The Military Retirement System
If you are considering making the military a career — or you have already made that decision, and just want to know more about your benefits — then this will be of special interest to you.
This article looks at the current Military Retirement Systems and the choices facing most today's active duty members. The following is a summary of what you need to know regarding Military Retirement Systems:
- Military Retirement Overview
- Factors That Determine Your Pension
- The Similarities and Differences of Retirement Systems
- The Basis for Calculating Your Basic Pay
- Calculating Retired Pay
- The Multiplier
- The Cost of Living Adjustment (COLA)
- The Bonus and the BIG Decision
The military retirement system is arguably the best retirement deal around. Unlike most retirement plans, the Armed Forces offer a pension, with benefits, that starts the day you retire, no matter how old you are. That means you could start collecting a regular retirement pension as early as 37 years old. What's more, that pension check will grow with a cost of living adjustment each year.
However there are many factors that determine exactly how much your pension (technically a reduced payment for reduced service) will be. Over the past twenty five years, the government has made some significant changes to the military retirement system.
If you entered the service:
- Prior to September 1980 you are eligible for the Final Pay retirement system.
- Between September 8th, 1980 and August 1986 you are eligible for the High 36 system.
- After August 1986 you are under the REDUX system, which means you have the option to choose either the High 36 retirement system, or the Career Status Bonus/REDUX (CSB) retirement system. If you decline to make a choice you will automatically receive the High 36 retirement plan.
- After December 31, 2017 you will be enrolled in the Blended Retirement System. If you enter service between December 31, 2005 and January 1, 2018 you'll have the choice to enroll in the Blended Retirement System or remain in today's current retirement system
All of these retirement systems have a common thread: if you stay in the armed forces for 20 or more years, you are eligible to receive a pension based on a percentage of your basic pay. But that's where the similarities end and the confusion really begins, because each of these systems determines your amount of pension differently.
There are four major differences between the retirement systems. If you joined the military after August of 1986 you especially need to thoroughly understand these differences, because when you reach the 15 year mark in your military career you will have to make a choice of a lifetime about which plan you want for yourself.
The major differences are the basis for determining your highest earnings, the multiplier, the Cost of Living Adjustment, and the Career Status Bonus.
Although you have no choice in the basis for calculating your retirement pay, it is a very important detail. For instance the Final Pay retirement system bases the amount of pension on a member's last month of pay.
For Example: if you retired at twenty years of service on the final Pay retirement system, you received 50% of your final months pay as your pension, and that percentage increases by 2.5% for each additional year of service.
Under the High 36 system a member's pension is based on the average of the highest 36 month's base pay. So if you retire under the High 36 system you would get 50% of your highest 3 years (36 months) average base pay plus 2.5% added on for every year of service over 20 years.
Under the CSB/REDUX system a member's pension is based on the average of the highest 36 month's base pay like above, but the main difference is that you will get 40% of your highest 3 years (36 months) average base pay plus 3.5% added on for each year of service between 21 - 30 years, and 2.5% added on for each year of service between 30 - 40. Also you get a $30,000 bonus when you reach your 15th year of active service.
Under the future Blended Retirement System, your pension is similar to the CSB/REDUX system, you will get 40% of your base pay after 20 years. You also get a bonus at 12 years of 2.5% of your annual base pay. The Blended Retirement System also includes matching funds from the government into your TSP account.
The multiplier is the percentage of your base pay you receive for each year of service. For the Final Pay and High 36 systems you earn 2.5% per year of service. That means you get 50% for 20 years of service up to a maximum of 100% for 40 years.
The multiplier for the CSB/REDUX system is 2% per year for the first 20 years, but you get an increase to 3.5% for each year of service between 21 - 30 years, and 2.5% added on for each year of service between 30 - 40. That means you get 40% for 20 years, but up to 100% for 40 years. That is a significant difference.
For the Blended Retirement System you get 2% of each year of service.
Note: Although rare, those who stay in past 40 years can continue to increase their retirement rate beyond 100%.
Learn more about how your Retired Pay is Calculated including a link to calculators to help you determine your retirement pay.
All three retirement systems have an annual cost of living adjustment. This is a subtle, yet very important detail. Over the lifetime of your retirement the cost of living adjustment could more than double your retirement check.
The COLA for the final pay and high 36 systems is determined each year by the national Consumer Price Index. But the COLA for the CSB/REDUX retirement system is the Consumer Price Index minus 1%.
For Example: A retiree under the High 36 may see a COLA increase in their retirement check of 1.7% in 2015, while a retiree under the CSB/REDUX plan would get a COLA increase of only 0.7%.
Note: There is one more twist to the COLA for the CSB/REDUX retiree. At age 62 the COLAs and multiplier are readjusted so that the High 36 and CSB retirees get the same monthly pay.
Now the CSB/REDUX system gets a bit more complicated. Under this latest system when you reach your 15th year of service, you must choose between taking the "CSB/REDUX" with a $30K cash bonus (approximately $21K after taxes) and a 40% pension check, or the High 36 retirement system with no bonus and a 50% pension check. This is a huge decision and cannot be made without some serious consideration and a clear understanding of the details.
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