Retired Guard and Reserve Health Care Options – TRICARE & Private Health Insurance

Retired Guard and Reserve Health Care OptionsMembers of the Guard and Reserves have different health care options than active duty servicemembers and active duty retirees. While still serving in the Guard and Reserves, members are eligible for TRICARE Reserve Select, which is a premium based health insurance program. It’s cost is very affordable, coming in at roughly $50/mo for a member, or around $205/mo for a family plan.

There are very reasonable annual deductibles, coming in at $150 for an individual, and $300 for a family. The maximum out of pocket cost (also referred to as the Catastrophic Cap) is also very reasonable, coming in at $1,000 per family, per fiscal year. These rates are much more affordable than many plans you will find through an employer, and are much lower than what you would find on one of the health care exchanges (the maximum out of pocket expenses for plans on the exchanges often range from around $6,000 for an individual, up around $12,600 for a family plan).

Unfortunately, once you retire from the Guard or Reserves, you lose access to TRICARE Reserve Select. You can still participate in a TRICARE health care plan, but you would have to transfer to another plan. Let’s take a look at some of your health care options once you retire from the Guard or Reserves.

Note: Click here to learn about your health care options after leaving active duty.

Guard and Reserve Health Care Options in Retirement

Retired members of the Guard and Reserves have several retirement plans available to them, depending upon their age, and believe it or not, where they live. Let’s break this down by age, because it isn’t until age 60 that retired members of the Reserve Corps are eligible to receive TRICARE Prime, the same military health care offered to active duty retirees. Prior to age 60, retired members of the Reserve Component are referred to as “Gray Area Retirees” because they are eligible for some military retirement benefits, but not all of them (notably the pension and TRICARE Prime).

Retiree health care options – under age 60. Once a member retires from the Reserve Component, he or she loses access to the subsidized TRICARE Reserve Select plan. They become eligible to participate in the TRICARE Retired Reserve plan, which is similar to TRICARE Reserve Select, but without any subsidies, and a higher Catastrophic Cap. The retiree must pay 100% of the premiums if they wish to participate in the plan. And it’s fairly expensive, at least compared to what you may be used to. Without subsidies, TRICARE Retired Reserve comes in at roughly $361/mo for the individual, and about $961/mo for a family plan. The Catastrophic Cap for TRICARE Retired Reserve is $3,000 per family, per fiscal year. This is more expensive than TRICARE Reserve Select, but it may or may not be more affordable than anything you can find through an employer or on one of the health insurance exchanges.

Non-military health care options – under age 60. It may pay to shop around for less-expensive health insurance if you find the premiums for TRICARE Retired Reserve to be too expensive. The obvious choice is to check with your employer if they offer health insurance. You may be also able to find a less-expensive health care option on the Health Care Exchanges. has a lot of great options on the Exchanges (this is where I go to find my health insurance).

Instant Health Insurance Quotes

Retiree health care options – age 60-65. Guard and Reserve retirees generally aren’t eligible to receive health care benefits until they turn age 60, at which time they would be eligible for TRICARE Prime, which is the same health insurance plan open to active duty military members and retirees. This includes access to health care at a Military Treatment Facility on a space-available basis. However, retirees are only eligible for TRICARE Prime if they live within a certain distance of a military installation or regional health care center. If the retiree lives out of the area, they would only be eligible to receive TRICARE Standard. TRICARE Prime and Standard both have monthly premiums, and associated copays, but there are some important differences.

Retiree health care options – age 65+. At age 65, Reserve Corps retirees are eligible to receive TRICARE for Life, which is a Medicare Supplemental Insurance Program. There are no monthly premiums for this plan.

*Retirees living overseas. I recommend you contact the TRICARE customer service line to find the best option for you. There are different rules and programs for retirees living overseas, and each situation is unique.

Finding the Right Plan for You

Your choice can almost be made for you, depending on your age, and where you live. The biggest question mark for most people is how to handle health insurance coverage as a Gray Area Retiree. If you find yourself in this situation, I would sit down and compare TRICARE Retired Reserve with the options available through your employer, or through one of the health care exchanges ( lists everything you will find on the exchanges, but in my opinion has a more user-friendly interface and better tutorials that explain your options).

Once you reach age 60, it makes sense to go with TRICARE Prime or Standard. Once you reach age 65, you are no longer eligible for Prime or Standard, and must move to TRICARE for Life if you wish to continue receiving health care through the military.

More help is available: You can always contact a TRICARE Ombudsman who can help you decide which plan is best for your situation. There should be one at each Military Treatment Facility, or you can contact TRICARE, and they will have someone explain things to you and help you choose.

Here are some plan details, and links to the website:

TRICARE Reserve Select – Premiums (~$50/ mo for member; ~$205 for family plan):

TRICARE Retired Reserve – Premiums (~$391/ mo for member; ~$961 for family plan):

  • Available to Retired members or the Guard or Reserves
  • Equivalent to TRICARE Reserve Select, however, there are no premium subsidies, so you pay entire cost of premiums.
  • Available until age 60, at which time you are eligible to TRICARE Prime or Standard
  • Link to TRICARE Retired Reserve website.

TRICARE Prime – Premiums ($50/ mo for member & dependent):

  • $12 copay off-base
  • MTF – space available, but no Copay
  • Prescriptions
    • Formulary – free
    • Local pharmacy – variable
  • Only available until age
  • Only available within 40 miles or 30 minutes from a military base (cost-cutting measure) There are waivers for this.
  • Link to TRICARE Prime website.

TRICARE Standard:

TRICARE for Life age 65:

Hopefully this helps you understand your options and points you in the right direction!

Active Duty Military Retirement Benefits (Podcast 010)

The Military Wallet Podcast on iTunesToday’s podcast covers active duty military retirement benefits. We cover a wide range of topics in this interview with Doug Nordman, military retiree and author of The Military Guide to Financial Independence and Retirement.

Active Duty Military Retirement BenefitsAs a military retiree, Doug has a great perspective on what it takes to earn an active duty retirement, as well as how to maximize the benefits you are eligible to receive as a military retiree. In our interview, and in this guide, you will learn more about:

  • How to qualify for an active duty retirement
  • How to calculate an active duty pension
  • How to prepare to live on your military pension
  • The power of Cost of Living Adjustments (this is much more valuable than you think!)
  • Health care options through TRICARE
  • Base access, shopping, & activities
  • and other valuable retirement benefits.

About Doug Nordman: As I mentioned, Doug is the author of The Military Guide to Financial Independence and Retirement. This book had a large impact on me and I highly recommend it. Doug also runs a blog called The Military Guide where he writes about a variety of topics related to military benefits, veterans topics, retirement, and personal finance.

The following article covers many of the facts in the podcast, but misses out on some of the examples given and additional information. I recommend listening to the podcast if you have the time, and bookmarking this as a resource for future reference.

How to Qualify for Retirement

In general, you need to serve 20 years to be eligible for military retirement benefits. This is true for those who serve on active duty, or in the Guard or Reserves. However, there are situations when you may be eligible to retire a little early. One example is the Temporary Early Retirement Authority, or TERA, which is often used during periods of downsizing (such as the present moment). Under TERA, some servicemembers are eligible to retire with as few as 15 years of active duty service. However, they also receive a smaller pension, both based on years served, and because there is a multiplier used that decreases the final pension calculation. Other exceptions for early retirement can be made for medical reasons, or under some other limitations. But in general, we are working with the assumption an active duty military retirement is 20 or more years.

