years seem like a long time but it will go fast & you will be glad you waited. You won't have to worry about $ & believe me you will be glad to have  more $ when you reach that age to travel, help kids, etc.  That is still a really young retirement that is also secure.

kendallf

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Re: Chasing a Pension vs. Early Retirement
« Reply #5 on: August 10, 2015, 12:24:21 PM »
You can cruise along your current path, and you'll be fine to retire at the somewhat early age of 49.  I would encourage you to *not* buy houses if you're getting PCSed every 3-5 years, BTW.  The transaction costs from each sale/new buy will probably eat your cost savings.  This path is predicated on your inability/lack of desire to cut your expenses and increase your savings rate.  If you're happy and want to continue, well and good.

Door #2 would be to take a serious look at your expenses, your savings, and what you want to do with the next 16 years.  There are plenty of people here living on your $30k/yr while including all housing expenses, for instance.  If you saved 70% of your income and lived stably on the rest, you could retire in less than 10 years, with no pension! 

I don't know if your pension is "cliff vested", i.e., will you reach 20 years of service at age 49 and otherwise get nothing if you leave before then.  If that money seems like too much to leave on the table, fine.  Increasing your savings and decreasing your expenses will only be good whatever path you choose.

BTW, I am an older version of your dilemma: I'm a federal employee with 8 years to go until I reach minimum retirement age.  I will probably stay federally employed until then as I have substantial financial incentive to do so.  In the meantime, I'm still trying to pare our expenses, save as much as possible, and generally make smarter choices.  My options after retirement will be considerably better as a result.

Nords

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Re: Chasing a Pension vs. Early Retirement
« Reply #6 on: August 10, 2015, 10:45:51 PM »
Good stuff, thank you.  I'll reach out to Nords.
Welcome to the forum, Mike, and thanks for sending the PM!

So, after all that, here is my question.  I donít see a way to get to a retirement before 49 years old.  By then my kids are 20, 19, 16 and letís say 14 on that still unborn child.  Iím basically hitting my life of leisure when my kids are out of the house or almost out of the house.  Do you see a way to get there sooner?  Isnít it just worth holding on for the next 16 years and getting to that pension?  Or is there another way to get to a comfy retirement before the age of 49?
This is the ancient military-retention dilemma of "Should I Stay Or Should I Go?"

You could grind it out for the pension as long as you're having fun:  enjoying the work, feeling fulfilled,  and putting up with the annoyances.  Commendations, pay raises, and promotions would be just bonus.

You'd leave active duty if it was no fun:  high stress, high blood pressure, headaches.  If you tried to grimly clench your jaw and gut it out then you'd risk your physical, mental, and emotional health. 

Perhaps you're somewhere in between, where the fun has not yet stopped but your priorities are shifting toward family more than career. 

The best compromise for this situation is to leave active duty for the Reserves or National Guard.  Get a drill billet at an armory or base near wherever you want to live (or commute to drill).  Your active-duty time counts toward a Reserve/Guard pension and all you have to do is earn enough good years to bring the total up to 20.  The rest of your time is free for additional Reserve/Guard duty or a civilian bridge career or your own entrepreneurial work.  You may be asked to deploy (although it's highly dependent on your skills and your unit) and that rotation will probably be less than one year out of five. 

Your Reserve/Guard pension will start at age 60 instead of an active-duty pension at age 49.  But (here's the important part) it'll be based on the pay tables in effect in 2042 (the year you turn age 60), and at the maximum pay for your retirement rank.  In other words from the day you "retire awaiting pay" until you reach age 60, you'll probably keep pace with inflation (at least with your expenses).  At age 60 you'll have an inflation-indexed annuity plus Tricare, and at age 65 you'll move to Medicare plus Tricare For Life.  That will insure your portfolio against financial failure and give you the rock-solid foundation upon which to build the rest of your investments.

Another compromise would be to leave active duty for a federal civil-service career.  Again you'd be able to credit your active-duty service time toward your civil-service pension.  Many state civil services offer this as well. 

Or you could just leave active duty completely and launch your own career.  The skills and discipline that you've learned in uniform are extremely valuable to employers, and they'll teach you the rest. 

