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Retired Pay and Other Money Matters

A common question from military retirees who have not yet reached the age of 65 is, “Will military retired pay affect my Social Security benefits?” The answer is no. Your military retirement pay is not reduced when you receive Social Security, nor are your Social Security benefits reduced because you receive military retirement pay.

If you are receiving disability compensation from the Department of Veterans Affairs (VA), your military retirement pay is reduced by the amount of VA disability compensation you receive, unless you qualify for an offset because your disability rating is 50 percent or more, or you’re eligible for Combat-Related Special Compensation.

Unlike active-duty and National Guard/Reserve pay, military retired pay can’t be garnished for commercial debts (credit cards, automobile loans, and the like). Military retirement pay can, however, be garnished for alimony, child support, IRS tax levies, and debts owed to the government.

Also, if you retire from the military and elect to get a federal government job, you may continue to receive your military retirement pay during your federal employment. However, if or when you retire from federal civil service, you can waive your future military retired pay to include your military service in the computation of your civil service annuity. Depending on which of the dozens of civil service retirement programs you fall under, this could be a good deal.

Taking the Bonus

In 2001, Congress made another significant change to the military retirement system. The program is called Career Status Bonus (and is commonly referred to as Redux). Under Redux, active-duty military members can elect to take a lump-sum bonus of $30,000 when they have 15 years of military service, in exchange for an agreement to accept a decreased retirement pay amount.

This is a good deal for the government, but not for the veteran. Congress’s goal in establishing this program was to save hundreds of millions of dollars in future retirement obligations. It works well, but at the veteran’s expense. In fact, it could be argued that no payday lender has ever ripped off a military member as the government has done with this program.

For a 20-year military career, High 3 provides retirement pay equal to 50 percent of your average basic pay over your three highest income years. Redux pays only 40 percent for a 20-year retiree. The percentage gap narrows for each year of military service performed past 20 years, so that for 30 years of service, both plans pay 75 percent of the average of 36 months of basic pay. But most members don’t serve 30-year careers. Redux also includes a cap on annual retirement pay cost of living allowances (COLA).

While other military retirees receive an annual COLA equal to the cost of inflation, Redux retirees have their COLA capped by a full percentage point below the inflation rate. Redux does provide a one-time catch-up in purchasing power at age 62, but then the capped COLAs continue until death.

Several military and government think tanks have dissected this program concluding it is a bad deal. The average loss in retirement pay over a normal life span is about $300,000.

Consider a typical enlisted member who takes the $30,000 bonus at 15 years of service. The amount received, after taxes, is actually about $25,500. If you retired at 20 years in the pay grade of E-7 at age 38, the lifetime retirement loss would be $344,400, or 13 times the value of the bonus.

Getting a Yearly Pay Raise

Military retirees receive an annual cost of living adjustment, or COLA, on December 1 of each year.

The amount of the COLA is equal to the inflation rate for that year, based on the consumer price index (CPI). The purpose of the annual COLA is to help retirees maintain the same purchasing power from year to year.

you accepted the Career Status Bonus (also known as Redux), your COLA will be capped at one full percentage point below the rate of inflation.

Is it Taxable?

Civilians often assume that military retirement pay is tax free.  However, military retirement pay is subject to federal income tax. The amount deducted from your pay for federal withholding tax each month is based on the number of exemptions you indicate on your W-4 after retirement. Whether your retirement pay is subject to state income tax depends on your state’s laws. Some states exempt military retired pay from state income taxes. Contact your state’s veterans office for more information about state taxes and military retirement pay.

You can change the amount of tax withheld from your retirement pay each month by completing a new W-4 at any time.

Although military retirement pay is subject to federal income tax, it’s not subject to FICA (Social Security) deductions.

Medical retirement pay is tax free if you joined the military before September 24, 1975. It is also tax free if the military makes a determination that your medical condition is combat related.

Divorce and Military Retirement Pay

In most cases military divorce rate equate to U.S. civilian divorce rate of approximately 50 percent.

The U.S. Supreme Court deemed military retirement pay couldn’t be divided as community property by state divorce courts in 1981 because current federal laws at that time constrained the handling of military retired pay as joint property. In 1982 Congress passed the Uniformed Services Former Spouse Protection Act (USFSPA) that entitled state courts to value disposable retired pay either as property only of the member or as property of the member and their spouse in congruity with the laws of the state court.

Depending on the reservations of the state law, the state could effectively divide military retired pay fifty-fifty, decide to award a majority of the retired pay to a former spouse, or treat the retired pay as the exclusive property of the military member.

The DOD, however, is capable of paying an ex-spouse directly if:

  • The ex-spouse has been married to the service member for a period of at least 10 years, with at least 10 of the marriage years taking place during a period of military service applicable to retired pay.
  • Direct payments won’t be made for division of retired pay for more than 50 percent. (If the service member has more than one divorce no more than 50 percent is paid as division of retired pay. A service member with two ex-spouses, then, could result in the court awarding the first ex-spouse 40 percent and the second ex-spouse 40 percent. The DOD directly pays the first ex-spouse 40 percent and the second ex-spouse 10 percent.)

These provisions constrain only when the DOD can pay the ex-spouse directly, whereas in alternative circumstances, the service member obtains the retirement pay and must subsequently pay the ex-spouse their share or be subject to contempt of court.

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