Active Duty Retirement Pensions

There are 3 Main Types of Military Retirement Pay Plans:

  • Final Pay / High Pay – for servicemembers who entered the military before Sep. 8, 1980
  • High 3 – for servicemembers who entered the military after Sep. 8, 1980
  • REDUX – an elective retirement option for servicemembers who entered the military after Sep. 8, 1980

We focus almost exclusively on the High 3 Retirement Plan in the podcast because most current servicemembers and recent retirees are eligible for this plan. REDUX is not discussed other than to say it is not a great option.

Military Pensions are from Your Base Pay Only

Your first retirement paycheck may surprise you. In fact, you might think there is an error. That’s probably because many people think their retirement pay will be roughly half their normal military paycheck. Unfortunately, that isn’t the case. Your military pension is based only on your base pay—it doesn’t take your other benefits such as BAS and BAH into account. You also won’t receive any form of flight pay, sea pay, danger pay, or other special duty pays or benefits in your retirement pay.

Rules of Thumb for Calculating Your Retirement Pay (High-3 Retirement System): Doug gave us a couple rules of thumb to use for back of the envelope calculations to get a rough idea of what your retirement paycheck will look like.

  • 95% Rule of Thumb: To calculate your pension under High-3, you can multiply your final base pay by 95% (this accounts for the annual raises during your final 3 years). Then multiply this by your multiplier based on years served (2.5% per year served under High-3; this comes out to 50% at 20 years). So at 20 years of service, your pension would be roughly 47.5% of your final base pay (50% * 95% = 47.5%).
  • 30% Rule of Thumb: Another rule of thumb is to look at your total compensation (base pay, BAH, and BAS) and multiply that by 30%. That will get you in the ball park of your pension payment. Note: this is less precise than the 95% rule of thumb, and may vary by rank and your location if you have a high BAH.

Get a More Precise Estimate of Your Pension: Every service has an online retirement calculator that allows you to put in very granular information, including your Date of Initial Entry Into Military Service (DIEMS), your estimated retirement date, and other factors. It’s important to note that these calculators are often password protected and you need to login to your branch website get this information.

Notes on Military Pension Payments:

  • You will not receive your first pension payment until the month after you retire.
  • Checks only arrive once a month at the beginning of month (may arrive a day or two early, depending on your bank – some military banks will actually deposit military paychecks and pensions early).

COLA Adjustments

The most underrated part of military pensions are the Cost of Living Adjustments (COLA). Military pensions are tied to an annual COLA based on the Consumer Price Index, or the average cost of inflation over a variety of consumer goods. This varies from year to year. In some years there is no COLA increase to retirement pay, and in other years it could 1%, 2%, or even higher.

What makes COLAs so valuable is they work like compound interest—they stack on top of each other. So your first COLA may be small, but it increases your base for the next COLA. Over time, even small gains of 1%-2% can make a huge difference. For example, Doug shared that his military pension has increased 27% over the last 12 years, just from COLA increases. 27% is huge!

It would not unreasonable to see a pension double in one’s lifetime, depending on various factors such as when the veteran retired, how ling the retiree lives, etc.

Big note: As Doug points out, the 27% pension increase is great. But it’s also just enough to keep up with inflation. So while the overall dollar amount is larger, the purchasing power should remain roughly the same. But what many military retirees don’t realize is that many private sector pensions aren’t indexed to inflation. That makes the Cost of Living Adjustment an immensely valuable benefit.

Health Care in Retirement

Military retirees are eligible for health care coverage through TRICARE. You will start off with TRICARE Prime or Standard if you are under age 65. TRICARE Prime is the same health care coverage you have as an active duty member. However, it is only eligible if you live within a certain distance of a military installation. If you move out of the area, you would only be eligible to use TRICARE Standard. TRICARE Prime and Standard both have monthly premiums, and certain associated copays.

If you are age 65 or over, you would be eligible to receive TRICARE for Life, which is a Medicare Supplemental Insurance Program. There are no monthly premiums for this plan.

Which plan is the best? This is where it’s a good idea to listen to the Podcast episode. Doug goes into each of these plans in more detail, and explains the associated pros and cons of each plan. Additionally, you can contact a TRICARE Ombudsman who can help you decide which plan is best for your situation. There should be one at each Military Treatment Facility, or you can contact TRICARE, and they will have someone explain things to you and help you choose.

Here are some plan details, and links to the website:

TRICARE Prime – Premiums ($50/ mo for member & dependent):

  • $12 copay off-base
  • MTF – space available, but no Copay
  • Prescriptions
    • Formulary – free
    • Local pharmacy – variable
  • Only available until age
  • Only available within 40 miles or 30 minutes from a military base (cost-cutting measure) There are waivers for this.
  • Link to TRICARE Prime website.

TRICARE Standard:

TRICARE for Life age 65:

Additional Health Care Info Covered in the Podcast:

  • Health care for dependents
  • What if you don’t live near a Military Health Care Facility?

Does all of this sound a little confusing? It certainly can be. Thankfully each Military Treatment Facility has a TRICARE ombudsman who can help you make sense of your options and help you make the best decision based on your needs.

Other Retirement Benefits

Doug and I discuss other military retiree benefits, including access to base facilities such as the:

  • Commissary
  • Base Exchanges
  • Gyms
  • Hobby activities where available, such as the Auto Hobby Shop, Woodworking Shop, MWR facilities, movie theater, etc.

These base activities can be a great way to save money, participate in hobbies, and continue to be a part of the military community.

Military Hops – Space-A Travel: Military hops and Space-A travel are another topic we discussed. These can be a great way to see the world on the cheap. Basically, flying Space-A allows you to jump onto a military transport if there are available seats. You pay a nominal fee (usually only a few dollars). You can often find trips going all over the world, and many of the flights go out on a regular basis. There are some downsides, however. Because you are flying on a space-available basis, you may not be able to get the flight at the day or time you want. Flexibility is the key if you use Space-A travel!

Benefits for Spouses & Dependents

Benefits for your dependents, including your spouse and children, are similar going to be similar to when you were on active duty, with the exception of your health care which will depend upon your specific situation (whether you are eligible to use TRICARE Prime, or are required to use Standard). Spouses and Dependents still maintain base access and access to the Commissary, Exchanges, MWR facilities, and other base activities.

Did we miss anything? Military retirement is a huge topic, and we tried to cover as much as we could in the 40 minutes or so that we talked. I also did my best to get the main points down on paper for those who prefer to read. Please leave a note in the comments if we missed anything and we’ll address it. Thanks!

Military Forcing Some Officers to Retire with Enlisted Pay

Update: Rep. Glenn Thompson (R-Penn.) is stepping up to introduce the Proudly Restoring Officers of Prior Enlistment Retirement (PROPER) Act. The bill would modify existing discharge authority to allow military officers appointed from the enlisted ranks with at least 20 years of service to retire as an officer with only four years of service as a commissioned officer. Source: MOAA.

Very few military members remain on active duty long enough to earn a military pension. The latest numbers show that only about 17% of servicemembers reach the full 20 years required for an active duty pension. It’s a wonderful achievement and a testament to the hard work and dedication it takes to make a career of the military.

That’s why it’s disheartening to read about certain service members who are being forced out of the military due to Force Shaping. It’s difficult for anyone who is forced out of the military, particularly when they have chosen to make it a career.

Officers forced to retire with enlisted pay

Some officers are being forced to retire before reaching enough service time to retire as an officer.

Some military members are being forced to retire early under the TERA program. This is unfortunate, as many retirees under TERA wish to complete their full 20 years of service and receive their full pension (retirees under TERA take a reduced pension equal to the number of years served * 2.5%, times a reduction factor based on the number of years they retired early).

But there is one class of servicemembers who arguably have it worse than others: some officers are being forced to retire from the military, but they don’t have the minimum service time to retire as an officer.

