Moving from active duty pay to military retirement pay can bring some surprises. It's a lot better if you're prepared! Here are six things that often surprise new military retirees, and a bonus surprise that's actually about your last active duty paycheck. (P.S. The bonus surprise is not positive, so be sure to read to the end.)
It's Once A MonthMilitary retirement pay is paid once a month. It is paid on the first of the month, or the business day prior if the first falls on a weekend or holiday. Pay is paid "in arrears," meaning that it is for a period of time that has already occurred. Therefore, the payment received on 1 June (or 31 May, or 30 May) is for the month of May.
The first retirement paycheck should come on the first of the month following your retirement. If you retire on 1 June, you should have your first retirement check on 1 July.
It's Taxable.Military retirement pay is subject to federal income taxes. However, because it is not considered "earned income," it is not subject to payroll taxes(Social Security and Medicare).
Also, you may be changing states after retirement. Many military members claim their state of legal residence in a state that does not have income tax. The protection of claiming a different state ends with retirement, so you'll owe taxes to the state where you actually live. Military retirement pay is taxed differently in each state. In some states all is taxed, some states tax none, and some states exempt a portion of military retirement pay from state income tax.
You'll Probably Want To Change Your WithholdingOne of the most frequent complaints about post-retirement finances is that people are not prepared for the higher tax bills, and don't have enough money withheld from their military retirement check and any post-retirement income. The Defense Finance and Accounting Service (DFAS) withholds income tax based upon the instructions you provided when you filled out your W-4 Employee's Withholding Allowance Certificate. DFAS can not predict whether you're going to get another job after retirement. They will continue to withhold taxes at the same rate until you instruct them to change your withholding. If you get another job, you need to change your withholding on your retirement pay or it will likely be the wrong amount. And usually, "wrong amount" means not enough, leaving you with a large tax bill at the end of the year.
If you'll be pursuing another career after leaving the military, you absolutely want to update your tax withholding.
Errors Do HappenIf you've been in the military long enough to reach retirement, you certainly know that the military pay system isn't exactly...um...without its challenges. This is also true of retirement pay. In particular, quite a few people discover that their retirement pay doesn't get started as it should. I've heard of people waiting weeks, even months, for their first retirement paycheck to arrive.
Yes, you'll get back pay when they figure it all out, but that doesn't help when you've gone through your savings and money is tight.
Allotments Carry OverMoving from active duty pay to retirement pay does not change your allotments. If you use allotments for a large portion of your expenses, be sure that retirement pay will be enough to cover those allotments.
If you want allotments to end, you will need to take the proper steps to make that happen.
Sold Back Leave Payments Don't Have A Strict Repayment ScheduleMany people sell back leave when they retire. When that money is paid can vary wildly, from being paid with the final paycheck to randomly arriving months later. Don't plan your budget around this money.
Delayed Last Active Duty PaychecksLast active duty paychecks are often held for review of financial accounts, and sometimes the wait can be long. While most people get their pay within the month following retirement, significant delays are not uncommon. By significant, I mean weeks or even months. Be prepared for this possibility.
No one wants big surprises during an already challenging transition. Knowing these things about military retirement pay will make the process a little smoother.
If you're retired, are there any pay-related issues you wish someone had told you before retirement?
For more information on this subject, you may enjoy: