How to Avoid the Military 'COLA Trap' by Getting Smart About Your Retirement Date

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Retiring from the military in July may sound like a no-brainer. You could spend June poolside on terminal leave or just have time off while your kids are out of school. And the longer you spend in the military over the course of your retirement year, the more your retirement is worth -- right?

Not necessarily, says Air Force Col. Douglas Fowler. Instead, thanks to a little-understood quirk in how military retirement pay and cost of living adjustments (COLA) are calculated based on both the month and quarter of the year in which you retire, that decision could cost you big time.

It's a problem he's coined "the COLA trap" in a research paper he wrote at the Air War College. And understanding the trap -- also known as a "pay inversion" -- before you retire, he says, is key to making sure you maximize your earned benefits.

Fowler regularly fields questions about pay inversions and the COLA trap on his LinkedIn page. For example, Fowler, who is serving as the business information manager and Air Force element commander at Allied Joint Force Command Naples, Italy, calculates that O-6s with 27 years of service retiring in March 2022 will get $3,061 more a year after their first COLA than O-6s retiring in July 2022, four months later. For E-7s with 21 years, the difference amounts to $1,261 in a year.

How Military COLA Works

Retiring sooner to get bigger retirement checks might seem counterintuitive, but such pay inversions are possible side effects of the calculation of military retirees' first cost of living adjustment (COLA).

That's because -- unlike the annual COLA that will automatically increase your retirement check on Jan. 1 in future years -- your first COLA is based on a calculation that combines factors, including the quarter in which you retire.

For 2023, the retiree and veteran disability pay COLA increase was 8.7%, the largest bump in decades.

What Is the COLA Trap?

For retirees who retired before 2022, that means a full 8.7% year-over-year increase in their retirement pay will be reflected in every 2023 check.

But for those who retired during 2022, the result of poorly timing their retirement date was to receive less of a COLA boost than other 2022 retirees.

That disparity will only grow as each subsequent COLA gets tacked on as an added percentage. Over the course of a decade, imagine the difference adding up to "a really nice car," Fowler told

Fowler focused his COLA and pay research on so-called "High-36," also known as "High-3," retirees, because so few troops opted for 1986's Career Status Bonus "Redux" option, and most who were given the choice to move to the new Blended Retirement System (BRS) did not do so. Meanwhile those retirees automatically enrolled in the Blended Retirement System won't start getting out until 2026. High-36 payees will continue retiring until 2048.

How to Avoid the COLA Trap

To understand how pay inversions happen -- more retirement pay for less time in uniform -- you'll need to get your head around how your retirement will be calculated, including the first COLA that will affect your checks for the rest of your life.

Serving Longer Increases Retirement Pay Two Ways

The High-36 plan for members who entered service after Sept. 8, 1980, calculates retirees' pensions based on the average of their highest 36 months of base military pay, usually the last three years. For each year of service, a retiree accrues 2.5% of that average, adding up to 50% after 20 years.

The average of your highest-paid 36 months will get a little higher each month you serve. This is because, under normal circumstances, one lower-paid month at the beginning of those three years will no longer factor in, and a higher-paid month at the end will get included.

For each extra month you serve, you'll also get a bigger percentage of the 36-month average. Each added month of service beyond 20 years amounts to about a 0.21% increase in retirement pay.

Better COLA vs. More Retirement Pay

Working longer may seem like it would add up to more money, but that doesn't account for the COLA. Over the long run, a better initial COLA can add up to more retirement pay than a couple extra months in uniform.

Annual COLA is the difference in inflation between two calendar quarters that are spaced a year apart. The law requires COLAs to equal the difference between the average inflation in the third calendar quarter -- July-September -- of the current year and the average inflation in the third calendar quarter the prior year. (If the difference is a negative number, the new COLA is 0%.)

But your first COLA compares quarters within the same calendar year. Your first COLA will differ from all the rest. You'll start to receive your first COLA effective Dec. 1, the same day as everyone else, but because you'll have been retired for only part of a year, the calculation differs this once.

It will instead calculate the difference between the third calendar quarter, also called the "base quarter," and the quarter before the one you retired in:

  • If you retire in the first quarter, your first COLA will be the average inflation of the third quarter (base quarter) of the year you retire, minus that of the last quarter of the prior year.
  • If you retire in the second quarter, your first COLA will be the average inflation of the third quarter (base quarter) of the year you retire minus that of the first quarter of the same year.
  • If you retire in the third quarter, your first COLA will be the average inflation of the third quarter (base quarter) of the year you retire, minus that of the second quarter of the same year -- in other words, the base quarter minus the quarter just before it.
  • If you retire in the fourth quarter, you won't receive a COLA that year, within only a month or two of your retirement date, because the base quarter will be subtracted from itself.

How to Choose a Retirement Date That Avoids the COLA Trap

Realistically, when you're selecting a retirement date as far as a year ahead of time, you won't be able to predict the inflationary environment in the quarter prior. In part by analyzing quarterly inflation, Fowler formulated a few rules to choose a retirement date by.

  • Retire in the last month of a fiscal quarter. You'll get the same initial COLA as if you retired in the first month of the quarter but also get the extra pay for longer service. In some years, earlier retirements that aren't in the last month of a fiscal quarter may net a better check than a December retirement, for example, so consider it a good general guide.
  • Out of those four good months, September is the worst. The difference between inflation in the second and third quarters generally amounts to the least.
  • Out of those four good months, March is the best. A March 1 retirement date has historically provided the best initial COLA, because it results in the biggest difference between two quarters of average inflation.
  • Don't retire on July 1. "These retirees really can get a bad deal," Fowler says.

By following Fowler's advice, you can avoid the so-called trap by picking a retirement date that both works best for your schedule and works best for your paycheck.

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