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How Does Military Retirement Work?
Military retirement benefits vary by plan, but each offers a monthly pension payment based on years of service and final average salary. The military retirement plan you are eligible for determines how your retirement pay is calculated and varies depending on your entry date.
Eligibility Differs for Active Duty vs. Reserve Component Members
The primary differences between Reserve Component (RC) and active duty retirement include:
- How qualifying years are calculated
- How retirement pay is calculated
- When members receive their retirement pay and other benefits
Generally, active duty service members qualify for retirement after serving at least 20 years of active service and receive retirement pay immediately after they retire from active duty. In comparison, Guard and Reserve members qualify for retirement after receiving a qualifying number of service points and typically don’t receive pay until age 60.
Despite the differences in pension calculations, Reserve Component members and active duty members are offered the same retirement benefits when it comes to healthcare, life insurance, and more.
Military Pension Plans
Service members who qualify for military retirement receive a guaranteed monthly pension based on their years of service and final average salary.
Four defined benefit plans have been established over the military retirement program’s history. The earliest is the Final Pay system, while the most recent is the Blended Retirement System. Chapter 61 retirement is available for service members with a service-connected VA disability.
We’ll cover the difference between each plan, who is eligible, and how pay is calculated under each.
Note: For each example calculation, we’ll use “years of service.” Guard and Reserve members can simply convert points to years by taking their total retirement points and dividing by 360. This gives you an equivalent number of years served. So if you have 7200 total points / 360, that would = 20 years.
1. Blended Retirement System
The Blended Retirement System (BRS) is the most recent military retirement plan; it is the default for all members who entered service on or after January 1, 2018. Members who had fewer than 12 years of service by December 31, 2017, had the ability to opt into the BRS.
The BRS plan provides a defined benefit that gives service members 40% of their average base pay from their highest earning 36 months. This pay percentage is lower than the Final Pay and High 3 plans, which offer 50% of basic pay. In exchange for a lower pay percentage, the BRS offers members government-matching contributions to the Thrift Savings Plan (TSP), up to 5% of a service member’s basic pay.
TSP Matching Contributions
The Thrift Savings Plan is a retirement savings and investment plan similar to a 401(k) offered to federal employees and service members.
Government matching contributions to the Thrift Savings Plan are a significant addition to the BRS. While High 3 and REDUX members can contribute to the TSP, they don’t offer matching contributions or portability like the BRS does. Under the BRS, even if you don’t make it to retirement, you can still take your TSP income with you (if you serve a minimum of 2 years).
For more information on how TSP contributions under the BRS work, check out our guide here.
BRS Continuation Pay
The BRS plan also offers a Continuation Pay Bonus, which is a one-time, mid-career bonus in exchange for an agreement to perform additional obligated service for a minimum of four years.
BRS Lump Sum
BRS participants are also eligible to receive a lump sum once they qualify for retirement in exchange for reduced monthly retirement pay. Members under the BRS can choose to receive either a 25% lump sum in exchange for a 50% reduction in monthly pay or a 50% lump sum in exchange for a 75% monthly pay reduction.
If you opt into the lump sum option, your pay will be restored to a normal amount when you reach full Social Security retirement age, which for most is age 67.
Example BRS Pension Monthly Pay:
Use our retirement calculator to estimate your monthly pay, or follow the example below.
BRS pay is calculated using a member’s highest pay averaged over 36 months.
Let’s consider an E-7 with 24 years of service and assume the average of their highest 36 months of pay averages to $5,782.54.
Take (Years of Service) x 2.0% (Retired Pay Multiplier) x (High-36 Average Monthly Pay)
Note: Military retirement plans use multipliers to calculate the retirement benefits an individual will receive. 2.5% is equivalent to 50%, while 2.0% multiplier is equivalent to 40%. So, if your multiplier is 2.0%, it’s like saying you’re getting 40% of your monthly base pay in retirement.
24 years x 2.0% x $5,782.54 (High 3 Average Monthly Pay)
In this example, 24 x 0.020 x $5,782.54 = $2,775.62 per month
Therefore, the annual retirement payout for this hypothetical E-7 under the Blended Retirement System would be $2,775.62 x 12 months = $33,307.44 per year.
While the fixed retirement benefit is less than the High 3 plan, BRS participants also have TSP matching contributions of up to 5% per year and a Continuation Pay bonus they can receive, enhancing the total value of retirement benefits.
2. High 3 Retirement System
Service members who entered the military on or after September 8, 1980, are eligible for the High-3 retirement plan, also known as the “High-36” plan. This retirement system sets the basis for calculating retirement pay using the average of your highest 36 months of base pay.
As of December 2017, the High 3 retirement plan can no longer be opted into.
Members under the High 3 retirement plan have a 2.5% multiplier, meaning they receive 50% of their average highest base pay. The Thrift Savings Plan is also available to members under the High 3, but they don’t receive government matching contributions like members of the BRS do.
Example High 3 Pension Monthly Pay:
Use our free military retirement calculator or follow the example below.
