- Written By Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher focusing on important, complex topics surrounding finance and investments. She is a Certified Educator in Personal Finance with FinCert, a division of the Institute for Financial Literacy, and a member of the Association for Financial Counseling & Planning Education (AFCPE).Read More
- Edited ByKim Borwick
Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for Annuity.org.Read More
- Financially Reviewed ByMichael J. Boyle, M.S.
Michael J. Boyle, M.S.
Former Compliance Professional
Michael J. Boyle began his career in the securities business in 2011 as a registered financial professional. Over his tenure, he’s worked with asset classes including equities, fixed income, CDs, mutual funds, futures, options and foreign currency.Read More
- Updated: December 19, 2022
- 16 min read time
- This page features 27 Cited Research Articles
You or a loved one served your country for many years, and retirement is fast approaching. This may seem like the end of a long journey, but the work is far from over.
Military members were once eligible for retirement benefits only after completing at least 20 years of service. Those who served less than that amount of time received no money for retirement.
But in 2018, a new plan rolled out that expands at least partial military retirement benefits to more than 80 percent of service members via the military equivalent of a 401(k) plan.
Still, military retirement plans are specific to the year you joined the service, so it’s important to know which program you qualify for.
Military retirement offers a host of positive benefits and resources for veterans but navigating the process can be tricky. Here, we explain the four basic military retirement plans, transition services and other information to make the process as smooth as possible for you.
Types of Military Retirement Plans
There are four retirement plans in the military, and the one you qualify for depends on the year you joined the service.
The Department of Defense website provides a list of useful online military retirement calculators to help service members determine their plan and benefit amount.
Final Pay is for service members who joined on or before Sept. 8, 1980. This plan multiplies your final monthly base pay by 2.5 percent for each year you served in the military. So, if you serve 20 years, you receive 50 percent of your current pay in retirement income. If you served 40 years, you will continue collecting 100 percent of your current base pay in retirement.
Each military retirement plan includes a yearly cost-of-living adjustment. Final Pay uses the Consumer Price Index, or CPI, to calculate this pay increase.
Final Pay no longer applies to many service members because it is the oldest of the four plans. In 2020, you would need to have served at least 39 or 40 years to be eligible.
Service members who entered the military between Sept. 8, 1980, and July 31, 1986 are eligible for the High-36 plan.
The High-36 retirement plan calculates retirement income based on the average of your highest 36 months of base pay earnings. This retirement plan is sometimes called the “High-3” because many service members earn the most during their final three years of service. And, like the Final Pay plan, the High-36 plan adjusts the cost of living based on the CPI.
If you first enlisted between Aug. 1, 1986, and Dec. 31, 2017, you have the option of enrolling in either the CSB/REDUX retirement plan or the High-36 plan.
There are a few differences between CSB/REDUX and other military retirement plans.
The first difference is the $30,000 gross cash bonus you receive during your 15th year of active duty.
However, in exchange for that attractive one-time bonus, your retirement pension is permanently reduced. Like the High-36 retirement plan, REDUX uses the average of your highest 36 months of base pay to calculate your retirement benefits.
Because the $30,000 bonus reduces your retirement benefits, you receive only 40 percent of your base pay for serving 20 years instead of the 50 percent distributed under the High-36 plan.
That gap gradually narrows for each additional year served after 20 years, so that by 30 years of service, both REDUX and High-36 retirees draw 75 percent of their base amount. At 40 years, your pension is equal to 100 percent of your base pay.
For example, if John served 20 years in the military and earned an average of $6,000 per month during his three highest-paid years, he would receive at least $2,400 per month in retirement under CSB/REDUX. Under High-36, he would receive $3,000 a month.
Another key difference between the CSB/REDUX plan and the others is that the cost-of-living adjustments are calculated by subtracting 1 percent from the CPI.
For example, if High-36 entitles a retiree to a 1.7 percent cost-of-living increase, he or she is entitled to a 0.7 percent increase under the CSB/REDUX plan.
However, at age 62, the 1 percent reduction falls off so that cost-of-living adjustments are the same for both plans.
