Objective: This study investigated the association between the onset of psychiatric morbidity and separation from military service over a 10-year period (1991–2001). Method: The prevalence of affective, anxiety, somatic, and substance use disorders was assessed in 2,215 male Australian Navy personnel with the Composite International Diagnostic Interview. Results: The onset of a psychiatric disorder during military service was related to a 19% greater risk of separation overall. The majority of those leaving military service did so in the first year after symptom onset. Personnel who remained in service past this period had no significantly elevated risk of separation in subsequent years. Conclusions: Psychiatric morbidity represents a significant potential cost to defense forces. Improved recognition and early management of mental health problems among military personnel may improve retention rates.