Rules for Retiring as an Officer

The normal rules require military members to serve 10 years as an officer to be able to retire as an officer. However, due to Force Shaping, there is currently an exception written into Title 10 of the US Code (the law that governs military pay and benefits), that allows service members with only 8 years of service as an officer to retire as an officer. Here are the applicable laws (note: these showcase the Army laws, as this is affecting more Army members than other services; the laws for the other services are similar):

  • Title 10 U.S. Code section 1370: “a commissioned officer […] will “be retired in the highest grade in which he served on active duty satisfactorily, as determined by the Secretary of the military department concerned, for not less than six months.”
  • Title 10 U.S. Code section 3911: “the Secretary of the Army may, upon the officer’s request, retire a regular or reserve commissioned officer of the Army who has at least 20 years of service computed under section 3926 of this title, at least 10 years of which have been active service as a commissioned officer.”
  • Title 10 U.S. Code section 3911: “The Secretary of Defense may authorize the Secretary of the Army, during the period specified in paragraph (2), to reduce the requirement under subsection (a) for at least 10 years of active service as a commissioned officer to a period (determined by the Secretary of the Army) of not less than eight years.”

But there are many officers being let go just shy of the required 8 years. In some cases, officers are allowed to get a waiver to extend their service up to 60 days or so to reach the required service time. But others aren’t so lucky, and are being forced from the service just short of reaching the requirement time served to retire as an officer. In fact, some of them are  just months shy of reaching the required 8 years.

And the difference is huge.

Impact on Retirement

There are two major impacts on retirement. The first, is these servicemembers retire as enlisted members, not officers. Their paperwork and retiree cards will be in the enlisted ranks. The other impact is to retirement pay.

The immediate impact on the pension is obvious – these soon-to-be-retirees will be earning substantially less in their retirement checks than they would have had they been able to serve an additional year or two. I’ll give an example in just a moment. But here is the worst part: these servicemembers’ pensions will be paid based on their previous enlisted pay.

Using High-3 rules, you have to go back to their highest three years of pay at their enlisted ranks. So not only do you have to take away their Officer Pay as though it never happened, these servicemembers’ pensions will be based on old pay scales at their previous rank. To add insult to injury, these servicemembers are artificially held at their last pay grade. So someone who served as an E-7 is forever an E-7 for pay and retirement purposes, even if they became a Captain.

Let that sink in a moment. These servicemembers didn’t have the same opportunities for promotion through the enlisted ranks. Its very possible many of these officers would have been able to promote one or two times as an enlisted member. Some of them may have been able to max out their pay scale and become E-9’s.  But they weren’t given that opportunity.

Reduced Pension for Enlisted Vs. Officer:

Here is a sample based on an E-7 pay grade and O-3E at 20 years service (7 as an officer)*.

  • Enlisted Base Pay (E-7, 18-20 years service): $4,323.90
  • Enlisted Retirement: $2,161.95
  • Officer Base Pay (O3-E, 18-20 years service): $6,726.00
  • Officer Retirement: $3,363.00
  • Difference: $1,201.05 per month

As you can see, there is a large difference – an approximate cut of 35%.

*These numbers are actually rough estimates. High-3 rules average the pay for the last 3 years of service at the highest grade held. So it would be an average of these salaries and the preceding two years.

The primary benefit these servicemembers received for being officers was increased pay while they were officers (increased base pay and BAH, however they had reduced BAS and were required to pay for all uniforms out of pocket).

Additional Reading on This Topic

Being forced out of the military is difficult for anyone, regardless of how long you served. There are many who are lucky, and are simply able to retire with full benefits, even if they were forced to retire earlier than they wished. Others may have to retire with a reduced pension under TERA rules. And then there are the unlucky few who rose from the enlisted ranks, answered the call to become an officer, and were later forced out before they could retire as an officer. This is an unfortunate situation, and unfortunately, one I don’t have answers for.

Here are some additional articles about this topic:

2015 Military Retirement Pay COLA – 1.7% Increase

Military retirement pay is based on a percentage of your the base pay you received prior to retiring from active duty, or from the Guard or Reserves. One of the benefits that makes military retirement pay so valuable is the built-in annual Cost of Living Adjustment (COLA).

Military Retirement Pay COLA Increase

COLA is pegged to the Consumer Price Index (CPI), which is a formula calculated by the Bureau of Labor Statistics. In layman’s terms, it tracks inflation for the cost of certain consumer goods. The final measurement is used for many government calculations, such as the Cost of Living Adjustment for federal pension plans (including FERS, CSRS, and military pensions), as well as COLA increases for Social Security Benefits, VA Disability Compensation, and other government benefits programs. In short, COLA is there to help your military retirement pay maintain its purchasing power over time.

Related: Did you know that your military service may increase your Social Security Benefits?

2015 Annual Military Retirement Pay Increase

The Cost of Living Allowance for 2015 will be 1.7%. This is the same increase that will be applied to Social Security recipients, VA disability compensation rates, and many other recipients of government pensions and other benefits programs (verify the final numbers with the parent agency if you receive a different form of compensation).

This military retirement pay COLA increase will take effect in your January 2015 payment.

Note about the term COLA: The term “COLA” has different meanings, depending on the situation. In this example, we are using it as a Cost of Living Adjustment. The military also uses this term to refer to a COLA for “Cost of Living Allowance” which is an additional form of payment given to some servicemembers living in areas with a high cost of living, including overseas locations. These are different uses of the same term.

Who Receives This COLA Increase?

If you retired under the Final Pay or High-3 retirement plans, and you have been retired for longer than one year, you should receive the full COLA increase. If you retired in 2014 (or plan to retire in 2014), your COLA may be affected. COLA is applied on a sliding scale if you retired during the calendar year.

DFAS hasn’t updated the final numbers for the 2014 retirees, so what follows are the numbers that affected military members who retired in 2013 (2014 had a 1.5% COLA increase). The numbers should be fairly similar for 2014 retirees, with the highest increase being the full 1.7% and the other COLA adjustments slightly higher.

Recent military retirees receive COLA based on the quarter in which they retired. For example, those who retired between January 1, 2013 and September 30, 2013 received a full or partial COLA, as follows:

  • January through March retirees received the full 1.5% COLA for 2014.
  • April through June retirees received 0.9%.
  • July through September retirees received 0.4%.
  • October through December retirees received no COLA in 2014.

Again, the 2015 numbers should be slightly higher, based on the 1.7% COLA increase. I would expect them to be around 1.7%, 1.0%, 0.5%, and 0%, or somewhere in that range. We will update this article when DFAS makes the official announcement. (DFAS page).

The reduced payment is a one-time deal, and only affects retirees following the year in which they retired. Retirees will receive the full COLA increase in subsequent years of retirement.

REDUX COLA Adjustments Will Be Smaller

If you signed up for the $30,000 Career Status Bonus at your 15-year mark and agreed to retire under the REDUX retirement plan, you will receive a smaller Cost of Living Adjustment each year. This is the agreement you made in exchange for receiving the $30,000 cash bonus. REDUX retirement recipients receive a COLA that is pegged at CPI – 1%. So for the 2015 increase, they would only see a 0.7% increase for the year.

One-time catch-up adjustment for REDUX retirees. There is a one-time adjustment at age 62 that brings REDUX retirees’ pay up to the level it would have been without the decreased COLA. However, this is a one-time adjustment. After this increase, the annual COLA of CPI – 1% resumes.

REDUX retirees in 2014. There is also a partial COLA given to military members who retired under the REDUX plan in 2014. Again, the COLA is based on the quarter in which you retired. Here are the 2013 numbers from DFAS (like the above example, we should see something very similar, if not slightly higher, for 2015).

CSB recipients who retired between January 1, 2013 and June 30, 2013 received a partial COLA based on the quarter they retired.

  • January through March retirees received 0.5% (the full 1.5% – the 1% REDUX adjustment).
  • April through June retirees received 0.4%
  • June – December retirees received no COLA adjustment for 2014.

Like the above example, the reduced payment is a one-time deal, and only affects retirees following the year in which they retired. Retirees will receive the full COLA increase in subsequent years of retirement.

More Info on CPI and Threats to CPI-Based COLA

How is CPI Determined: The measurement the government uses is called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), but you will often hear it simply referred to as CPI. The CPI is determined by measuring the price increases for consumer goods, such as food and beverages, housing, clothing, transportation, medical care, recreation, education, communication, and more.

Threats to CPI and Military Retirement COLA. The government has recently examined several methods of decreasing the annual COLA pay increases for military retirees and other government benefits recipients. Two of the more stringent methods are explained below:

  • Chained CPI. Chained CPI is a measurement that reduces the overall CPI used today. The theory is that as the cost of some goods increase, people replace them with lower-cost goods. An example would be, as the price of steak increases, people eat less steak, and more chicken. And as the cost of gasoline increases, people will carpool, drive less frequently, or take public transportation. There are flaws in these assumptions, but that is the gist of it. Here is a full-length article on how Chained CPI can erode your purchasing power.
  • Congress decreased Military Retirement Pay – then restored it. In early 2014, Congress agreed to cut military retirement pay, or should I say, they agreed to decrease the annual Cost of Living Adjustment similar to the REDUX option. Retirees would receive an annual COLA of (CPI – 1%), up to the age of 62, at which point they would receive a one-time adjustment to bring their pay back to the level it would have been under the full COLA method we have now. Then full COLA increases at the CPI rate would resume. This was later voted back to the current method.

While these last two examples didn’t end of happening, it’s important to keep in mind that there are threats to your military retirement pay.

Podcast 002 – Financial Independence and Early Retirement on a Military Salary. An Interview with Doug Nordman

The Military Wallet Podcast on iTunesRetirement. It means many different things to different people. To some it means working until you are 65, then hoping you have enough money put away to live the rest of your life in relative comfort. Others are able to retire at an earlier age. How do they do it? How can they afford to retire after working a 20- or 30-year career? It’s easy to say some people just make a lot of money, so they can retire early. But there is a lot more to it than just earning money.

Yes, you need to earn money. But you also need to save and invest that money wisely. You also need to account for things like inflation and escalating health care costs, supporting your family, and outliving your nest egg.

Financial Independence & Earlly Retirement on a Military Salary

Want to retire early? Listen to this podcast!

In today’s podcast, I want to introduce you to my friend, and early-retiree, Doug Nordman. Doug is a retired Naval officer. He was able to retire at age 41 and never work again. But don’t let that fool you – Doug remains just as busy today as he was when he was in the service. The difference is he is doing the things he loves, not what he has to do.

Doug structures his day around his passions – surfing, writing, and helping others. In fact, Doug’s book, The Military Guide to Financial Independence and Retirement, had a large influence on me, as you will hear in this podcast. Doug also runs a blog called The Military Guide, where he writes about a variety of topics related to military benefits, veterans topics, retirement, and personal finance.

About the Book: The Military Guide to Financial Independence and Retirement explains how one can retire on a military salary and related retirement benefits, without having to work again. But it also explains how those who don’t serve a full 20-year career in the military can save for early retirement and reach their goals at their own pace.

Chapter 5 in his book had a big influence on me, as it covers serving in the Guard or Reserves, something I had thought little about until a few years ago. If you have separated from the military and haven’t considered joining the Guard or Reserves, then it might be something worth exploring. The personal, professional, and financial benefits can have a lasting impact on your life.

What You Will Learn in This Podcast

In this podcast, we cover the following topics:

  • Doug’s story about how he and his wife were able to engineer their lives to meet their personal and financial goals, allowing Doug to retire for good at age 41.
  • An overview of Doug’s book, and some of the personal stories that went into it.
  • Why Doug donates all his book’s royalties to military charities, including the Wounded Warrior Project and the Fisher House Foundation.
  • The definition of Financial Independence, and how you can achieve it.
  • The difference of being Financially Responsible, and Financially Independent.
  • How to live a balanced life while pursuing your values and goals.
  • Where to find additional resources for reaching Financial Independence.
  • The under-appreciated value of serving in the National Guard or Reserves, and the true value of the retirement benefits from the Guard or Reserves (most people vastly underestimate the value of a Guard or Reserve retirement!).
  • Doug’s current project, with the current working title of, “The Military Guide to Making Good Insurance Decisions.” Doug wants to help people understand which types of insurance they need, which they can skip, and why.

 You Don’t Want to Miss This Episode

If retirement is on your mind, you need to listen to this episode. Whether you will have a military pension and the related benefits, or whether you are going it alone with your own investments, you will want to hear the information in this podcast. You will learn a lot about how to approach financial independence and retirement.

I highly recommend his book. The Military Guide to Financial Independence and Retirement is the best book I have read about military finance. And I don’t make this statement lightly. This book is also not just for current servicemembers. It can be an excellent resource for anyone who has served. I have read it cover to cover twice, and I have read certain sections multiple times. This book opened my eyes to many aspects of my own finances and has shaped my view of working and saving for retirement. As you will hear in the podcast, Doug recommends you see if your library has a copy you can borrow. He also recommends seeing if your unit can purchase copies for people on base. If those avenues don’t work, then you can find it on Amazon in paperback or Kindle format. It can also be found at several other online retailers. You can also read much of the content from the book in the archives on his site.

Where to Find Doug Online:

You can lave comments here on our site, or if you want to reach Doug, you can find him at the following locations:

Modernizing Military Retirement Pay – Hybrid Military Retirement Plan

The military retirement system is one of the most generous pension plans to be found almost anywhere. But the days of retiring at half pay after 20 years of service may be numbered. The DoD and Congress have been investigating opportunities to cut military retirement costs. It’s a delicate balance. The government needs to trim expenses across the board (thanks to the Sequestration), but the military needs to balance cuts with retention. Slice too deep, and too many service members will leave the service before they qualify for retirement benefits, leaving the military short on experience and leadership.

Modernizing military retirement benefits

Will retirement be as rewarding in the future?

The latest study, called Concepts for Modernizing Military Retirement (pdf), aims to meet that balance by offering a hybrid pension plan that combines a 401(k) style defined contribution benefit with a traditional pension. The basics work like this: all troops who serve at least 6 years will receive a contribution on their Thrift Savings Plan, a cash retention bonus will be paid at 12 years of service, and a larger lump-sum payment will be made after retiring after 20 or more years of service.

These new TSP contributions and cash payments come at a price, however. Military retirees would either receive a reduced retirement benefit multiplier, or a reduced pension while they are still working age (until around age 62).

Let’s take a look at what this may mean for future military retirees.

Hybrid Military Retirement Plan

There are three main components of the new potential retirement plan*. Here are the basics of each:

Matching Contributions in the Thrift Savings Plan: All service members would have a Thrift Savings Plan account opened on their behalf. Starting at year 2, the DoD would automatically contribute 5% of the service member’s base pay to the account, with no requirement for military members to make any contributions to receive the full 5%. Service members would be able to make their own contributions to the account if they wish. However, full ownership of the DoD contributions would not pass to the servicemember until they reach 6 years of service. A vesting period like this is a common retention tool in the civilian world.

Mid-career retention pay: The next benefit would be a lump-sum mid-career retention pay made to the servicemember around year 12. The proposal is around 2 months pay for enlisted members, and 6 months pay for officers. However, these payments would be controlled by each branch of service, so these numbers may be variable if the retention pay is used as a reenlistment incentive for undermanned or critical career fields.

