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Military Retirement Pay & Pension Benefits Explained

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Serving in the United States Armed Forces is a career choice that requires years of sacrifice, challenging and dangerous assignments, and fairly meager pay.

However, one of the benefits offered to the men and women who choose a life of service and sacrifice is a pension plan.

This pension is payable immediately upon retirement for qualified active duty service beyond 20 years.

What Is a Military Pension?

Military members are eligible for a pension (lifetime monthly paychecks), following 20 years of qualified active duty service. The amount of your lifetime payments are determined by the retirement program that you are eligible for. There are three programs:

  • Final Pay: for members who joined the military prior to 1980
  • High 36: for members who joined the military following 1980
  • REDUX: an optional plan that offers a $30,000 bonus after 15 years of service in exchange for reduced lifetime benefits

Currently, any members who joined the military after 1980 are automatically enrolled in the High 36 plan, unless they opt for the $30,000 bonus and subsequent reduced benefits offered in the optional REDUX plan.

High 36 Plan

The High 36 retirement plan calculates your pension benefits based on your highest basic pay earned during any 36 month period in your military career. The plan uses what is called a “multiplier” to determine the amount of benefits you are eligible for when you begin receiving pension checks.

The multiplier is currently 2.5% per year of qualified service. This means that if you retire after 20 years of qualified service, you are eligible for 50% of your highest 36 month average monthly earnings while serving in the military. If your highest base pay amount was $5,000 a month for 36 months, and you serve for 20 years, you will receive an immediate paycheck of $2,500 a month. The number of years of service correspond to the percentage of your highest basic pay you will qualify for in retirement. For example, if you serve for 30 years, you will qualify for a 75% pension, if you serve for 40 years, you will qualify for 100% of your highest average 36 months basic pay.

How is this amount adjusted for inflation?
The best part about military retirement benefits is that the monthly check is tied to the effects of inflation. This means that the buying power of your monthly pension will rise along with the cost of living over time. The amount is adjusted annually based on the Consumer Price Index (CPI). Although we cannot predict what inflation will do in the future, the CPI increase has averaged approximately 3% over the past decade, although it fell during the recession of 2008.

What is a High 36 military pension worth?
Although the benefits gained from a lifetime military pension will differ based on the pay grade of the member upon retirement, I’ll provide two examples of the worth of a lifetime military pension.

(The following calculations assume the following: High 36 retirement plan, began service at age 22, served for 20 years, and national average life expectancy of 78.4 years.)

  1. The typical officer: The typical officer who retires in 2010 as an O-4 with 20 years of active duty service will receive $2,523,817  total over the next 34 years.
  2. The typical enlisted member: The typical enlisted member who retires in 2010 as an E-7 with 20 years of active duty service will receive $1,465,308.00 total over the next 34 years.

What’s the bottom line?
A military pension is a reward from the people of the United States for more than 20 years of active duty service. Although the first year’s payment of 50% base pay at the 20 year mark would require a significant cut in spending to be able to fully retire, the lifetime value of the pension can be worth millions, whether you retire as an officer or a senior enlisted member. This is primarily due to the compounding effects of the CPI increases discussed above, which result in approximately a 3% pay increase annually.

Final Word

Most military members have one question: is it worth staying in the military until retirement eligibility?

This is an extremely personal decision. Many military members leave the service prior to becoming eligible for retirement benefits. Only you and your family know whether or not staying in the military for 20 years is the right decision.

The lifetime payouts of your military pension could be worth millions, regardless of whether you retire as an officer or an enlisted member. And the lifetime value of healthcare coverage and other fringe benefits such as commissary and exchange privileges also factor in to make staying in the military until retirement eligibility a potentially lucrative decision. Still, it’s not a decision to be made lightly.

Pat S
Pat S is an active duty military officer. On his off time he enjoys working out, reading, writing and spending time with his dog. Pat became interested in personal finance after several costly mistakes early in his military career that could have been avoided by a basic understanding of personal finance.

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