High 3 retirement pay is calculated using this equation:
(Years of Service) x (Retired Pay Multiplier) x (Average of Highest 36 Months of Pay)
Let’s consider an E-7 with 24 years of service and assume the average of their highest 36 months of pay averages to $5,782.54.
Take (Years of Service) x 2.5% (Retired Pay Multiplier) x (Average 36 Months of Highest Pay)
24 years x 2.5% x $5,782.54
In this example, 24 x 0.025 x $5,782.54 = $3,469.53 per month
Therefore, the annual retirement payout for this hypothetical E-7 under the High 3 retirement system would be $3,469.53 x 12 months = $41,634.36 per year.
3. REDUX Retirement System
REDUX retirement plan eligibility applied to service members who began military service on or after August 1, 1986, but before January 1, 2003, AND who elected to receive the Career Status Bonus. It remained an option until December 31, 2017, when the military closed this retirement plan in favor of the Blended Retirement System.
The REDUX retirement system offered military service members a choice at the 15-year mark between two retirement benefit options: the High 3 plan OR a permanently reduced retirement benefit (unless you served 30 years or more) in exchange for a $30,000 Career Status Bonus. Members apart of the REDUX program also receive decreased annual COLA pay raises.
Compared to the 2.5% multiplier used with the High 3 system, the REDUX multiplier is calculated as follows:
2.5% times the number of years of service minus 1.0% for each year of service less than 30 years.
For example, a member with 20 years of service would receive 2.5% per year x 20, which is 50%. Then, you would subtract 1% for each year of service that you served less than 30 years.
In this case, you would subtract ten years (30 – 20 = 10) and then multiply that by 1%.
Finally, you would subtract 10% from 50%, giving the retiree 40% of the average of their High 3 retirement pay.
REDUX Retirement Pay Example:
Using the example above, let’s look at how the same E-7’s retirement pay (24 years of service and average highest 36 months of pay = $5,782.54) would change under the REDUX system.
Take (Years of Service) x (Retired Pay Multiplier) x (Average of Highest 36 Months of Pay)
Let’s start by finding the retired pay multiplier under REDUX.
24 years x 2.5% = 60%. Then, we must subtract 1% per year of service under 30. 30 – 24 = 6.
Next, we subtract 6% from 60%, giving us 54%. This is our years of service multiplier.
In this example, we will take 54% x $5,782.54 = $3,122.57.
Therefore, the annual retirement payout for this hypothetical E-7 under the REDUX retirement system would be $3,122.57 x 12 months = $37,470.84 per year, plus a one-time career status bonus payment of $30,000.
This is an 11% decrease from the retirement pay the same individual would earn under the High 3 retirement plan. The member would also have smaller COLA pay raises each year.
3. Final Pay Retirement System
The oldest retirement system is the Final Pay system, which was available for those who entered service before September 8, 1980. This plan calculates retirement pay by taking a percentage of the service member’s final monthly base pay at the time of retirement multiplied by the number of years of service.
Final Pay Retirement Example:
Consider an O-3 with 20 years of service and a monthly final basic pay rate of $7,890.52.
Take (Years of Service) x 2.5% (Retired Pay Multiplier) x (Final Basic Pay)
20 years x 2.5% x $7,890.52 (Final Basic Pay)
In this example, 20 x 0.025 x $7,890.52 = $3,945.26 per month
Therefore, the annual retirement payout for this hypothetical O-3 under the Final Pay retirement system would be $3,945.26 x 12 months = $47,343.12 per year.
5. Military Medical Retirement
Military medical retirement (also referred to as Chapter 61 retirement) is a benefit offered to service members who suffer from medical conditions or injuries that render them unable to perform their military duties.
The process to qualify for disability retirement involves medical evaluations through the Integrated Disability Evaluation System (IDES), followed by assessments by medical review boards to determine the extent of the disability.
The Physical Evaluation Board (PEB) assigns a disability rating, indicating the severity of the impairment. If deemed unfit for further military service due to the disability, service members may be eligible for disability retirement. This provides them with a monthly pension and healthcare benefits. The military also offers transition assistance programs to aid in the transition to civilian life.
Disability retirement pay is calculated using the retirement plan multiplier that the member falls under and their military disability rating.
Members who qualify for Chapter 61 retirement can choose the higher of:
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- Creditable years of service multiplied by the multiplier under the plan they are eligible for (either 2.0% or 2.5%) or
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- The member’s military disability percentage multiplied by the retirement plan multiplier under the plan they are eligible for (either 2.0% or 2.5%)
In both cases, the multiplier is limited by law to 75%.
Additional Resources
Understanding your options is key to securing your financial future. You can confidently plan for a comfortable and stable retirement by staying informed and utilizing available resources.
For more resources on military retirement planning, check out the following articles:
- How to Plan for Military Retirement
- Active Duty vs. Reserve Retirement
- Reserve/Guard Retirement Guide
- Which States Tax Military Retirement Pay?
- Military Retirement Pay Dates
- The COLA Trap
- How VA Disability Affects Retirement Pay
- Retirement Requirements for Commissioned Officers
You can also sign up for our free email newsletter to get updates on military benefits and advice on how to prepare for retirement.
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