Today’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.
As 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 some 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 ballpark 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 the month (may arrive a day or two early, depending on your bank – some military banks will actually deposit military paychecks and pensions early).
The most underrated part of military pensions is 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 by 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 long 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
- 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.
- No premiums
- Only pay when you visit a doctor
- Only pay 20-25% of negotiated rate
- Only pay for treatment you receive
- Link to TRICARE Standard website.
TRICARE for Life age 65:
- Retirees go on Medicare
- Medicare Supplemental Insurance
- No premiums for TRICARE for Life
- Link to TRICARE for Life website.
Additional Health Care Info Covered in the Podcast:
- Healthcare 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.
Military Retiree Dental Care
Military retiree dental coverage was provided through the TRICARE Retiree Dental Program (TRDP) until November of 2018. At that point, the TRDP transitioned to the Federal Employees Dental and Vision Insurance Program (FEDVIP).
Military retirees have the option of using the FEDVIP program for their dental insurance. Other options include purchasing coverage through a civilian employer or self-insuring for dental care.
This article covers military retiree dental care options in more detail.
Other Retirement Benefits
Doug and I discuss other military retiree benefits, including access to base facilities such as the:
- Base Exchanges
- 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!