CSB/REDUX faced criticism by some who claimed the plan was a bad deal for service members. The American military newspaper Stars and Stripes categorized REDUX as a “rotten plan” and a scheme by Congress to keep pension costs down. The 2014 article provided data from CNA, a defense think tank under contract by the Marine Corp. The CNA report showed that service members who opted in to REDUX for the $30,000 one-time bonus eventually lost $300,000 or more over their lifetimes due to the retirement plan’s pay reduction.
CSB/REDUX became increasingly unpopular in the years prior to the Blended Retirement System rollout in 2018. The Marine Corps’s opt-in rate for CSB/REDUX fell from 56 percent in 2001 to 12 percent in 2014, according to the article.
Blended Retirement System
In 2018, the military introduced a new program known as the Blended Retirement System. It was created by the Department of Defense and approved by Congress as part of the 2016 National Defense Authorization Act. The sweeping overhaul was cited by The New York Times as the most comprehensive change to military retirement plans since World War II.
Under the Blended Retirement System, 20 years of service makes you eligible for defined benefits that are calculated by multiplying your years of service by 2 percent then multiplying that number by the average of your highest 36 months of basic pay.
Enlistees who joined the military on or after Jan. 1, 2018, are automatically enrolled in the new plan. Another 150,000 or so new service members were automatically enrolled in the year following the program’s Jan. 1, 2018, rollout.
Service members who joined before 2006 are not eligible for the program, but those who joined between 2006 and Dec. 31, 2017, have the option of staying with their current plan or opting in to the Blended Retirement System.
More than 400,000 service members reportedly chose the new plan during a one-year open enrollment period in 2018. This accounted for about 1 in 3 eligible service members.
The Blended Retirement System extends benefits to more service members than ever before. Previously, you had to serve at least 20 years to receive any type of retirement benefit. That left out roughly 80 percent of service members. Under the Blended Retirement System, an estimated 85 percent of service members will receive some type of benefit, even if they don’t qualify for full retirement.Blended Retirement has three main components:
- Lifetime monthly government contribution to a Thrift Savings Plan account after 20 years of service
- Continuation-pay bonus after 12 years of service for those who re-enlist for a minimum of three years
- Option to receive a portion of retirement pay as a lump sum up front, which will reduce monthly retirement benefits until age 67
The Thrift Savings Plan is arguably the biggest change, as it creates a retirement savings account similar to a 401(k) plan. Service members can now make automatic contributions of 1 to 5 percent of their monthly pay to a retirement savings account. The contribution is matched by the military until the service member has completed 26 years of service. After two years, the money is portable, meaning the service member can roll it into a civilian 401(k) plan.
As with funds in a 401(k), the Thrift Savings Plan money becomes available when a service member turns 59 1/2.Did You Know?Service members can apply for a Thrift Savings Plan even if they do not qualify for the Blended Retirement System.
Continuation pay is a one-time cash bonus for midcareer service members who agree to “perform additional obligated service” for a minimum of three years. The payment is two and a half months of basic pay for active duty members and half a month of basic pay for reserve members.
When you retire you can either get your full retirement or opt to get a lump-sum payment equal to 25 to 50 percent of your benefit amount. If you take the lump sum your monthly retirement check is reduced until you turn 67.
If you still have questions about the Blended Retirement System, call Military OneSource, a division of the Department of Defense, at 800-342-9647.
Service members who receive a disability rating of 30 percent to 75 percent are eligible for disability retirement.
Military disability retirement is not the same as disability granted through the Department of Veterans Affairs. The VA uses different standards — based solely on an injury or medical condition — to determine service-connected disability.
Military disability retirement is based on your ability to perform your military job.
A military medical board will determine if your disability is severe enough to qualify for medical retirement. If so, you are either placed on the Permanent Disability Retired List or the Temporary Disability Retired List. The difference depends on the stability of your medical condition. If it’s not expected to improve, you are placed on the permanent list, and if it’s unstable, you are placed on the temporary list.
People on the temporary list must undergo a medical examination every 18 months to see if their condition has improved. This process can take up to five years, but the medical board can make a decision after any 18-month exam. Anyone placed on the temporary list receives retirement benefits, including a monthly stipend and medical coverage for the individual and their dependents.One of four things can happen after the board makes a final decision about your disability.
