Update: Regarding all the comments with regard to Social Security and Medicare taxes: the commenters are correct. Military retirement pay is not subject to Social Security and Medicare taxes. The wrong image was included in the post, and there were some technical issues removing it. I believe it has been fixed. Thanks for pointing it out, and let me know if you are still seeing the wrong image. Thanks!
The opportunity to earn military retirement pay is one of the major benefits that comes with a military career. Service members who serve 20 years are eligible for military retirement pay, which starts at 50% of base pay (40% for those who selected the Career Status Bonus/REDUX option) and goes up for more years of service. It's a fabulous benefit.
One thing that I do hear is that the retirement paycheck is actually significant smaller than the recipients had guesstimated before retirement. Since no one likes that sort of surprise, let's do a little digging into what a retirement paycheck might work out.
When Will The Pay Come?
First, let's talk about when those paychecks are going to come. Military retirement pay is paid once a month, in arrears. It is on the 1st of the month, unless the first is on a weekend or holiday, in which case it is shifted to the business day prior to the weekend or holiday. This works just like end-of-month active duty pay days.
Because it is paid in arrears, the first military retirement paycheck will come the month following retirement. For example, if you retire on 1 February 2016, you will get your first military retirement paycheck on 1 March 2016.
How Much Retirement Pay Have I Earned?
Military retirement pay is calculated at 2.5% per year of service, times the average of the highest 36 months' base pay.** For example, if you have 24 years of service, you will receive 60% of the average of the highest 36 months' base pay. This percentage is only on base pay and does not include any special pays or allowances.
The fact that it is just base pay, while often know, still surprises people when the actual math works out. In particular, housing allowance is a huge portion of many service member's pay.
Different Taxes
Upon retirement, service members lose the protections of the Servicemembers' Civil Relief Act. With particular regard to taxes, this means that the retiree must begin paying income taxes to the state in which they actually live (if it has an income tax and does not have an exemption for military retirement pay.) Many active duty service members claim residency in tax-free states while on active duty, so retirement may be the first time they've ever paid state income taxes. State income tax rates can range up to 13.3%, but thankfully the average is closer to 6%.
Altogether, depending on your federal tax bracket and your state tax situation, you should anticipate that your paycheck will be reduced by 25% to 40% just for taxes.
Paying for Tricare and Dental Coverage
Retirees are often shocked by the cost of health care coverage. If they are still working, they may choose health insurance from their new employer, or select Tricare insurance at the retired rates. While Tricare is still very inexpensive compared to civilian coverage, retirees do pay more than active duty families.
For example, Tricare Prime is free for active duty family members. Retirees pay $47.10 a month for family coverage, with cost-shares for most services.
Dental coverage is also significantly more expensive for retirees. If they don't have the option of an employer-sponsored plan, retirees may choose to use the same dental insurance that is available for active duty members. While the coverage is the same, the price is not. Tricare dental premiums are calculated based upon family size and location, but they can range as high as $148.85 for a family, as compared to the $34.68 paid by active duty families.
Survivor Benefit Plan Premiums
Commenters have pointed out that I have completely failed to include the cost of Survivor Benefit Plan (SBP) benefits in the equations, and that is important!
SBP is the annuity program that provides income to the survivors of military retirees. It has many similarities to life insurance, though I think it is vastly superior. Not everyone purchases SBP coverage, but I would like to include it in this sample.
"Full" SBP coverage provides survivor income at 55% of the amount of the military retirement pay, and costs 6.5% of the retirees military pay each month.
How Much Will Be In The Check?
Here's a comparison of the active duty pay and retirement pay for an imaginary E-8 who retires with 20 years of service:
As you can see, this sample service member's retirement paycheck is significantly less than 1/2 of her active duty paycheck.
And Then There Are Those Expenses!
Because it is easy and obvious, let's start with medical. After paying the monthly premium, retirees must also pay cost-shares for their care. Under Tricare Prime, regular visits cost $12, emergency room visits are $30, and outpatient mental health is $25 per visit. Looking over my family's calendar for the last few months, we would need to budget $400 to $500 per month just for cost-share charges. While still very affordable for the amount of health care provided, that is a lot more than the $0 my family is paying for the same services as an active duty family.
Another issue to consider is that if you pursue a second career, you may move into a significantly higher federal income tax bracket. If you don't manage withholding carefully, you may find yourself owning a significant federal income tax bill at the end of your first year in retirement.
A common surprise is the cost of home ownership. Many military families purchase their first home shortly before or after retirement. Home ownership is always more expensive than you anticipate!
After leaving the military, retirees are no longer covered under the Servicemembers' Group Life Insurance (SGLI) policy. Transitioning to the Veterans' Group Life Insurance (VGLI) program or purchasing comparable civilian insurance is significantly more expensive. Plus, it is essential that you secure your post-separation or post-retirement life insurance before leaving the military.
Understanding how much money you will actually receive in retirement is just one part of retirement planning. The more you know, and the earlier you start planning, the easier you will find the transition process.
