Active-Duty Military: Retirement Income and Finances

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In return for 15, 20 or more years of patriotic service and sacrifice, active-duty service members enjoy a retirement income plan that’s among the very best in any occupation.

Retired pay, the military’s version of a pension plan, has three powerful features. It is:

  • Guaranteed for life.
  • Adjusted annually for inflation.
  • Available immediately upon retirement, regardless of your age.

Three Retirement Plans

The military retired pay system has evolved over time. Depending on when you began your service, you’ll be covered by one of three plans:

  • Final Pay
  • High-36 (often called High-3, because 36 months equals three years)
  • CSB/REDUX (Career Status Bonus and REDUX retirement system)
Which plan applies to you?
Date You Entered Service Retirement Plan
Before Sept. 8, 1980 Final Pay
Between Sept. 8, 1980, and July 31, 1986 High-36
On or after Aug. 1, 1986 Your choice of High-36 or CSB/REDUX

 

How Retired Pay Is Calculated
Retirement Plan Retired Pay Formula
Final Pay 2.5% x years of service = % of final monthly basic pay you’ll receive
High-36 2.5% x years of service = % of average highest 36 months of basic pay you’ll receive
CSB/REDUX For first 20 years of service: 2% x years of service = % of average highest 36 months of basic pay you’ll receiveFor each year after 20 and up to 30: 3.5% x years of service = % of average highest 36 months of basic pay you’ll receive

The 15-Year Choice

When today’s military members reach their 15th year of service, they are asked to choose between the High-36 and CSB/REDUX plans. Those who select the CSB/REDUX plan receive a $30,000 bonus immediately but are required to serve at least another five years to complete a 20-year commitment.

“While the bonus may be tempting, CSB/REDUX isn’t the best choice for most people,” says JJ Montanaro, a CERTIFIED FINANCIAL PLANNER™ professional with USAA. “The early ‘bonus’ is really more like a loan, which you’ll pay back (and then some) over your lifetime.”

Upon receiving the $30,000 at your 15th year, your 20-year retirement is reduced from 50% to 40%. Additionally, the CSB/REDUX plan provides smaller inflation adjustments each year. Over the years, you’ll be giving up far more than $30,000.

How much more? The chart below shows the decrease in lifetime benefits for three retirees of different ranks, ages and years of service. The analysis assumes investing 100% of the $30,000 available after taxes.

CSB/REDUX: Bonus Today, Much Less Money Tomorrow a,1

Status at Retirement Lifetime Reduction in Retirement Benefits
Grade Age Years of Service Through Age 79 Through Age 85
E-6 38 20 $317,071 $419,279
W-3 38 20 $426,460 $563,930
O-5 44 22 $428,627 $617,424

 

VA Disability Pay and Retired Pay

Until 2004, retired service members were unable to simultaneously collect their military retired pay and any Veterans Affairs disability compensation. Essentially, their military retired pay was reduced by the amount of their VA disability income. As of Jan. 1, 2014, this policy has been totally phased out for those with a 50% or higher disability rating through what the government calls Concurrent Retirement and Disability Payments.

But, Montanaro notes, retirees with combat-related disabilities don’t necessarily need to meet the 50% rating threshold to receive both VA and retirement benefits at the same time. If they meet the right qualifications, they can apply for payments through the Combat-Related Special Compensation program, which allows them to replace some or all of their retired pay that was withheld because they receive VA disability income.

Protecting Your Retirement with the Survivor Benefit Plan

“When you consider the value of a lifetime of inflation-adjusted income, retired pay may be your largest financial asset,” Montanaro says. “Fortunately, you can help prevent your loved ones from losing this income when you die, through an optional government program called the Survivor Benefit Plan. While participation isn’t free, the price could be well worth it considering the protection your family receives.”

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