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Making the Most of Active-Duty Retirement Pay

Military Transition

Years before you hang up your uniform and leave active-duty military service, you will need to make a major decision about your retirement pay.

If you entered on or after Aug. 1, 1986, you'll be asked around your 15th year of service to choose between two different retirement plans. The High-36 retirement plan is so named because it's based on the average of your highest 36 months of basic pay, while the CSB/REDUX option comes with a $30,000 Career Status Bonus. The small number who entered the service before that date are automatically covered by the Final Pay or High-36 plan. See the chart below for the full range of options.

Take the Money?

The CSB/REDUX looks pretty attractive at first glance -- or at least that $30,000 bonus does. But the plan could actually cost you much more over the long term, warns JJ Montanaro, a certified financial planner ™ with USAA.

Consider some of the disadvantages:

  • Lower cost-of-living allowance. The annual cost-of-living adjustment is 1% lower than the High-36 plan -- that's money lost over all the years of your retired life.
  • Lower multiplier. At 20 years of service, you'll only receive 40% of your basic pay, instead of the 50% available under the High-36 plan. Both plans offer 75% of basic pay at 30 years of service.
  • More taxable income. The $30,000 is taxable, which means if you do anything other than invest it in the traditional TSP account, Uncle Sam will take a bite.

"In general, I'd think long and hard before taking the CSB," Montanaro says. "While everyone's situation is different, it's like taking a loan you repay for the rest of your life. Yes, you get the $30,000 bonus, but you're going to pay for it with a smaller paycheck forever.

A hypothetical calculation by Montanaro tallied the lifetime loss of income at more than $800,000 for a veteran retiring as an O5, taking the CSB and living to age 80.**

Montanaro recommends visiting the Defense Department's Retirement Choice Calculator to help decide which plan is best for your needs.

Plan/Basis of Pay Multiplier Cost of Living
Readjustment Bonus Eligibility
Final Pay:
Based on final basic pay
2.5% per year of creditable service Based on Consumer Price Index (CPI) None None Began service before Sept. 8, 1980
High-36: Average of highest 36 months of basic pay 2.5% per year of creditable service CPI None None Began service Sept. 8, 1980, or latera
CSB/REDUX: Average of highest 36 months of basic pay Same as High-36 minus 1 percentage point for each year short of 30 years of service CPI minus 1% At age 62:
  • Retired pay raised to High-36 level
  • Multiplier now equals High-36
  • COLA stays at 1% below CPI
$30,000 Career Status Bonus at 15th year of service with obligation to serve 20 years Began service Aug. 1, 1986, or later

Source: U.S. Department of Defense

** Other criteria apply. For more information, visit the Defense Department's Pay Plans Summary.

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USAA, a diversified financial services organization, is the leading provider of competitively priced financial planning, insurance, investments, and banking products to members of the U.S. military and their eligible families. Rated among the highest among financial services companies for customer advocacy in a Forrester Research survey, USAA provides convenient and accessible financial products to its more than 9 million members. For more information about USAA, or to learn more about membership, visit usaa.com

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