How do I Plan for Military Retirement?

John Lister

Somebody planning military retirement faces several challenges and tasks. The most pressing, which may have to be dealt with several years before retirement, is to decide on the arrangements for receiving a military pension. Personnel will also need to prepare for finding new accommodation, check potential restrictions on new jobs, and consider counseling and advice to help with the transition.

A retired couple.
A retired couple.

The basics of military pensions are simple. Somebody who is in the armed forces for fewer than 20 years gets no military pension. Somebody who is in the armed forces for 40 years or more gets a pension equal to his army pay. Somebody who is in the armed forces for between 20 and 40 years gets a pension worth a percentage of his army pay, based on the length of service. Since 1986, though, military staff must make an important decision about his military pension on reaching 15 years of service.

A soldier who serves in the military for 40 or more years will receive a pension equal to his or her army pay.
A soldier who serves in the military for 40 or more years will receive a pension equal to his or her army pay.

The key to planning for military retirement — and knowing what military pension you will receive — is understanding which of three systems applies in your case. Somebody who entered service before September 1980 comes under the Final Pay system. Somebody who entered between September 1980 and August 1986 comes under the High 36 system. Somebody who entered after August 1986 comes under High 36 by default but can opt instead for a system known as Career Status Bonus or REDUX. There are several key differences between the systems that will affect how much pension is paid.

The Final Pay system is the simplest to understand. It bases the pension on the level of pay the person received in his last month of service. The person receives 50% of this amount as a pension if he completed 20 years of service, and an extra 2.5% for each additional year. This pension is then increased each year in line with the Consumer Price Index.

The High 36 system bases the pension on the average pay during the highest-paid 36 months of the person's military career. Aside from this, it works in the same way as Final Pay. That means the starting pension amount is 2.5% for each year of service, with the amount rising in line with inflation.

The REDUX system uses the same 36-month average basis as High 36 but has some key differences. The REDUX pension proportion starts at 40% for 20 years of service and increases by 3.5% for each additional year. The starting pension is increased by only 1 percentage point below the Consumer Price Index. These differences apply only until the person is 62, at which point he receives the same pension that he would have received under High 36.

The main decision a person planning for military retirement today comes after 15 years of service, at which point he must choose between High 36 or REDUX. If he chooses REDUX, he receives a $30,000 US Dollars (USD) taxable bonus. Of course, under REDUX his starting pension will be lower and will grow more slowly until the age of 62. The better option depends on several factors including the person's age, salary, and length of service upon retirement, so the person will need to crunch the numbers carefully. It's also important to take into account the potential return that could be made by investing the cash bonus to provide additional retirement income.

Financial provision is not the only concern for a person planning military retirement. Deciding where to live can involve several factors. One is whether to choose private housing or — if it is appropriate or necessary — a retirement community or care home. Some former military staff may be more comfortable living with or near other retired military staff, while others prefer a clean break. Choosing a location may also involve checking tax laws: some states tax the income from military retirement schemes, others do not.

Somebody retiring from the military may decide to take up a new job, and that is subject to some restrictions. Most notably, a former military member will forfeit any retirement pay that is due while he is working for a foreign government, whether as an employee or contractor, unless he has received prior permission from the military. In principle, a former military member is not allowed to work for the Department of Defense in any capacity during the six months after retirement, though the person should check whether this rule is currently in effect or temporarily waived.

A person who retires from the military may also experience significant culture shock in adjusting to civilian life. To mitigate this, each of the various branches of the military has a department designed to help with the adjustment. These include the Army's Retirement Services Office, the Air Force Retirees Services, the Navy Retired Activities Branch.

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