The Economic Pros and Cons of Staying in for "Just One More Month"

We've all heard it: every month you stay in after 20, you're "working for half pay." But it's not nearly that simple.

Here are the different costs and benefits I looked at when considering whether I should stay in for a few more months or punch out now:

ECONOMIC BENEFITS OF STAYING IN. These benefits are easy to quantify:

• You get BAH and BAQ. And tax-free, at that. That's $1000-3000 a month, depending.
  
• You don't pay state income taxes (which can be 0-10% of your paycheck, depending on the state)
• Your retirement paycheck gets bigger every month you stay on active duty. In my case, I crunched the numbers and found that for every month I stayed in, my monthly retirement paycheck would increase by $25 (i.e., for each month that I gutted it out, I'd get an extra $25 a month for life, or $300 a year for life; assuming an average lifespan, that increase has a present value of $3000 or more). About half of the increase was due to my "top 36 month" average pay getting bigger, and the other half of the increase was due to the 2.5% per year retirement pay multiplier.
  
• And of course, as long as you're still on active duty, you get paid that other "half" of your base pay.
  

ECONOMIC COSTS OF STAYING IN. These costs are a lot harder to quantify, and vary a lot according to your personal circumstances and values:

• Second career opportunity cost: every day you're still on active duty, you're not building seniority/experience in your second career.
  
• Actuarial cost: your retirement is worth less because you'll receive it for fewer years. Assuming a constant lifespan, each month you stay in is one less month you'll receive your retirement pay. In my case, I found that although my potential retirement paycheck went up $25 every month, the total future value of my retirement package really only went up roughly half that much, given that the Air Force would have to pay me one less month. This is something to keep in mind if you hate active duty and you're only staying in "for a bigger retirement check."
• Life experience opportunity cost: can't even begin to put a pricetag on this one. What are you missing out on every month you're on active duty? If your dreams and your family are on-hold while you're on active duty, and job stress is chipping away at your health, this may be the biggest factor of all.
  

BOTTOM LINE:

Unless you're retiring at 30 years, your take-home pay is going down a lot. Don't expect "half pay." It will probably be a lot more like "one-third pay." Crunch the numbers yourself so you can make an informed decision.

But remember that it's still a guaranteed steady income stream equivalent to winning a several-hundred-thousand-dollar lotto prize. Figuring out when/how to use that money should be one of your life's most pleasant challenges.

RESOURCES:

The DoD has very rudimentary on-line calculators to compute your approximate retirement check.