Transition Pay at Retirement: There would also be a “transition pay” given upon military retirement at 20 years of service. This could be anywhere from one year of basic pay, up to three years of basic pay, depending on which option is chosen (see below for the immediate vesting, or the delayed vesting option).

Two Proposals:

There are two options currently under proposal regarding how much military retirees would receive for their military pension, and when they would receive it.

Proposal  1 – Immediate Vesting: This proposal would be similar to the current retirement system in which retirees would begin receiving full retirement checks and standard Cost of Living Adjustments for life.

Proposal  2 – Partial Payments While Still Working Age: The second proposal would enact a dual-tiered pension plan with reduced monthly payments to working age retirees, with payments beginning immediately upon separate from the military. The reduced pension would probably be around 25% of base pay. The retiree would then begin receiving full retirement pension at a more traditional retirement age of around age 62.

New Retirement Multiplier

The current military retirement multiplier is 2.5% pf pay for each year served. If you serve the minimum 20 years to qualify for military retirement benefits, you will have earned 50% of your base pay (actually, the average of your highest three years of pay for most military members still serving). Serving 30 years would earn a retiree 75% of their pay, and so on. This proposal would change the retirement multiplier, depending on which of the above options is chosen, the immediate vesting option, or the delayed vesting option.

Multiplier for Immediate Vesting: The immediate vesting option would place the multiplier at 1.75% of base pay. This would equate to a 35% benefit at 20 years of service. Serving for 30 years would net a retiree 52.5% of their pay.

Multiplier for Delayed Vesting: If the option for delayed vesting is chosen, the multiplier would likely remain at 2.5%, or possibly be reduced to 2.0%. The 2.5% multiplier would have no impact on the retiree, with the exception of the retiree receiving reduced pension payments until they reach retirement age. A 2% multiplier would pay 40% at 20 years, and 60% at 30 years (after reaching traditional retirement age).

How Much Will This Cost Retirees?

The DoD numbers show this will cost most retirees around 10% of their lifetime benefits compared to current retirement plans, depending on various factors, such as the rank and time in service of the retiree, age at retirement, market conditions for the TSP contributions, and which of the two options are chosen, the immediate or delayed vesting.

Who Wins & Who Loses Under This Proposal?

There are always pros and cons to every change. Lets take a deeper look at how this impacts military members.

Non-Retirees Benefit the Most. There are some people on the other side of the table (lawmakers and policy makers) who often quote that the military retirement system isn’t fair because fewer than 20% of service members remain on active duty long enough to qualify for a 20 year retirement. Many of the servicemembers who leave before serving 20 years walk away with nothing. This plan would change that. Anyone who serves at least 6 years would walk away with vested contributions in their Thrift Savings Plan account. The mid-career cash bonus at 12 years would also benefit many servicemembers, especially if they have the option of contributing the amount to their TSP. These Thrift Savings Plan contributions belong to the servicemember when they leave the military. This has the potential to be worth tens of thousands of dollars in the future, depending on how much the member received from the DoD, market conditions, and more importantly, whether the troops left the money in their TSP until retirement age.

Retirees See the Biggest Change. These two plans are different enough to warrant an individual response. Under the immediate vesting option, retirees would see a much reduced multiplier, substantially reducing their retirement pay. This would virtually guarantee every military retiree would have to work again after they reach military retirement. Currently, many retirees are able to plan in advance and may be able to retiree for good on a military pension. The added TSP contributions would make up for some of the pension shortfall, but this moves the responsibility to the servicemember, and would require them to leave their funds in the TSP until they are able to withdraw it (currently age 59½).

The delayed vesting option would cap military pensions at 25% until the retiree reaches a traditional retirement age (age 62), at which point they would receive their full pension. The delayed vesting option has either the same multiplier, or a slightly reduced multiplier. The primary difference is a larger cash payout for the career transition bonus paid out when the servicemember retires. How the servicemember uses the transition pay would have a large impact on how the numbers work out in the long run.

Does the government win? Either of these plans would save the government money in the long run, but they wouldn’t bring immediate cash savings. The Pentagon would grandfather in all current servicemembers to their current retirement plan, and the DoD would have to begin making large lump sum payments in the mean time to all servicemembers who meet the benchmarks for cash payments. The real savings by the Pentagon wouldn’t be seen for a few decades at least. After that, the savings would grow.

Will The DoD Move Toward a Hybrid Retirement Plan?

About two years ago, the Defense Business Board proposed some radical changes to the retirement system that would move almost the entire military retirement system to a 401(k)-like retirement plan. The plan would eventually shift 100% the responsibility for retirement from the government to the troops. The proposal was wildly unpopular, and the DoD feared the military would have a hard time meeting retention goals. This new proposal is somewhere in the middle.

One thing is clear: changes are coming to the military retirement system. It’s not really a question of if. It’s a question of when, and to what degree the changes will take place. We have already seen the previous proposal to shift all of the retirement to a 401(k) type plan. And this year we have seen Congress pass a law to reduce Cost of Living Adjustments for working age retirees. That law was repealed almost in its entirety shortly after it was passed. The law was changed to grandfather in all servicemembers who were in the military prior to 2014. Those who entered the service in 2014 or later will still have a reduced military pension.

The writing is on the wall. Changes will happen. It’s just a matter of the government finding a happy medium that will work for the lawmakers and lobbyists, and that won’t hurt retention too much.

The good news is the DoD has stated current servicemembers would be grandfathered into their current retirement plan. Hopefully this will be the case, and any changes that happen in the future will happen when servicemembers join the military under the assumption of the new rules.

* To be clear, the Pentagon is not calling this a proposal or recommendation at this time, simply an option the military could choose in the future.


Image credit: General Frank Grass.

Concurrent Receipt Rules – Concurrent Retirement Disability Pay (CRDP)

Concurrent Retirement and Disability Pay (CRDP), also known as Concurrent Receipt, allows military retirees to receive both a full military retirement pension and full VA Disability compensation benefits, provided they meet eligibility requirements (listed below).

concurrent receipt military retirement pay

Are you eligible for Concurrent Receipt?

The CRDP program, which began on January 1, 2004, replaces the VA disability offset, which was previously required by law (and still is for some retirees). There is a 10 year phase in period in which military retirement pay was increased 10% each year until the recipient began receiving full military retirement pay (there was no phase-in period for retirees with a VA disability rating of 100%). The phase-in period lasted until January 2014.

Concurrent Receipt Replaces the VA Disability Offset

The VA disability offset requires military members to waive part of their military retirement pay in order to receive VA disability compensation benefits. Retirees are required to waive retirement pay up to the amount of VA Disability compensation they received (for retirees who have a VA disability rating of 40% or lower). The exception is retirees who have a VA disability rating of 50% or higher, in which case they are eligible for Concurrent Receipt, in which they can receive full military retirement pay and full VA disability pay. Retirees can elect not to waive military retirement pay and forgo receiving VA disability pay. However, waiving military retirement pay makes sense because the VA disability benefit is a non-taxable benefit, and military pensions are taxable income. Receiving VA disability pay will help retirees receive a larger net income.

Concurrent Receipt Eligibility

Military retirees qualify for concurrent receipt under the following conditions:

  • You are a regular military retiree with a VA disability rating of 50 percent or greater.
  • You are a retiree of the Guard or Reserves with 20 or more Good Years, have a 50% VA disability rating, and have met retirement age (60 in most cases, but some Reservists are eligible for early retirement).
  • You are retired under Temporary Early Retirement Act (TERA) and have a VA disability rating of 50 percent or greater.
  • You are medically retired under Chapter 61 with 20 years or more and a 50% or greater VA disability rating.
  • You are a disability retiree who earned entitlement to retired pay under any provision of law other than solely by disability, and you have a VA disability rating of 50 percent or greater. You might become eligible for CRDP at the time you would have become eligible for retired pay.