- If your disability is 30 percent or higher but you have less than 20 years of service, you are placed on the Permanent Disability Retired List.
- If you have more than 20 years of service and any percentage of permanent disability, you are placed on the Permanent Disability Retired List.
- If your disability is less than 30 percent and you served less than 20 years, you are separated with severance pay. This is a one-time lump sum and is typically calculated as 2 times your basic pay multiplied by your years of service.
- If you are found to be physically fit, you will likely be ordered to return to active duty.
Those placed on the Permanent Disability Retired List receive all the benefits of a military retiree as well as an additional payment.The rate is figured using one of two methods:
- (Years of Service) x (2.5%) x (Retired Base Pay) = Disability Retired Pay
- (Disability Percentage: Not to exceed 75%) x (Retired Base Pay) = Disability Retired Pay
Your retirement base pay is determined by the year you enlisted.Advertisement
Retirement from the Reserves
According to the Department of Defense, members with 20 or more years of qualifying service are eligible for reserve retirement payments when they reach age 60. This applies to members who serve in the Coast Guard, National Guard and other reserve units.
The formula is essentially the same for Guard and reserve members as it is for active duty members, except a point plan is used to configure equivalent part-time and full-time service.
A reservist must accumulate at least 50 retirement points a year for it to count as a retirement qualifying year. There are various ways to earn points. For example, a reserve member receives one point for each day of active duty and 15 points for each year of reserve service.
So, if a reservist completes one weekend per month of drill and two weeks per year of active duty training without absence, he or she can earn 62 points.
Depending on when you joined the reserves, your retirement pay may be calculated using the Final Pay, High-36 or Blended Retirement System.
Reserve members with more than 4,320 retirement points will remain under their current plan, while members with less than 4,320 retirement points as of Jan. 1, 2018, could choose to either opt in to the new Blended Retirement System or remain in their current plan. Those who enrolled in the reserves after Jan. 1, 2018, are automatically enrolled in the Blended Retirement System.
Taxability of Military Retirement Pay
About 83 percent of states do not apply full state income tax on military retirement pay. As of 2019, Indiana and North Dakota were the newest states to implement at least a partial reduction in state income tax for veterans.States That Tax Military Retirement Pay
Thirteen states tax only a portion of military retirement pay. These states include:
- New Mexico
- North Dakota
- Rhode Island
- District of Columbia
- North Carolina
- South Carolina
Rules vary widely in states that tax only a portion of military retirement income. Some exempt pay up to a certain point. For example, Maryland doesn’t tax the first $5,000 of yearly retirement pay, and Arizona exempts up to $2,000.
Other states also take age into consideration, often increasing the untaxed military retirement pay limit after a veteran turns 62 or 65 years old. In Delaware, for instance, taxpayers aged 60 and younger may exclude up to $2,000 of military retirement pay, but that figure increases to $12,000 after a veteran turns 60 years old.
South Carolina may become the next state to offer total state-tax exemption for military retiree pay if current legislation passes. As of November 2019, military retirees under 65 may deduct up to $17,600 from their income taxes. Those 65 and older may deduct up to $30,000.
Tax laws differ from state to state and change frequently. Always consult a tax professional to learn about recent updates to your state’s tax code.
Survivor Benefit Plan
The Survivor Benefit Plan allows a military service member to create a continuous lifetime annuity for their dependents. The annuity is based on a percentage of your retired pay and is distributed to your beneficiaries after you die.
You begin contributing to your Survivor Benefit Plan after you retire. You pay monthly premiums similar to premiums for a life insurance policy. The amount you pay each month depends on how much coverage you want your benefactors to receive upon your death. This can be up to 55 percent of your retirement pay.
You can select current and former spouses or dependent children as benefactors. Children are eligible to receive benefits until they turn 18, or until they turn 22 if they are a full-time, unmarried student.
If you have no spouse or children, you can choose an “insurable interest,” such as a parent.
The base amount and payments to surviving benefactors will generally increase at the same time and percentage as cost-of-living adjustments.