The challenge is bridging the gap between age 33 and age 60.  Some of that will come from your Reserve/Guard drill pay plus any additional orders.  You'll make up the rest with employment income or your entrepreneurial projects.  You and your spouse would have more shared childcare and shared homeschooling, so that might free up some of her time for her next career. 

Savings Ė currently about $45k in Roth IRAs and Roth TSP, accessible at 59 years old. 
Technically there are several ways to access those funds, tax-free and penalty-free, before age 59.5.  For example, Roth IRA contributions can be withdrawn any time for any reason.  The Roth TSP could be rolled over to a Roth IRA, and after five tax years in a Roth IRA you'd be able to withdraw the amount of the rollover-- again tax-free and penalty-free.  Here's the gory details:
https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

Itís not likely Iíll pay my house off before 30 years as I move around with the military a lot and will likely sell this house soon anyway.  As such it will be tough to own a home and just pay it off, unless I want to deal with the hassle of renting it out but never being around to check on it or maintain it.
Agreed.  Unless you're planning to get into the landlord business, it makes little sense to buy a home on active duty.  The transaction costs are high and the short-term market volatility is very risky when you're only holding it for a few years.

Villanelle

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Re: Chasing a Pension vs. Early Retirement
« Reply #7 on: August 11, 2015, 12:48:26 AM »
My husband is AD Navy and we've asked ourselves this question frequently over the past decade+.

H'es now at 16 years, and has orders that will bring him to 19.5, so clearly our decision has been made.  For us, it was a combination of factors.  It's hard to walk away from that big, beautiful pension once you are past about 12 years.  On top of that, he still mostly enjoys what he does, and he had specific career goals that he was working towards and then will be actually doing, so he wanted to stay for non-financial reasons as well.  Had he been miserable, we might have made different choices as the 12-14 year point.  At this point, the question we are now starting to ask isn't "20?", it's "Stay longer and try to pick up one more rank and get 3 years at that rank before bailing", but the logic is largely the same, though with less pressure.  Is he still enjoying the work?  Is the lifestyle still working for us?  Is there something else he wants to be doing?  (He is unlikely to actually retire once we reach FI, so there will definitely be work of some kid for him after 20, though not necessarily for financial reasons.)  And even questions like "Is the detailer offering jobs in places we want to be, doing things he wants to do?" 

Another thing to keep in the back of your mind is the many proposed changes to the retirement system, and how those might affect your choices.  If the 20 year cliff vesting goes away, you might be able to walk at 15 or 18 years and still get something, or there might be a TSP match that changes the picture significantly, giving you a bit more freedom.  With only 4 years in, a lot could happen, including changes in the pension, you becoming utterly miserable, not making rank and facing HYT, and more.  So while it's good to have an outline of a plan, I'd be careful about putting all my eggs in the one 20 year basket so early on.

Giro

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Re: Chasing a Pension vs. Early Retirement
« Reply #8 on: August 11, 2015, 07:29:01 AM »
Since you began your military career later in life and can't retire for 16 more years(unless I'm missing something since you said you have 16 to go for your pension), I think it's a bit presumptuous to assume you will have 16 more years in your career.  I would plan for the worst and have an escape route if you need it.  There will be significant ups and downs over the next 16 years and I wouldn't rely on being able to stay in or getting those bumps in salary.  I would ensure that you have a backup plan.  Being in the military is nice because they will pay you to get a degree in some cases.  My husband got two master's degrees while active and they paid him to do it and paid his tuition.  It was glorious.  He then slid right into a high paying civilian job.

DH did 20 years and retired 4 years ago, but he retired at 40 not 49.  His pension started at around 50k and goes up a little each year.  Yes, it's wonderful to have that income each month.  I also LOVE Tricare for our family.  He is now working as a civilian and those darn golden handcuffs have him wanting to stay 10 years to get a second pension. 

BUT, you give up quite a bit by doing this.  A similar job as a civilian may pay significantly more.  Calculate your time to retirement, your loss in income for being active duty, moving your family wherever THEY tell you to go, etc.   Put everything down on paper.  The military is notorious for persuading folks with safety and security.  They want you to stay.  They do not always have your family's best interest at heart.  Just lay everything out and make sure you are comparing apples to apples. 

So, $50k a year pension for doing 16 more years.  If you worked elsewhere for 25% more for 16 years how much would you have at the same age? 