The Disability rating of 50% or greater is the primary qualifier for retirees. If you have a disability rating that is lower than 50%, then you will not qualify for the Concurrent Receipt benefit. However, there are other programs which you may qualify for, including the Combat-Related Special Compensation (CRSC) program, which also replaces the VA disability offset program. The primary requirement for the CRSC program is having a 10% or higher combat related disability. Examples of qualifying disabilities for the CRSC program include training that simulates war, hazardous duty, armed conflict, and instrumentality of war (weapons, combat vehicles, Agent Orange, etc.).

Individual Unemployability & Concurrent Receipt

You are eligible for full concurrent receipt of both your VA disability compensation and your retired pay if you are a military retiree who meets all of the above eligibility requirements in addition to both of the following:

  •     You are rated by the VA as unemployable, generally referred to as Individual Unemployability (IU)
  •     You are in receipt of VA disability compensation as a result of IU

This is effective October 1, 2008 and is retroactive to January 1, 2005.

Applying for Concurrent Receipt

In most cases, you do not need to apply for Concurrent Receipt. It should be automatically applied to your paychecks. However, there may be times when your situation changes and the system doesn’t automatically take this into account. In most cases, you will be eligible for retroactive back pay. Determining back pay will require an audit from DFAS and the VA. DFAS states they will pay any retroactive benefits within 30-60 days of receipt of you’re your first CRDP monthly payment. If their audit determines you should be eligible for a retroactive payment for the VA then they will forward the results  of their audit to the VA, which is responsible for making the VA disability benefits payment.

Retroactive pay limitations: Your retroactive pay can only go back to January 1, 2004, which is the first day concurrent receipt was available. However, DFAS will only go back to the day you first received a 50% disability rating. If your 50% disability rating was made retroactive, then your eligibility will extend to that date, provided it isn’t before January 1, 2004.

Example: The VA has begun extensive reviews of disability benefits ratings for military personnel from the Vietnam Era. Many veterans have begun receiving retroactive disability benefits for Agent Orange exposure and related illnesses, and PTSD. If you are a military retiree who received retroactive disability compensation, then you may be eligible for retroactive back pay for the Concurrent Receipt program.

Other examples of retroactive pay would be someone who retired and began receiving VA disability compensation some months later, after their disability compensation package was approved. In many cases, this can take some months.

Value of Concurrent Receipt Pay

Under the VA disability offset program, you must waive a portion of your retirement pay if you wish to receive VA disability compensation. This is usually a smart move, because VA disability compensation is considered non-taxable income, whereas military retirement pay is taxable income. You are required to make this decision if you are a retiree with a VA disability compensation rating of 40% or less.

Those who qualify for concurrent receipt are eligible to receive both benefits in full. The value of this is enormous.

Simplified example: Let’s make a simple example of a retired  E-7 with 20 years service. The base pay for an E-7, according to the 2014 pay scale, would be $4,372. At 50%, the retirement pay would be $2,186. The following chart shows how valuable this benefit is (assuming the retiree elects to waive a portion of his or her retirement pay in order to receive the VA disability pay, which is tax exempt):

  • 0% disability: Base pay = $2,186
  • 10% Disability: $2,055 Base Pay, $131 VA Disability Pay; $2,186 Total
  • 20% Disability: $1,927 Base Pay, $259 VA Disability Pay; $2,186 Total
  • 30% Disability: $1,785 Base Pay, $401 VA Disability Pay; $2,186 Total
  • 40% Disability: $1,610 Base Pay, $576 VA Disability Pay; $2,186 Total
  • 50% Disability: $2,186 + $822 = $3,008
  • 60% Disability: $2,186 + $1,041 = $3,227
  • 70% Disability: $2,186 + $1,302 = $3,488
  • 80% Disability: $2,186 + $1,526 = $3,712
  • 90% Disability: $2,186 + $1,714 = $3,900
  • 100% Disability: $2,186 + $2,858 = $5,044

Notes about these assumptions:

  • All military retirement benefits are considered taxable income (some states may not tax retirement benefits or other income, but the federal government does).
  • All VA Disability Compensation Benefits are non-taxable income at all levels
  • The disability benefits are for a retiree with no dependents. The Concurrent Retirement and Disability Pay benefit is worth much more when the retiree has dependents.

Takeaway: having a VA disability rating is valuable for your retirement. A disability rating of 40% or less will off set taxable income with non-taxable income, which will result in a large tax savings. A VA disability rating of 50% or larger is worth considerably more over the long run. You can run a similar scenario with your own situation to get an idea of what concurrent receipt would be worth for your specific situation, based on your retirement pay, years of service, and VA disability rating.

The Future of Concurrent Retirement and Disability Pay

There has been talk of extending the Concurrent Retirement and Disability Pay benefit to all military retirees with a VA Disability compensation rating of 10% or higher. Unfortunately, the recent budget problems have shelved those talks, and it doesn’t look like that will happen any time soon. In fact, there has been discussion of doing away with the benefit.

As we have seen in recent months, military retirement pay and other military and veterans benefits are under fire. Congress even went so far as to reduce military retirement benefits for some retirees, then later backtrack and restore those same benefits. Concurrent Receipt has been targeted as an area for cutting fixed expenses for retirees. Concurrent Receipt is a relatively new law, having first been approved in mid-2003, and implemented beginning in January, 2004. It wouldn’t be a surprise to see this law come under more pressure in the near future. That said, Concurrent Receipt made it through the most recent round of benefits cuts. So let’s hope Congress leaves this benefit alone.

Where to go for additional information: If you have any questions regarding your CRDP payment from DFAS, call 800-321-1080. For questions concerning disability ratings or disability compensation, please contact the VA at 800-827-1000.

Photo credit: orangejack.

National Guard and Reserve Early Retirement Age

Update – 2015 National Defense Authorization Act. The 2015 NDAA changed the rules on early retirement for Guard & Reserves. Please see below for update.

Members of the National Guard, Air National Guard and military Reserves who have met the 20 year service requirement are generally eligible for receiving retirement benefits at age 60. However, the 2008 National Defense Authorization Act authorized early retirement benefits for members of the Reserve Corps who met certain criteria. This only applies to starting retirement pay early. TRICARE benefits eligibility still begins at age 60.

Under the 2008 National Defense Authorization Act, members of the Reserve Component who served at least 90 days during a fiscal year on a deployment in support of overseas operations such as the Iraq or Afghanistan campaigns are authorized to retire three months early for each 90 day period they served in any given fiscal year. This only applies to members of the Guard or Reserves who participated in a qualifying active-duty mobilization after Jan. 28, 2008, which is the date the Act was signed into law. Service on or before this date does not count toward early retirement.

In January 2013, Congress expanded the criteria for early retirement by authorizing additional eligibility requirements. The new rules allow members of the Guard or Reserves to count activations for national emergencies including natural disasters such as earthquakes, hurricanes, tornadoes, floods, etc. Members of the Reserve Components may also be eligible to retire early if they were in a Warrior Transition unit and were injured while mobilized for responses as mentioned above.

Early Retirement from the Guard and Reserves

How to qualify for retirement from the Guard & Reserves. A member must serve a full 20 year service obligation before being eligible to retire from the National Guard or Reserves. Members can retire as soon as they have 20 good years of service, but they are considered gray area retirees until they reach age 60. In general, they will be eligible to access base activities such as the gym, MWR, commissary and base exchange privileges. They would only be eligible to begin receiving other retirement benefits at age 60, including pay and medical benefits.

How early retirement works. To be eligible for early retirement, a member of the Reserve Corps must still complete the 20 year service requirement. How early they can retire depends on the number of active duty days they served on a mobilization after Jan. 28, 2008.

