Military Retirement — Special Six-Part Series — Part 1 — 20 Year Retirement
Here’s the first installment in our five part Military Pay series. Other posts are here:
In return for years of service, the military offers an array of benefits for retirees, including a pension adjusted every year for inflation, money for college, health-care coverage and more. These days the options for military retirement are even more complex than most any civilian plan. While some benefits are tiny, others are huge, and not everything happens automatically. If you’re retired, retiring or you have a client affected by these issues; RetirdPay.com will be running a special six part series this week. Tune in often.
Death benefits
Many benfits are provided for a retiring veteran, retired or not retired. All veterans and their families should know about them, abd attirneys may need to know when it involves a client. many divorce disagreements revolves around the smallest of issues. Scheduled to run 2 August
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20-year retirement
Here’s how the magic 20 years (or higher) Military Retirement system works. As you can see from previous discussions it is a defined benefit system. Military members don’t make a contribution. They perform their duty while receiving their legal pay and allowances, then, when requirements are met, they are eligible for a retirement annuity.
Eligibility: Twenty years on active duty — or equivalent time spent in what is known as “qualifying service” as a reservist — is the basic eligibility requirement for military retirement. Every service member who reaches the requirement can receive retired pay that increases each year through a cost-of-living adjustment.
But retirees never completely sever their responsibilities to the military. Technically, they still are subject to the Uniform Code of Military Justice, and most can still be recalled to active duty.
Features: Here are the fundamental features of the military retirement system:
• Everyone with 20 years of active or qualifying reserve service is eligible for retirement pay, including those picked by selective early retirement boards. Initial retired pay increases for active-duty service between 20 and 26 years, but not for service after 26 years. An important consideration here for members retiring from the reserve forces. Although their pay can not exceed 75% of base pay, their base pay used for the computation is often much higher than their pay when they left the actively participating reserve. The 20 years or so that many reservists wait to collect benefits does count as time in service when determining base pay upon retirement date. The maximum retired pay anyone can collect is 75 percent of basic pay for 30 years or more of service.
• After retirement, retired pay increases whenever a cost-of-living adjustment is granted.
• Retirement pay is tied to basic pay. Bonuses and allowances are not included. This can be of much interest when working out division of assets in a divorce case. A married military member is often collecting several allowances in his or her paycheck. These allowances must be factored out if deciding on an amount for on-going shared retirement.
• Retirement pay for active duty begins immediately after separation. Eligible reservists must wait until their 60th birthday to start collecting pay. Exceptions are certain Reservists who spent 20 years on active duty are paid immediately upon retirement.
Formula: There are three formulas for computing 20-year military retirement pay. Each applies to a specific group of retirees, based upon the dates they originally enlisted. For most, that is the date they came on active duty. This will also be reflected in their records by the acronym TAFMSD - Total Active Federal Military Service Date
Some people incur a legal obligation to the military before they come on active duty. These are mostly reservists, those who attended a military academy, ROTC cadets, midshipmen and others who enlisted under a delayed-entry program. They are eligible for the retirement system in effect at the time they first entered the armed services (when they entered the reserve, the academy or the delayed-entry program.)
The three basic retirement formulas apply only to active-duty retirements for service members not claiming a disability. Retirement based on a disability has its own rules. The formulas are:
• Classic or Legacy Formula: Retirees who became members of the military before Sept. 8, 1980, collect monthly checks based on rank and the number of years they served on active duty. Those who get out at the 20-year mark thus receive half their final basic pay.
The figure for basic pay is determined by the pay rate for the member’s retired grade and length of service as of the date the service member was transferred to the retired rolls. For each year of service beyond 20 years, the retirement check is increased by 2.5 percent of basic pay, up to a maximum of 75 percent of basic pay for 30 years of service. Members under this system also retire at the highest grade held … even if they were an officer and then reverted to an enlisted grade.
• Top Three Formula: For individuals who entered military service after Sept. 8, 1980, but before Aug. 1, 1986, retirement pay is based on average basic pay over a member’s highest three years of service. That average is multiplied by 2.5 percent for each year in uniform to determine retirement pay. Thus, for 20 years of service, this “High-3” formula offers retirement pay equal to 50 percent of average basic pay over the member’s last three earning years. Note that this formula normally reduces the amount the member will receive, since even if s/he held the same rank for three years before retirement, the pay for that rank was almost certainly lower in the preceding two years. This is why it’ can be hazardous to a retiree’s financial health if his lawyer allows the other side to calculate on the basis of half the member’s base pay as a future salary. He’ll only be entitled to less, no matter how long he serves.
Redux option Formulas: Those who entered military service after Aug. 1, 1986, can elect to receive retirement pay under the High-3 system, or choose the Career Status Bonus/Redux option.
Under the Redux plan, a service member at 14 years, sixth months of service who agrees to stay in uniform at least five more years may elect to receive a $30,000 bonus, either in lump sum or in annual installments, at the 15th year of service. But retired pay for 20 years of service is lower — only 40 percent of average base pay over the three highest-earning years.
That increases by 3.5 percent a year for each additional year beyond 20. At 30 years of service, the retirement pay rate is the same as under the regular High-3 system — 75 percent of average basic pay over the three highest-earning years — but yearly cost-of-living adjustments are 1 percent lower. A one-time “catch-up” adjustment is made at age 62. Notice that this is a much more complex formula than any of the previous options. You absolutely must get competent assistance in calculating which option is best. I’ve seen many retirees make “shoot from the hip” decisions on these issues and the wrong decision can hurt for the rest of their lives.
Disclaimer
As always remember that this site, although written by a retiree with substantial experience in the school of hard knocks, it is for personal, lay opinions and informational purposes only. If you have a legal question you should seek help from a legal professional. If you have questions involving current or future values of pensions you need an actuary or competent pension valuation expert. If your questions are tax-related, seek a competent tax advisor. In other cases, I recommend the base chaplain.
Related posts:
- Military Retirement — Special Six-Part Series — Part 1 — 20 Year Retirement
- Military Retirement — Special Six-Part Series
- Military Retirement — Special Six-Part Series — Part 3 — Disability Benefits
- Military Retirement — Special Six-Part Series — Part 3 — Disability Benefits
- Military Retirement — Special Six-Part Series
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