Those darn pensions are enticing but run the numbers and weigh the sacrifices. 

My DH retired when he knew he would be deployed at least one more time as an officer.  Our family was done with the looming threat of deployments. 



HappyHoya

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Re: Chasing a Pension vs. Early Retirement
« Reply #9 on: August 11, 2015, 08:28:02 AM »
I'm also a federal employee (civilian), and retiring at 49 still sounds young. I agree with the previous poster who mentioned having an escape plan in the event you really need to get out before then, but I suspect it will go quickly. It sounds like you're doing a great job leveraging the security of military employment with mustachianism!

mikewanders

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Re: Chasing a Pension vs. Early Retirement
« Reply #10 on: August 11, 2015, 10:43:26 AM »
Oh Boy.  This is a veritable gold mine.  Thanks everyone.  It is presumptuous that the military would keep me around (or I would keep myself in it) for the next 16 years.  But it is my most likely scenario right now.  I like the work well enough (and can deal with the monumental annoyances).  The pension is a cliff plan, 20 or nothing.  And in terms of the looming retirement plan changes my understanding right now is that anyone currently in will be grandfathered into the current plan, with the option to switch to what looks like will be a TSP match option.  As such I've decided to hedge my bets by saving on my own.  Unfortunately I've observed that most military people dont care to save, instead banking on the pension, if they can get there.  And even if they do its typically not enough.  Im trying to set my family up where at 49 I can walk away from work totally if I want.  and if I walk away from the military before the 20 years then at least Ive been throwing money into retirement accounts and other savings accounts.

My wife and I seem to have the disposition that hard things are worth it.  That are bumpy as the next 16 years could be it will bless us financially thereafter.  Her dad was career military for 30 years and so she is accustomed to the lifestyle (though its clearly different as a spouse than a child).  Additionally I take the mindset that the grass is not always greener on the civilian side.  I have numerous friends in private sector and to achieve their financial goals and to 'get that promotion" they are working long hours and enduring some difficulty and annoyance as well, only without the healthcare and pension. 

Left

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Re: Chasing a Pension vs. Early Retirement
« Reply #11 on: August 11, 2015, 10:58:03 AM »
Fed employee here as well, I plan to just take what pension I can at 40, by then I hope to be mostly FI, so I will work part time in private sector for half a year or so then enjoy that until 45 where I might fully retire. I will just be invested at about 12% at 40 but that will be my eating out money and not living money based on how I plan it. Hoping to hit $1 million at 40.... so far I am on track but 12 years is a long time for things to go wrong

I don't think a pension provides any more reason to keep working than a high salary... or any other benefits. I mean sure a pension and health-care is nice but if you can provide it without any problems why chase after it?
« Last Edit: August 11, 2015, 11:00:50 AM by eyem »

Cassie

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Re: Chasing a Pension vs. Early Retirement
« Reply #12 on: August 11, 2015, 02:24:14 PM »
Whether you work in public or private there will be times the work environment is good & times it would be terrible. When I turned 43 I decided to work the government pension and no matter how bad it got I would hang in. Well it was great for first 4 years, got really bad for another 4 and then was just okay. I was tempted to job hunt when it was bad but just reminded myself that someday I would be happy to have a check mailed to me very month & I am so happy that I did. The 15 years just flew by.

Kiwipino

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Re: Chasing a Pension vs. Early Retirement
« Reply #13 on: August 11, 2015, 05:01:09 PM »
Something you want to consider (assuming you are a currently an active duty military officer), is get out and get a job as federal civil servant.  You can "buy" your military service back and use it towards a federal employee retirement system (FERS, which is a pension), which is 1 percent of your high-3 average salary for each year of service.  Typically (depending on your DOB), you can retire at 57 with 30 years of federal service (military service would count).  But, you can possibly retire "early" from federal service at age 50 with 20 years of service if your federal agency is going through a major reorg or RIF.  This early retirement action falls under the Voluntary Early Retirement Authority (VERA).  My agency is not going through a major reorg that I know of, but VERA is being advertised via our personnel center and I get occassional data calls from command if any eligible employees want to retire early.

FERS, along with TSP (IMO one of the best 401k-type plans out there) and SS, constitute the "3 legged stool" of a federal retirement.