Early retirement reduces eligibility age for receipt of Reserve retired pay by three months for each aggregate of 90 days of qualifying active duty performed within a fiscal year. For example, if you served 90-179 days in a fiscal year, you could only retire 3 months early. If you served 180 or more days in a fiscal year you could be eligible to retire 6 months early.

Important Note for deployments that started prior to FY 2015: the entire 90 days must also be served during the fiscal year. If you served 90 consecutive days, but part of your mobilization was before the fiscal year end and part was during the new fiscal year, then the 90 day mobilization wouldn’t help you retire early.

The good news is that your mobilization doesn’t need to be continuous. If you served 30 days at the beginning of the fiscal year, and 60 days at the end of the fiscal year, you would meet the requirements, so long as all 90 days were served within the fiscal year. Many Guard and Reserve members are often mobilized for short time frames, including 15 or 30 day rotations. You can add all of these together to meet the 90 day requirement, so long as they all fall within the same fiscal year. If you find yourself in a similar situation, then be sure to keep good track of your mobilization dates so you know whether or not your mobilizations will help you qualify for early retirement.

90 Early Retirement Periods are Cumulative. Servicemembers can qualify for more than one 90 day early retirement period. For example, someone who served 90+ days in FY 2009, 180+ days in FY 2010, and 90+ days in FY 2011, and 90+ days in FY 2012 would be eligible to retire at age 58 and 9 months (five three month periods, or 1 year 3 months early). The only rule for the cumulative early retirement benefit is that members cannot retire before age 50.

Update 2015 National Defense Authorization Act

The 2015 National Defense Authorization Act makes it easier to qualify for early retirement when members of the Reserve Corps are called to active duty. Prior to FY 2015, members had to serve 90 days on active duty during a fiscal year in order to be eligible to retire early. Service time that crossed a fiscal year didn’t count toward early retirement unless they had 90 or more days during a fiscal year, making the timing of the deployment very important when determining early retirement eligibility.

The new law allows that time to cross into the new fiscal year. However, this only applies to deployments that started after 30 September, 2014 (or deployments that began in FY 2015).

This law is not retroactive to 28 January, 2008, which is the date of the original early retirement rule. So to recap:

  • Early retirement qualifying service (28 January 2008 – 30 September 2014): Must serve 90 days on active duty within a fiscal year to qualify for early retirement.
  • Early retirement qualifying service (01 October 2014 – present): Must serve 90 days on active duty; service time can cross fiscal year and still qualify for early retirement (service must be within consecutive fiscal years).

*Note: We will update this with the official language when it becomes available. I have seen this reported in various news sites, but I haven’t seen the official regs yet.

Qualifying and Non-Qualifying Service for Early Retirement

Qualifying Service: Most active duty time counts for early retirement, including deployments in support of overseas operations, mobilizations for natural emergencies which are authorized by the governor and paid for by federal funds, and other active duty service including training and attending military schools. However, not all service counts toward early retirement.

Non-Qualifying Service: You must have been a member of the Guard or Reserves when you were activated for the qualifying service. Members who originally joined the service as active duty then later transitioned to the Guard or Reserves are not able to count their previous active duty service toward early retirement. Other ineligible Guard or Reserve duty includes actions such as performing weekend drills, 2 weeks annual training, those in full-time AGR or TAR status, muster duty, those who were activated for courts-martial or disciplinary reasons, and those who were listed as not participating at a satisfactory level.

Meeting Eligibility Requirements is Only Part of the Battle

It’s up to the member to be aware of these changes, and file for early retirement. In these instances, you will need to have proof of your activation, including the reason and the duration of time you were activated. This is where your mobilization orders and DD Form 214 are essential. As you know, your DD Form 214 is issued when you are released from active duty service. This is a different form than your DD Form 256, which is the Honorable Discharge paperwork you receive when you separate from the Guard or Reserves.

Keep good records of your service. Your mobilization orders should state the reason for your mobilization or activation, as will your DD Form 214. In order to qualify for the early retirement under the new rules, you will need to have either Title 10 or Title 32 orders with the following annotation: 12301(a), 12301(d), 12301(h), 12302, 12304, 12305 or 12306.

Because much of this is up to you filing the required paperwork on time, you need to keep excellent records. If you notice discrepancies in your paperwork, contact your unit immediately to have your records corrected. If you have since left your unit and are no longer serving, you may need to contact the National Archives. We have an article on requesting military records.

Early Retirement is For Pay; Other Benefits Come at Age 60

While your deployments can start the clock earlier for your retirement pay and benefits such as access to the commissary or base exchange, early retirees will have to wait until age 60 to be eligible for TRICARE benefits.

2013 Retirement Plan Contribution Limits

Anyone who is saving for retirement needs to pay attention to the retirement plan contribution limits. There are two reasons this is important – you want to contribute as much as you can to reach your goals, but you also don’t want to contribute too much, because that can trigger possible penalties. The IRS reviews retirement plan contribution limits each year, and this year they made a few changes and increased the maximum contribution levels of several retirement plans for 2013. The big changes came to employee sponsored deferral programs such as the Thrift Savings Plan and the 401(k) plan – and similar plans such as the 403b, 457, 401a Plans. Let’s take a look at some of the details you need to know.

Types of Retirement Plans

Retirement Plan Contribution Limits

There are many plans to choose from.

There are many different retirement accounts available to workers, and they can be broken down into three major types: employer-sponsored, individual, and self-employed/small business. Let’s take a look at some of the different types of plans and their contribution limits. One note before we start – this is a simplified version of the types of retirement plans out available to most people. This does not include traditional pension plans such as those provided by the military retirement system, the government, or companies in the private sector.

Employer-sponsored retirement plans. If you are in the military or work in the civil service, you are most likely eligible for the Thrift Savings Plan, or TSP. For the most part, the Thrift Savings Plan functions just like a 401k plan, which is a more common retirement plan in the civilian sector. Similar retirement plans include the 403b (common in non-profit sectors), 457, and 401a plans. These numbers might seem confusing at first, but don’t put much into their names – they simply refer to a chapter of the tax code.

Individual retirement plans including the popular Roth and Traditional IRAs. These plans are one of the best ways to save for retirement, whether you have access to an employer sponsored retirement plan or not. In fact, you can invest in both of these types of plans without having to worry about exceeding your retirement plan contribution limits. This is because these plans are not in the same classification.

Self-employed retirement plans or small business retirement plans. There are a variety of retirement plans that are only open to small businesses and those who are self-employed. One of the most popular is the Solo-401k, which has the same limits as the 401k plan you would find in the commercial sector, with one major addition: small business owners can defer a portion of their business income as a tax-free contribution. Other examples include SEP IRAs, SIMPLE IRAs, and Keough Plans. The IRS has a good rundown here.

2013 Retirement Plan Contribution Limits

The new limits are good for the 2013 tax year. Future retirement plan contribution limits will be pegged to inflation levels and raised in $500 increments. Here are the contribution limits for the various types of retirement plans:

Employer sponsored retirement plans: 401k, 403b, 457, 401a, and Thrift Savings Plan:

Individual Retirement Arrangements (IRAs):

Self-Employed and Small Business Plans:

  • SIMPLE IRA Plan – $12,000 in salary contributions and either a 2% fixed contribution or a 3% matching contribution.
  • Simplified Employee Pension (SEP) – Up to 25% of your net earnings from self-employment, up to $51,000.
  • Solo 401k – Salary deferrals up to $17,500 (under age 50); $23,000 (over age 50); Contribute up to an additional 25% of your net earnings from self-employment, up to $51,000.

It is recommended to get tax assistance if you have a self-employed retirement plan to ensure you choose the best retirement plan for your situation.

