08 Sep Estimating Retirement Pay
Military Retirement Pay
Retirees can qualify for different kinds of pay in relation to their position during service. Estimating retirement pay can be a hassle without all of the proper information handy. Different kinds of military pay include:
- Combat pay
- Subsistence allowance
- Housing allowance
- Hazardous duty pay
- Flight pay
- Jump pay
- Sea pay
- Submarine duty pay
When measuring retirement pay, only basic pay militates, which is received by all members of the military. Monthly basic pay is calculated by an individual’s rank and years served.
Though in most cases retirement rank is the same as active-duty rank, there are exceptions. If increments of a military career were spent as a commissioned officer, the law demands the member have at least 10 years of service as a commissioned officer.
If a member is registered with the High 36 Program, this will not affect commissioned officers. The High 36 Program determines retirement pay by using a member’s highest 36 months of basic pay. If an individual entered the military before September 8, 1980, the amount of time spent as a commissioned officer could affect retirement pay considerably.
Those who have entered before September 8, 1980, who enlisted first and subsequently became commissioned with less than 10 years of commissioned service, retire using basic pay of the highest enlisted rank held. This rule could have a significant effect on retirement pay as enlisted members generally procure less in basic pay than those considered commissioned officers.
Because members retiring from active duty serve full-time, and those retiring from the National Guard or Reserves serve a combination of full and part-time, retirement pay is measured differently.
Measuring Active-Duty Retirement
Twenty years of active-duty military service is required to qualify for retirement from active duty. To calculate estimating retirement pay:
Basic Pay × Number of Years Active-Duty × 2.5%
For example, if an individual is an E-6 with 20 years of military service and a basic pay of $3,243.30 per month, the equation would run:
$3,243.30 × 20 Years = $64,866
$64,866 × 2.5% = $1,621.65
Members may be eligible for these retirement payments or a smaller, averaged amount categorized as “High 3”, contingent on when they joined the military.
Active-duty members receive retirement pay on the first day of the month after their official date of retirement. Active-duty monthly pay is equally divided between two paydays (the 1st and 15th of each month) whereas those in the High 36 receive retirement pay only on the 1st of each month. Members get their retirement pay on the first business day after the 1st if the 1st falls on a weekend or holiday.
Computing Reserve Retirement Points and Pay
To measure retirement pay for National Guard and Reserves, the formula is essentially the same as for active duty except for the difference in full-time and part-time service. Members must configure equivalent active-duty time.
Retirement points are accrued by members of the National Guard and Reserves. Members are required to perform one weekend of drill per month and two weeks of active-duty training per year, occasionally garnering more time on active duty if attending military training school or if they’re called for deployment.
Guard/Reserve members are eligible for four points for each weekend drill and one point for each day spent on active duty. Deployments, active duty for training (ADT) (including two weeks of training per year), and attending military school are considered active duty for Guard/Reserve members.
Guard/Reserve members are required to have 20 years of military service to be eligible for retirement and those years must be qualifying years. A qualifying year requires a minimum of 50 retirement points.
If a member completes one weekend per month of drill and two weeks per year of active-duty training a year without absence, they accrue 62 points. This margin is advantageous, anticipating incapacitating sickness or emergencies that might warrant an absence.
60/75 Point Rule
By law, members can accumulate a total of 60 points per year of inactive-duty time for service before 1996 and 75 points per year for duty performed after 1996.
Deployed military personnel are considered active-duty while full-time duty is spent in military schools and is not eligible for the 60/75 point rule because they are not inactive-duty time.
An enlisted member deployed to Iraq for the length of one year would earn 365 retirement points.
Converting Points to Year
To determine how much retired pay a member is eligible to get, calculate the number of equivalent years of service:
Total Number of Retirement Points ÷ 360
This formula determines the number of comparable years of service the member completed (comparable to full-time active-duty service). Ten years of equivalent active-duty service amounts to 3,600 points.
Figuring payment is the same as for active-duty retirement pay:
Basic Pay × Number of Years Equivalent Active-Duty Service × 2.5%
Contingent on when a member joined the military determines whether a member is eligible for this amount or the smaller, averaged amount.
When to Expect the First Check (Military Retirement Pay)
Members retiring from the National Guard and Reserves don’t get their retirement pay instantaneously after retirement; they get their first pay at the age of 60.
Under the 2008 National Defense Authorization Act, Congress scaled down the age for receipt of Guard/Reserve retired pay by three months for every 90 days of specified duty performed during any fiscal year after January 28, 2008. Retired pay eligibility age can’t be shortened below the age of 50.
Specified duty includes active duty for deployment to a combat zone and recall to active duty in reply to a national emergency declared by the president or supported by federal funds.