Also, while the military is a great career (I'm former military), it is an "up or out" system.  If you don't make a promotion list to the next rank, see ya.  With looming troop level cutbacks, promotion boards are getting competitive. A couple of 0-3/0-4's that I work with are getting nervous about staying in and making it to 20 years.

Nords

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Re: Chasing a Pension vs. Early Retirement
« Reply #14 on: August 11, 2015, 11:44:08 PM »
There's good advice here from people, especially the personal examples of how the assignment officer's attitude changes when you reach 14-16 years of service (and there are fewer billets for your higher rank).  The closer you get to 20, the more limited the choices and the faster the fun stops.

And, yeah, I should've seen this next one coming.  I'm getting PMs and e-mails with questions about the details of calculating a Reserve/Guard pension.  Here's a generic answer, and you can insert your projected rank into the pay tables.

Keep in mind that this answer is also generic at the DoD level, but your service will have more specific requirements (especially for "good years" and points) at the unit level.

The Reserve/Guard retirement is based on points instead of years.  When you leave active duty for the Reserves, you'll start your point count with one point for every day of active duty (365 or 366 points per year) and with credit for a certain number of "good years" that you earned on active duty.  Your goal is to rack up at a total of at least 20 good years (active + Reserve) with as many total points as possible. 

A good year is awarded for completing a minimum number of drill weekends (generally 10) and for earning a minimum number of points (generally 50).  A good year also means that you've complied with unit requirements for mandatory training, bodyfat composition, physical fitness tests, medical/dental readiness, and other details.  Once you get to 20 good years you can file for "retired awaiting pay", or you can keep on drilling to 30 good years.

Some years you might do more duty for more points, and maybe every five years you'll mobilize for 6-12 months (one point per day of mobilization).  You could conservatively estimate your Reserve points to be 50 points per good year.  A realistic estimate might be 60-70 points per year.

Your pension will be:
Monthly pension = [points / 360] x 2.5% x High-Three pay base.  (The divisor is 360 because military pension months only have 30 days.)

Your High-Three pay base is complicated.  It's the average of the 36 months of highest pay, of course, but when you retire awaiting pay then the calculation will include all the pay tables up until the day you reach age 60.  It'll also include your longevity as though you'd been on active duty the entire time up until age 60.  If you joined at age 29 then at age 60 you'd be assumed to have 31 years of service for pay purposes, or the >30 column of the pay tables.  (It's actually the High-Three average of one year of >28 and two years of >30, but that's the same amount of pay.)  Admittedly nobody knows what will happen to pay tables over the next 27 years. 
http://www.dfas.mil/dam/jcr:7061e0ca-a436-42f9-aa30-1a93b6454aa3/2015MilitaryPayChart.pdf

The pay tables will presumably keep up with inflation over the next 27 years, so you could keep track of your Reserve pension in today's dollars.  (But you can see how these assumptions start to pile up over nearly three decades.)  If you had four years of active duty and 16 good years at 50 points per year, then in today's dollars your low estimate of your Reserve pension (at age 60) would be:
[((365x4) + (16x50)) / 360] x 2.5% x $(High Three average)/month = $1375/month.

This is a low estimate because most Reservists accumulate 2500-4500 points.  However the pension is an inflation-adjusted annuity at age 60 with a life expectancy of another 25-30 years, so a smaller Reserve pension will still eliminate the chance of portfolio failure.  You'll also have Tricare and Medicare so your health expenses will be very low as you age.

Here's two facts (with no assumptions!) that I've heard from hundreds of veterans in their 50s or older.  Every freakin' one of them is either very glad that they kept drilling for the Reserve/Guard pension, or they're very very sorry that they didn't make the time to get the pension.

More details are at these posts:
http://the-military-guide.com/2012/06/02/calculating-a-reserve-retirement/ (the blog's #1 post for over three years)
http://the-military-guide.com/2010/12/06/retiring-from-the-reserves-and-national-guard/
http://the-military-guide.com/2014/11/01/comparing-an-e-7-active-duty-pension-to-an-e-7-reserve-pension/

Again, if you're still having fun then you should stay on active duty.  But if the fun stops (or if your priorities change) then this is how you salvage enough pension to support your financial independence.