The Military Retirement System

Military retirement payments are provided for every retired military person with a qualified 20 years of service, regardless of rank, status or salary. This makes the military retirement program one of the most stable in today's economy, but it is not always one of the most profitable. When you enter the military, you are automatically enrolled in the program, and you will receive the same benefit as others who have entered the service on the same day. Only a few unique factors will allow you to earn more or less in retirement.

Salary while in the Military

In most pension systems, an individual earning a higher salary over the length of his or her career will earn more upon retirement. This is not necessarily true in the military. While some calculators account for high salaries, the most basic calculator uses only a formula based on your retirement pay to determine your retirement benefits. This means the year of your retirement can have a big impact on how much you earn in retirement. In more recent models, this program was replaced. The remainder of this article will host an exploration of the differences. 

Date of Entry

For the most part, you will have no choice in the formula used to calculate your retirement benefits: the formula is based on your date of entry. If you entered the military prior to September of 1980, you will be forced to use the Final Pay retirement system. In this system, your benefits will be based on the pay you were receiving on the exact date of your retirement. If you entered the military after September 1980, you will be enrolled in the High-3 or High-36 plan. This plan allows you to average the salaries you received in the highest 36 months, or three years, of your service to calculate your retirement. As you can see, the smallest difference in your enrollment date can greatly impact your benefits.

REDUX Option

If you entered the service after August 1986, you will have a big decision to make in your 15th year of service. You will have to choose whether to use the High 36 option or the Career Status Bonus/REDUX option. You will receive an automatic $30,000 extra toward your retirement for choosing the REDUX option, which presents you with a 40 percent pension check. If you stick with the High 36 option, you receive a 50 percent pension check. 

Cost of Living Adjustment (COLA)

All plans offer an adjustment based on the cost of living. This helps veterans deal with rising costs in basic needs. Over your retirement, if you are paid under the final pay or high 36 plan, you will receive an adjustment each year based on the Consumer Price Index, which measures inflation. If you are paid under the REDUX plan, you will receive the same adjustment minus 1 percent, which means your COLA will be lower. However, once you reach age 62, your pay will be adjusted to match that of the high 36 plan. 

What Your Basic Pay Is Based On

When calculating your military retirement benefits, you will use the formula Multiplier times Basic Pay.

Your multiplier is based on your years of service. To determine your multiplier, simply divide your total retirement credits by 360.

Your basic pay is based on your date of entry plus some personal elections. If you entered the military prior to September 1980, your basic pay will always be the salary you earned at the date you retired. If you entered after that date, there are two options. The first is the High 3 (or high 36) option. It uses the average pay you received in your highest three years of salary. Finally, there is the REDUX option, which uses the same calculation but pays a lower percentage over time. This option comes with a $30,000 bonus. Once you have been in the service for 15 years, you will have the option of either taking the bonus and using the REDUX option or sticking with the High 3 option. The High 3 option has a higher percentage pay, 50 rather than 40, in the first year of retirement. However, the percentages even out down the line. In order to make your decision, you can ask your accountant to show you which option will likely net you more retirement income.

How does the Career Status Bonus (or CSB REDUX) work?

You may have the option of choosing the Career Status Bonus (CSB Redux) option to calculate your base pay for your military retirement benefits. With this option, your base pay is still calculated using the "High 36" formula. This formula uses the average of the highest three years of salary you received in the military to calculate your final pay. With the CSB redux bonus, this remains constant, but the percentage of the salary you receive upon retirement will be reduced from 50 to 40 percent in the first year. It will slowly climb until it is even with the basic High 36 plan, and you will receive a $30,000 bonus for choosing this option. However, you may still be better off without the bonus depending on your salary. 

How is the cost of living adjustment (COLA) applied for military retirees?

A cost of living adjustment (COLA) is applied annually to your military retirement pay. This adjustment is based on the consumer price index. Individuals on the Final Pay and High 36 plan will receive an adjustment exactly equal to the CPI increase annually. Individuals on the CSB Redux option will receive an adjustment of the CPI minus 1 percent. Once these individuals reach age 62, however, they receive the same adjustment as the other plan members. Consider these COLA differences when choosing your retirement options with the military.

Concurrent Retirement and Disability Pay (CRDP)

Prior to 2004, an individual receiving disability pay was not eligible for any CRDP (concurrent retirement and disability pay). The individual's annual retirement would be reduced by his or her annual disability pay. However, this has been reversed, and now an individual can receive both. If you have 20 or more years of military service and a VA-rated disability of 50 percent or higher, you will still be eligible for your full retirement benefit. This new system will be phased in over the 9 years after 2004, and individuals receiving pay in the interim may be subject to unique rules.

Calculating Military Retired Pay

Military retired pay is always calculated based on the formula Multiplier times Basic Pay. However, the formula for determining basic pay differs. If you are on the final pay system, meaning you entered the service prior to September 1980, the amount you were earning on the day of your retirement counts as final pay. If you entered the military after this date, you have a choice of the High 36 option or the High 36 plus CSB Redux. Both calculate your basic pay as the average of your highest 36 months of pay. With the Redux option, you also receive a $30,000 bonus if you choose to reduce the amount you receive upon retirement from 50 percent to 40 percent of this figure.

Which veterans are eligible for extra Social Security earnings?

Some veterans who served between 1940 and 2001 will be eligible for additional Social Security earnings. Depending on the length of time and frame of time of your service, you can benefit as follows:

  • If you served from 1978 to 2001, you are given a $100 credit for each $300 of active duty pay you received, up to a maximum $1,200 per year. 
  • If you served from 1957 to 1977, you are given an automatic $300 earnings credit for each quarter in which you received basic pay, regardless of how much pay you were earning at the time.
  • If you served from 1940 to 1956, you did not pay any taxes toward Social Security. However, you will still be credited $160 per month for any service between September 16, 1940, and December 31, 1956, to be paid out to you through Social Security benefits. 

How do you determine what your military pension will be?

Determine your military pension by using this formula.

First, determine your multiplier by dividing your total retirement credits by 360. Then multiply this number by 2.5 percent for every year served, up to 75 percent. 

Multiply your multiplier by your final pay. Final pay is determined by one of two systems. If you entered service before September 8, 1980, your final pay is your actual final pay on the day you retired. If you entered after this date, your final pay is the average salary of the highest 36 months of pay you received while serving.

How do you qualify for combat-related special compensation (CRSC)?

You may be eligible for additional military compensation through the Combat-Related Special Compensation (CRSC) plan if you suffered an injury while in combat. This program provides tax-free monthly payments for the length of your retirement or veteran's benefits, longer in some cases. Congress provided this additional benefit as of December 2, 2002. For you to qualify, your injury must be a direct result of combat. Even if you receive disability or retirement benefits as a result of the injury, you may still receive this additional bonus.



When and how do you choose between the High 36 and CSB/REDUX Systems?

Once you have 15 years of service in the military, you will be asked to choose between the High 36 and the CSB/REDUX program. The CSB Redux program has the newest formula used to calculate retirement benefits. Like the High 36 option, it is calculated by averaging your salaries from your three highest paid years. The main difference is that under the Redux plan, you will receive a lower percentage of this salary upon retirement. You will also have a lower cost of living adjustment until the age of 62. Why choose the Redux plan? It comes with a $30,000 bonus. When it is time to choose, determine whether the bonus will make the Redux plan more beneficial to you.

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