The military also offers life insurance options for veterans and their families.
Applying for Military Retirement
Certain procedures must be followed before your military retirement is finalized. Reservists and Guard members must apply for retired pay, just like active-duty service members.Applying for Military Retirement: Basic Steps
- Choose your separation date.
- Review your pre-retirement package.
- Prepare the necessary documents.
- Fill out and submit your Form DD 2656.
- Complete the Transition Assistance Program.
Pre-Retirement Package and Documents
You will receive a pre-retirement package at least one year prior to your separation date. Review it carefully. Some decisions cannot be changed, and the choices you make will impact how much retirement money you receive, as well as your spouse’s benefit amount.
You also need to consider what to do with unused leave. You can use it or sell it back to the military. You may sell back up to 60 days of unused leave at 3.3 percent of your basic pay per day. Your third option is taking what’s known as terminal leave, which allows you to move back home and not report back to your duty station.
Next, you need to gather key documents no less than six months before your target separation date. Carefully review them. Briefings from your commander will also guide you through the pre-retirement process.Important Military Retirement Documents
- Retirement orders
- Separation data
- Statement of service
- High average base amount
Your Data for Payment of Retired Personnel Form (DD 2656) is the most important document in the pre-retirement process. You will receive your DD 2656 form during a meeting with your branch’s personnel office. Once again, review and complete it carefully as it is difficult to change these decisions. This form determines how you want to receive your pay, as well as federal and state tax withholding information. You also use DD 2656 to enroll in the Survivor Benefit Plan.
This form, along with all other supporting documentation, is submitted to the Defense Finance and Accounting Service. It takes about 30 days to process your documentation. If all paperwork is received on time, you can expect your first payment 30 days after you retire.
Preparing for Life After the Military
Leaving military life can be a major adjustment. Thankfully, numerous resources exist to help make the transition easier. First though, you need to complete a few more tasks before exiting active duty.
Transition Assistance Program
Contact your branch’s Transition Assistance Program. This program underwent major changes on Oct. 1, 2019, but statements from the military assure that its purpose remains the same — to bolster opportunities, programs and training for transitioning service members.
The military advises retirees to begin the Transition Assistance Program at least two years prior to retirement.
The process starts with an initial counseling session between the service member and a program counselor to identify post-military goals.
Next, pre-separation counseling takes place and should occur no less than a year before retirement. The counseling process teaches service members about benefits, entitlements and resources. Spouses and loved ones are encouraged to attend counseling with their service member.
You will also participate in Transition Day, which includes multiple courses on post-retirement issues, such as financial planning and translating your military skills to the civilian workforce. The VA will educate you on the services and benefits they can offer you and your family.
As retirement nears, the Department of Labor provides a briefing on employment preparation. You must select at least one readiness track and undergo two days of instruction per track. Tracks include employment, vocational, education and small business administration entrepreneurship.
Finally, the Transition Assistance Program culminates with a capstone event.Looking for guaranteed income in retirement?Annuities can provide you with income for life, ensuring you won't run out of money in retirement. Find out if an annuity is right for you.
Creating a Stable Financial Future
You served your country honorably for years, maybe even decades. Many service members can begin collecting a military pension in their late 30s or early 40s and still devote 20 years or more to a post-military career. As you approach full retirement age in your 60s, it’s important to plan for a stable financial future.
Members of the military earn numerous benefits during their career. By combining these with Social Security income, savings plans and annuities, you will be one step closer to ensuring stability for yourself and your family during retirement.
Veterans preparing for retirement may choose to purchase annuities with their bonuses or extra pension funds to supplement their military retirement pay and Social Security benefits.
Annuities are insurance products designed to provide guaranteed income in retirement. You can pick between immediate annuities (payments start within 10 months) and deferred annuities (payments start years after they are purchased). You can also pick how your annuity accumulates interest.
In addition to the tax deferral and income guarantee, annuities allow retirees to delay Social Security claims until you are older, thereby maximizing your monthly benefits.Advertisement
Connect With a Financial Advisor InstantlyPlease seek the advice of a qualified professional before making financial decisions.Last Modified: December 19, 2022Advertisement
27 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
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