The military retirement system is complicated. With multiple pay systems and complex calculations used within each one of them, figuring out where you stand in terms of retirement can be challenging. Today we’ll break down how pensions are set in simple terms.
First, look at your Join Date. That largely controls which system you will use for retirement.
MILITARY JOIN DATES AND MATCHING RETIREMENT SYSTEMS
Before Sep. 8, 1980
Final Pay System
Sep. 9, 1980 – Jul. 31, 1986
High 36 Retirement System
Aug. 1, 1986 – Dec. 31, 2017
High 36 System or REDUX System
After Jan. 1, 2018
Blended Retirement System (BRS)
When the Blended Retirement System (BRS) went into effect in 2018, active service members with twelve or fewer years of service on December 31, 2017 were given the option to stay in their legacy retirement system or migrate to BRS. These decisions were generally required to be made by military members between 2017-2018.
FINAL PAY SYSTEM
This is the oldest, least flexible retirement system for service members. The breakdown for pensions is based upon two figures:
- Monthly base pay at the time of retirement
- Number of years in service
These figures are then multiplied by 2.5% to determine a Veteran’s pension.
As with other retirement systems, the longer you stay in service, the greater your pension.
- If a Veteran retired with 20 years of service, then they are eligible for 50% of their base pay at the time of retirement.
- If a Veteran retired with 40 plus years of service, then they are eligible for 100% of their base pay at the time of retirement.
The military provides a free calculator for the Final Pay System.
HIGH 36 RETIREMENT SYSTEM
This system is very similar to the Final Pay System. They differ in how the base monthly pay is set. Instead of using the base pay at the end of your service, calculations are based upon the average of the highest 36 months of pay during your YOS. Pension is then determined multiplying 2.5% by base pay and YOS.
The military provides an online calculator for this system.
Slightly more complicated than Final Pay and High 36, REDUX created clear incentives for lengthier military careers. Payments also differ based upon the age of the recipient.
Prior to age 62:
- Base % is 2.5% times the number of your years of service minus 1.0% for each year of service less than that of 30 years.
- Base pay is average of your highest 36 months of basic pay.
At age 62 and after:
- Same as the High 36 System.
- 2.5% times the number of your years of service times the average of your highest 36 months of your basic pay.
The military provides an online calculator for the REDUX system.
Prior to December 31, 2017, members with 15+ YOS were eligible to choose a one time, Career Status Bonus (CSB) of $30,000. This is no longer an option.
BLENDED RETIREMENT SYSTEM (BRS)
The Blended Retirement System provides several alternatives for payments, taking into account the duration of service and potential financial needs for Veterans. It provides traditional military benefits, but also ones similar to that of a 401k. Understanding the different forms of payment is key to planning a career in the military and eventual retirement.
The BRS can be broken down into:
- Defined Benefit
- Defined Contribution
- Continuation Pay
- Lump Sum
This is the simplest of options within the BRS:
- Applies to individuals with 20+ years of service (YOS)
- Benefit multiplier of 2%
- The longer you serve, the higher your benefit
- Provides full cost of living adjustment (COLA)
- You may choose traditional monthly payments or a LUMP SUM
This is the most complex of all the categories with the BRS. It involves contributions to the federal Thrift Savings Plan (TSP), an investment plan similar to a 401k. Here are the basics:
- A TSP account will be set up for you generally within 60 days of starting service.
- The military automatically contributes a matching 1% contribution to your TSP account.
- If you choose to increase your contributions to your TSP account, the military will match up to 4% on those you make.
- Contributions can be made via your service’s online pay portal.
- The TSP is a portable retirement account, meaning that upon ending service, it can be transferred to an IRA or a 401k account from a civilian employer.
For more information about the TSP, visit its website.
Active service members may select to receive a one-time, mid career bonus payment called Continuation Pay.
- You are eligible for it when you complete between eight, but no greater than twelve years of service (YOS).
- Continuation Pay is 2.5 to 13 times your regular pay.
- How the rate of pay is set is service specific.
Also, note that:
- Opting for Continuation Pay incurs an additional service obligation of three years or greater, depending on your Service.
- Continuation Pay is taxable income. It may change your tax bracket.
You may opt to receive 25-50% of your total retired pay up front.
There are currently two options:
- One lump sum
- Four equal payments distributed over four years
If you choose either of the lump sum payments, your monthly retirement pay will then be reduced by either 75-50% until you reach full Social Security age.
If you choose to receive any of the lump sum options, you must officially file for it at least 90 days prior to the end of your service.
For Veterans in need of a larger amount of cash, this may be a good option. However, it may also raise your tax bracket, as it is taxable income.
The military provides an online calculator to help determine possible payments under the BRS.
For more information, visit: https://militarypay.defense.gov/BlendedRetirement/
Pension payments are only one component to post-service life.
SAVI is here every step of the way to help you transition from service-member to thriving Veteran retiree. Our retirement track can provide additional resources and coaching for that purpose.