The Opportunity Cost of Leaving the Military
When I enlisted, I had a plan to finish my two years in the Army then leave to get my bachelor’s degree. I ultimately followed through on my plan but I’m not so sure whether I would have if I had not been so steadfast in my resolve. Senior leaders in my unit such as my first sergeant were eager to point out all the benefits of staying in the military, and why not? It had worked out well for them and they were well on their way to earning a healthy pension by 40 with a college degree paid for by Uncle Sam. If you’re eyeing your ETS date and only talking to your senior leaders, then you are only hearing the story from someone who reenlisted and who may have an incentive to convince you to reenlist. Instead of presenting another biased viewpoint, I’d like to present a financial analysis that shows the opportunity cost of leaving the military.
What is opportunity cost?
When evaluating a decision, it’s good practice to consider what would happen under the status quo. In this case the status quo when considering whether to leave the military (and use the GI Bill) is to remain enlisted in the military. We can make reasonable assumptions about promotion schedules and use military pay tables to figure out what staying enlisted would mean financially. A second, and perhaps better, scenario to consider is remaining in the military to take advantage of programs that help enlisted soldiers earn a college degree and commission. I learned about such a program in the Army from my first sergeant as soon as I began talking about using the GI Bill. He was eager to share details and I suspect there are similar programs in other branches of the military.
Whether you remain enlisted or take advantage of a program to remain in the military and commission, each of these scenarios represent your next best alternative to using the GI Bill to go back to school. In other words, they are your opportunity cost. They are important to understand because they allow us to evaluate a decision relative to our best alternative rather than trying to evaluate a decision in a vacuum.
Scenario A: NCO Route
Let’s first consider the scenario where you don’t go back to school and instead follow the path of least resistance and continue your day-to-day work. In this scenario, a soldier continues to receive their housing benefits and salary over the next four years when they would have otherwise been going to school full time. In addition to retaining their salary, the soldier also gets raises for time in service (TIS) and maybe even a promotion or two. An E4 with three years of experience can expect to earn more than $150,000 in salary alone over the next four years.
| Year | 1 | 2 | 3 | 4 | Total |
| Salary | 36,700 | 36,700 | 39,300 | 39,300 | 152,000 |
Surprisingly Predictable over 9 years
Understanding what you’ll give up over four years in school is useful, but we can make an even better prediction by looking at the five years after graduation as well. It’s true that not every soldier will get promoted on the same schedule but given the nature of the military bureaucracy I suspect my predictions would be fairly typical for most soldiers.
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Event | Promoted to E5 | Promoted to E6 | Promoted to E7 | ||||||
| Salary | 36,700 | 36,700 | 39,300 | 39,300 | 46,400 | 46,400 | 47,900 | 47,900 | 52,200 |
| Food Allowance | – | – | – | – | 4,500 | 4,500 | 4,500 | 4,500 | 4,500 |
| Housing Allowance | – | – | – | – | 17,800 | 17,800 | 17,800 | 17,800 | 18,600 |
| Healthcare | – | – | – | – | – | – | – | – | – |
| Tax Savings | – | – | – | – | 6,700 | 6,700 | 6,700 | 6,700 | 6,900 |
| Annual Total | 36,700 | 36,700 | 39,300 | 39,300 | 75,300 | 75,300 | 76,800 | 76,800 | 86,300 |
For our hypothetical soldier who re-enlists after their first three-year contract, they manage to make it to E6 in the year that they would have graduated from college had they gone to school instead. With eight years of time in service and a rank of E6, they’ll make a modest base salary of $46,400. However, they’ll receive over $22,000 in additional food and housing allowances (untaxed) which gives them a compensation package of just over $75,000. While this value exceeds the average college grad, there isn’t much upside as we might expect their compensation to increase only another $11,000 over the following four years.
Scenario B: Butter Bar (O1) in Training
The starting salary for a freshly minted second lieutenant (O1) in the Army is only ~$42,000 which wouldn’t match our predictions for an enlisted soldier that makes E6 in eight years. However, an enlisted soldier that commissions will be on a different pay scale than other freshly minted lieutenants. The Army offers a financial incentive for enlisted soldiers to become officers by paying them more than officers in the same pay grade that don’t have prior time in service (TIS). The increased base pay and housing allowance boosts compensation by $20,000 or more annually over peers who commission without TIS.
