Saturday, February 14, 2009

Advice to Junior Officers: Timing of signing a contract

My junior officers on my previous boats have heard me explain this before, but I thought I'd post it here for a broader audience.

First, a disclaimer: This is NOT an attempt to convince you to Stay Navy by dangling dollar signs in front of your face. This is also NOT directed at any particular individuals who either currently or previously worked for me.

IF you aren't sure about staying in the submarine force, then stop reading here. Make your decision about whether to continue your career as a steely-eyed killer of the deep first.

IF you are already thinking about staying in for a department head tour, then be advised: you are financially better off signing a contract for Nuclear Officer Continuation Pay ("COPAY" - remember from this post "eets naught a bohnus") BEFORE you reach the end of your Minimum Service Requirement (MSR - i.e. 5 years from your commissioning date).

Here's why:

IF you sign a contract BEFORE the end of your initial service obligation ends, then you have the option of receiving one payment more than the number of years in your contract (see Paragraph 7.c.(1)(a) on page 7 of OPNAVINST 7220.11B).

In other words, if you are signing a 5 year contract, then you can elect to receive 6 payments. You receive the first payment as soon as you sign the contract, and then you will receive each of the follow on payments on your anniversary date.

Allow me to illustrate using two examples. Let's say these two guys were both commissioned on 21 May 2004, so their initial five year obligation ends on 21 May 2009.

Example #1. LT Procrastinator waits and doesn't sign a contract until after his obligation expired on 21 May 2009. He signs a 5 year contract for $30k per year.

Example #2. LT Smartguy passed his PNEO exam, is gung-ho about the cool tactical missions we do on the pointy-end of the spear. He wants to go back for a department head tour. He signs a 5 year contract on 1 Mar 2009 and elects to receive 6 payments.

Here's how that works.

In both cases, 5 years x $30k per year = $150k total value of the contract.

In LT Smartguy's case, $150k total NOIP divided by 6 payments = $25k per payment.

LT Smartguy will get $25k (minus taxes) immediately upon signing the contract on 1 Mar 2009. Then he will get another payment for $25k on his anniversary date of 21 May 2009 and every year thereafter.

In LT Procrastinator's case, $150k total NOIP divided by 5 payments = $30k per payment.

That might seem confusing at first. You might be saying to yourself, "Self, aren't $30k payments better than $25k payments?"

Well... not exactly. TWO $25k payments in rapid succession are much better than ONE $30K payment. When LT Procrastinator received his first $30k payment on 21 May 2009, LT Smartguy received his SECOND $25k payment. So in May 2009, LT Smartguy now has $50k plus the interest he earned on the initial $25k from March through May and LT Procrastinator now has $30k.

Now, when these two lieutenants transfer to shore duty and are each looking to buy their first house, one of them has $50k and the other has $30k to use toward a downpayment (minus taxes). Even if they both made $30k downpayments on their respective houses, LT Smartguy still has enough extra money to finish the basement or remodel the kitchen.

You might say to yourself, "Self, in the long run it's the same amount of money either way, right?" The answer is no. If you invest the money, then the time value of money (compounding interest over time) is going to make a big difference. At the end of that first 5 year contract, the lieutenant who took 6 payments and invested the money could have in the ballpark of $10k more in the bank than the lieutenant who waited and only took 5 payments.

In order to illustrate this to the junior officers on my last boat, I put it all into an Excel spreadsheet to show them Option A versus Option B (and also took into account interest rates and tax rates). I don't know how to post an Excel file here in my blog, but I'm happy to send it to you via email if you'd like to see it.

So, to sum it all up, if you're going to stay in for a department head tour, then don't wait. Sign up for the bonus as soon as you finish PNEO and elect to receive the extra payment.

To see the reference documentation on Nuclear Officer Incentive Pay, please visit the PERS-42 website.

1 comment:

subtorp77 said...

Very interesting. As you pointed out here, it's not confusing at all. Unfortunately when my first EAOS came due, I couldn't advance up the ladder. All the older chiefs were holdin' out for the full 30 years, so there were no opening billets all down the line. My old man was sure I'd be an officer, someday. That never came to pass, alas.