The High 36 Retirement Program
Congress initiated the High 36 Retirement Program (otherwise known as the High 3 Program) in the 1980’s that effectively altered provisions of the final retirement pay for which a member was eligible.
Those having joined the military before September 8, 1980, are not affected by the High 36 program. These individuals receive a retirement pay that is their final base pay multiplied by the number of years of active-duty service multiplied by 2.5 percent:
Final Base Pay × Number of Years of Active-Duty Service × 2.5
Those having joined the military after September 8, 1980, have a retirement pay that is reduced under High 36. The formula for finding retirement pay is:
Average of highest 36 Months of Basic Pay × Number of Years of Active-Duty Service × 2.5
The amount of retired pay differs with each individual because of pay increase factors during the member’s final 36 months of service such as:
- A cost of living allowance (COLA) is made available for military members every January, increasing the basic pay afforded to them.
- If they have more time-in-service.
- If they are promoted during the final 36 months of service.
Generally, High 36 retirement pay is approximately 10 percent less than retirement pay for those who aren’t affected by High 36.
Determining What is Taxable – Military Retirement Pay
Military retirement pay is accountable to federal income tax. After retirement, veterans specify the number of exemptions they’re eligible for on their W-4. The amount deducted from their pay for federal withholding tax each month is based on this exceptions number. The state in which the retiree lives in determines whether or not their retirement pay is subject to state income tax.
Some states exclude military retired pay from state income taxes. Veterans can contact their state’s veterans’ office for additional information about state taxes and military retirement pay.
At any time, retired military personnel can alter the amount of tax excluded from their retirement pay by completing a new W-4. Visit “Keeping DFAS Up-to-Date” for more details.
Military retirement pay is subject to federal income tax but no FICA (Social Security) deductions.
Medical retirement pay is tax-free under the condition a member joined before September 24, 1975, and if the military determines that a member’s medical condition is combat related.
How Retired Pay Relates to Social Security
Military pay does not affect Social Security benefits because retirement pay is not reduced when a member receives Social Security and vice versa.
A veteran receiving disability compensation from the Department of Veterans Affairs (VA) has their military retirement pay reduced by the amount of VA disability compensation they receive. The exception for this is if the member is eligible for an offset due to a disability rating of 50 percent or higher, or they’re eligible for Combat-Related Special Compensation.
Unless for alimony, child support, IRS tax levies, and debts owed by the government, military retirement pay is not improved for commercial debts, contrary to active-duty and National Guard/Reserve pay.
If retired a military personnel accepts a federal government job they can carry on receiving their military retirement pay during their federal employment. If or when the member subsequently retires from the federal civil service, they are elected the option to waive their future military retired pay to include their military service in the estimation of their civil service annuity.
If a military retiree combines their military retirement with their civil service retirement, they forgo qualification for the disability compensation offset or the Combat-Related Special Compensation programs.
Taking the Bonus
Congress passed the Career Status Bonus (also known as Redux), under which active-duty military members can opt for a lump-sum bonus of $30,000 when they have accumulated 15 years of military service after exchanging acceptance of a decreased military retirement pay amount.
High 3 allocates retirement pay equal to 50 percent of average basic pay over the three highest income years for those having served 20 years of military service (“The High 36 Retirement Program”). Redux pays 40 percent for a member with 20 years of military service. Each year of military service performed past 20 years results in a reduced percentage gap. That is, for 30 years of service, both plans pay 75 percent of the average of 36 months of basic pay, though many members do not serve 20 years. Redux additionally provides a cap on annual retirement pay and cost of living allowances (COLA). Visit “Getting a yearly pay raise” for more information.
Redux retirees have their COLA capped by a full percentage point underneath inflation rate while other military retirees get an annual COLA equal to the cost of inflation. For those 62 years of age, Redux can provide a unique offer of catch-up in purchasing power. However, the capped COLA’s continue until death.
Leading authorities suggest the Redux deal is disadvantageous considering the average loss in retirement pay over a normal lifespan is approximately $300,000. The average enlisted member takes a $30,000 bonus at 15 years (the final amount is reduced after taxes) whereas a retired member of 20 years in the pay grade of E-7 would have a lifetime retirement loss of around $344,400 (13 times the amount of the bonus).
Getting a Yearly Pay Raise
Military retirees get an annual cost of living adjustment (COLA) on the first December of each year equivalent to the inflation rate of the respective year. Inflation is based on the consumer price index (CPI). COLA helps military retirees sustain their purchasing abilities each year.
If a member accepts the Career Status Bonus (Redux), their COLA is capped at one full percentage point beneath the rate of inflation.