One program that I was offered in the Army would have kept me on active duty as a cadet. The program provides a couple financial benefits. Firstly, I would receive cadet pay which amounts to $14,600 a year. Secondly, as an active-duty military member I would continue to accrue credit towards my TIS which would be applied to my future income as a commissioned officer. I didn’t get an answer as to whether the time would count towards the twenty years required for a military pension, but that would be a pretty sweet deal if it did!
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Event | Go to College | Start as O1 | Promoted to O2 | Promoted to O3 | |||||
| Salary | 14,600 | 14,600 | 14,600 | 14,600 | 58,100 | 58,100 | 72,200 | 72,200 | 88,400 |
| Food Allowance | – | – | – | – | 3,000 | 3,000 | 3,000 | 3,000 | 3,000 |
| Housing Allowance | – | – | – | – | 19,500 | 19,500 | 19,700 | 19,700 | 19,900 |
| Healthcare | – | – | – | – | – | – | – | – | – |
| Tax Savings | – | – | – | – | 6,800 | 6,800 | 6,800 | 6,800 | 6,900 |
| Annual Total | 14,600 | 14,600 | 14,600 | 14,600 | 87,600 | 87,600 | 101,900 | 101,900 | 118,200 |
With eight years of time in service by commissioning, the soldier who stays in the military to earn their degree can graduate earning a base salary of $58,100. Similar to the previous scenario, the base salary appears lackluster. However, a second lieutenant receives similarly generous allowances for food and housing as an E6 which boosts total compensation to an impressive $87,600 for the first year out of college. Career progression for an officer also looks more promising, especially if you can make captain (O3) within five years of commissioning. In total, a soldier that opts for scenario B will out earn a soldier that stays enlisted like in scenario A over the predicted 9 years and will have a significantly higher earning potential for their career. Regardless of your choice to stay in or leave the military, it’s worth it to get an education. Don’t be a dummy.
The case for staying in the military
While I personally chose to leave the military after my first contract, I can’t overlook the financial case for staying in the military. Staying in provides a clear path to an income that exceeds the US median income. Even though you should definitely get an education, the compensation exceeds the US median income in both of the scenarios I analyzed. While the salaries themselves appear underwhelming the benefits provide a surprisingly competitive compensation package. Benefits such as government provided healthcare at zero out of pocket cost, a housing allowance that adjusts to your household size and to wherever you are stationed, and a food allowance that can cover your groceries aren’t found in the private sector and come with significant tax advantages.
Choosing to go back to school to become an officer requires trading a full-time income for a cadet’s pay, but it pays off in a big way at graduation. The combination of rank and a longer time in service means that a soldier will graduate just a few short years of what amounts to a six-figure income. Historically the path from an Army second lieutenant (O1) to a first lieutenant (O2) is almost as sure a bet as you can find in life and achieving this rank will propel a former enlisted soldier to a six-figure compensation within about two short years of getting a college degree. Not bad.
The case for leaving
The case for staying considers the average graduate and the average outcome of those graduates, but you needn’t be average. The average graduate might make closer to $60,000 but even an average engineering graduate can expect to make $75,000. However, even $75,000 underestimates how much a new college graduate can make by pursuing an in-demand field in an area with high incomes. Starting compensation packages at Google, for example, can approach $190,000. Working in big expensive cities like New York or San Francisco can provide plenty of opportunities to out earn the wages of average graduates.
Leaving the military also means that you gain much more control over your life and career. You can choose:
- Where you live
- What type of work you do
- Who you work for
Bottom Line
The average US soldier leaving the military has a significant opportunity cost to pursue a career outside the armed forces. Regardless of whether you leave the military to go to college or remain connected with the military as a cadet, getting a college education can improve your career progression and income. Just looking at the pay tables I grabbed from the US Army, a commissioned officer can easily out earn what they would have received on the enlisted side and that earnings gap will only expand over the course of a career.
The average college graduate will not make a salary of $87,000 or more to match what a freshly commissioned officer with enlisted experience could make, but why settle for being average? The GI Bill allows you to write your ticket with a full ride to the best school you can get into and even pays more for you to attend cities with high rents and even higher incomes. The math is clear that leaving the military to be an average graduate is a sub-optimal decision. Therefore, if you’re going to get out, then do it right. Work with your commanding officers to get recommendations, study for the SATs, and make your application as competitive as possible.
Not sure where to look for the cities with the most opportunities? Look no further than Financial Samurai’s Best City in the World to Make Money, San Francisco. While rents are high, salaries more than compensate especially if you can snag a job in the tech sector. With a four-year runway to find a high paying job you’ll have ample opportunity to get your foot in the door.
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