Don’t Exceed Retirement Plan Contribution Limits!

It’s also important to note that some of these plans share contribution limits. For example, the Solo 401k plan shares a contribution limit with the employer-sponsored plans listed above. For example, if your are under age 50, you would only be able to contribute $17,500 in 2013. Let’s say you are a military member who contributes to the Thrift Savings Plan and you also have a small business on the side and have a Solo 401k. The most you can contribute from your salary across both accounts is $17,500. The shared limit only applies to the employee deferral contribution (from your payroll), and the max limit of $51,000. You could contribute additional money to each account if you have bonuses or profit sharing. If you have questions, always consult a tax professional.

Traditional and Roth IRAs also share a contribution limit with each other. The limit for 2013 is $5,500 across both accounts if you are under age 50. You can contribute all to one account , or split it between them. It doesn’t matter as long as you don’t exceed the limit.

Contribute as much as you can now

It’s best to contribute as much as you can contribute to your retirement accounts because that gives your money more time to grow via compound interest. If the current markets make you nervous, then consider placing your money in a high interest money market account or a CD until you feel more comfortable investing the money in equities. Most retirement accounts have a cash fund or cash equivalent, which leaves you no excuse not to start investing now!

Proposed Changes to Military Retirement Benefits

The military retirement system is one of the most loved – and valuable – benefits available to military members. It is unique in many ways, and one of the few retirement plans in the US which starts paying beneficiaries immediately upon retirement without a standard waiting period or age limit.

Unfortunately, it is also a target by cost-conscious members of the government who are looking for ways to decrease the military budget and cut costs over the next few decades. Because of the high cost of the military retirement system, the Defense Business Board which was tasked with studying the military retirement system and making recommendations on how the government can save money on the military retirement system in the coming decades.

The basic conclusion by the Defense Business Board, found in this pdf entitled, Modernizing the Military Retirement System, was that the current military retirement system is “unfair, unaffordable, and inflexible.”

What follows is the slideshow prepared by the Defense Business Board, containing their recommendations and how they would affect the military. Afterward, we give our take on the proposed changes:

Proposed Changes to Military Retirement Benefits

US Military Logos

The current military retirement system – why it’s good for members and why it might change. In the current system, active duty servicemembers who retire after 20 years can expect to begin receiving their pension almost immediately and the payments will not only continue through the remainder of their lives, but will also increase based on Cost of Living Adjustments (COLA). A military retirement is worth millions over the course of a lifetime. While military retirement benefits may not be enough to live on for everyone, the system is a fairly generous program, and one that is hard earned by its recipients.

The problem with the military retirement system, according to the government, is that it is becoming increasingly more expensive and potentially unsustainable in the long run, especially when factoring in the full health care coverage given to military retirees and their family members. TRICARE has its critics, but overall, it is a very affordable insurance program which is basically unmatched in the civilian sector.

All of this leads us to cost: the government has been seeking out ways to reduce the overall cost of the military retirement system, which, if left unchanged, will spiral out of control in the coming decades. Here are some of the main notes from the study, which support the need for change:

  • The military retirement system has not materially changed for over 100 years
  • The current military retirement system was designed for an era when life spans were shorter
  • Pay was not competitive with civilian pay
  • Second careers were rare since military skills did not transition easily to the private sector

These additional reasons were given to support a new military retirement system:

  • DoD pays retirees 40 years of retirement benefits for 20 years of service
  • Military skills are transferable to the private sector
  • Second careers are now common for those retiring in their 40s

What follows are a couple of recent recommendations which have been making headway.

Defense Business Board Recommendations:

Please keep in mind these are only proposed changes by the Defense Business Board, and have not yet been put before Congress or the President and have not been voted on for becoming part of law.

  • Convert military retirement to a civilian-style retirement system similar to a 401k plan; retirement pay wouldn’t be paid until age 60-65 (or Social Security age)
  • Retirement benefits would vest after 3-5 years of service
  • Authorize “gate pays” and separation pay to encourage separation from active duty or to continue service on active duty

Let’s take a look at each of these and how they might affect military members.

Military Retirement Changes: Defined Benefit Plan

Perhaps the biggest proposed change is moving away from the traditional pension style system to a defined benefit plan, similar to a civilian 401k plan. In this proposed system, military members would receive a mandatory Thrift Savings Plan account into which annual contributions would be made by their member service (the average DoD contribution was listed at 16.5% of annual pay).

There are several versions of the defined benefit plan discussed, with vesting starting as soon as 3-5 years of active duty service. These plans would also be portable into the civilian sector and back into military service if there is a break in service.

Individual members would have the ability to contribute “gate pays” or additional funds to their account and each service would be able to contribute additional funds to members based on high deployment schedules, hardship, troops who are at risk, for bonuses and as a retention tool, and for other reasons as each service sees fit.

What this proposed plan is – and isn’t. Basically, this proposed plan is what you would find at many companies in corporate America – a 401k plan with matching benefits which would vest after serving a few years with the company. After your defined benefit plan vests, you could take it with you when you go to another company. What this plan is not, is a pension plan, which pays servicemembers a defined benefit at a specific time.

Will Current Servicemembers Be Grandfathered in?

The proposal by the Defense Business Board did not plan on changing any benefits to current retirees. So if you have already retired, then your benefits probably won’t be touched, at least by this set of proposals.

But there were two different scenarios given regarding how these proposed changes would be implemented for current military members – a low cost proposal and a high cost proposal – low cost meaning low cost to the government, and high cost meaning high cost to the government. Let’s take a look at both options.

The low cost proposal would go into effect as soon as it was voted into law and would affect current military members on a graduated basis. For example, if you had already served 20 years, you would be grandfathered into the old system and would receive your pension benefits under that plan. If you had had fewer than 20 years of service, you would get a combination of the old retirement plan (the pension, or annuity) and the new plan (the 401k style plan). To receive the pension, military members would still be required to serve 20 years. Here is how the “low cost” proposal would affect current servicemembers.

  • 20 years of service or more, no change
  • 15+ years of service, 37.5% of base pay in a pension plan, and the rest under the 401k-style plan.
  • 10 years of service, 25% of base pay, and the rest under the 401k-style plan.
  • 5 years of service, 12.5%, and the rest under the 401k-style plan.
  • New recruits, new retirement system.

The high cost proposal would mean that everyone currently in the military would continue to be under the current retirement system and could receive their normal pension after they reach 20 years of service or more. The new retirement system would only affect servicemembers who join active duty after the new retirement system is voted into law and takes effect.

Will a New Military Retirement System be Voted into Law?

Military Retirement Pay ChangesRight now it’s too early to tell. This is only one recommendation for change and it has been sent back to be studied further and will be presented again in February of 2012. Though we don’t know what will happen, we can say two things for certain:

  1. Something will need to change with the military retirement system.
  2. It will be fought tooth and nail by military interest groups.

1. The numbers don’t lie. Like the Social Security System and Medicare, the military retirement system is quickly growing out of control. Changes need to be made – how or when, I don’t know. But I would hope that the government would find a middle ground between the current retirement system and any proposed changes.

2. Any changes to the military retirement system will be highly contested by military and veteran organizations. And rightly so. Military servicemembers put their lives at risk and make more physical and emotional sacrifices than the average office worker who earns a 401k and a pat on the back. The military retirement system is just one manner in which military members are rewarded for their sacrifices.

I also don’t believe the changes should affect anyone who is 1) already receiving military retirement benefits, or 2) already serving with the understanding that they are eligible for benefits under the current retirement system. Taking away benefits from someone after they had earned them or made life changing decisions based on what they would receive is not the way to take care of the people who protect our freedom.

What are your thoughts on these proposed changes to the military retirement system?

photo credit: USAF