Military Retirement Pay – What Will My Military Pension Look Like?

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One of my friends asked me to write about the impacts to your cash flow when you retire. While your cash flow may go up or down based upon a lot of non-military factors, such as relocation or your follow-on career, this blog post will attempt to address the military-specific changes that occur, and which you should take into account when you’re planning for separation or retirement.

One of my friends asked me to write about what happens to your military pension when you retire. While your military retirement pay may go up or down based upon a lot of non-military factors, such as relocation or your follow-on career, this blog post will attempt to address the military-specific changes that occur, and which you should take into account when you’re planning for separation or retirement.

If you’re retiring, you should plan your post-military career finances as if you’re not getting a military pension. It might not be possible in all situations, but if you’re able to plan without having to count on your pension as part of your total compensation, then you have additional flexibility to address unexpected issues as they come up.

What Will My Military Pension Look Like?

Before we discuss your military pension, let’s make sure to clarify what your post-military pay looks like. Many people don’t consider the fact that you will no longer get housing allowance, subsistence allowance, or COLAs. More importantly, when you look at post-military careers, you need to take into account that these were tax-free allowances and that you will need more before-tax income to make up the difference.

Let’s clarify a couple of things:

  • Let’s assume that you are retiring under the High-36 program (not High-3 as many people refer to it), and not under either Final Pay (for those who entered prior to September 8, 1980), or CSB/REDUX (for those who chose the option at the 15-year mark with a $30,000 payout).
  • Also, let’s clarify what the online pension calculators do not take into consideration. Under High-36, DFAS will calculate the highest 36 months of pay into the retirement calculation. If you’re retiring after 2 years TIG, that means 1 year of your lower paygrade goes into this calculation.
  • Additionally, if you’re retiring after exactly 20 years, then 2 years’ pay will be at >18 years, and 1 year will be at >16 years (your 17th year). Your highest 36 months’ pay will be averaged out, and multiplied by your service percent multiplier, which starts at 50% at 20 years, and increases by 2.5% for each whole year beyond that.

In my situation, I’m retiring as an O-5 with 2 years TIG, at 20 years and 2 months. The online calculator gives me a monthly calculation of $4,231.40, while I came up with $4,040.78 (both pre-tax figures) when taking these factors into consideration. Obviously, I hope that DFAS will give me an additional $200 per month, but I’m not planning on it.

Taxes on Military Retirement Pay

Once you’ve determined what your pre-tax military pension will be, you need to adjust for taxes. I’ll break this part into two sections: monthly withholdings and your annual tax liability.

Military Retirement Tax Withholdings

Regarding your monthly withholdings–When you retire, your tax withholdings will be determined by how you fill out your DD Form 2656-Data for Payment of Retired Personnel. This form, which directs DFAS where to send your pension after retirement, also calculates your dependent data & tax withholdings, similar to an IRS Form W-4.

Within this form, you can request DFAS to withhold at a higher tax rate (which may be beneficial if you expect a large salary from your post-military job), or you can claim as many dependents and exemptions as your family status allows, to minimize your tax withholdings. The IRS website has a withholding calculator so you can estimate your monthly tax withholding.

Military Retirement Annual Tax Liability

However, your monthly withholding is only an approximation of your tax liability. Your tax liability depends on your total income (including what you bring in outside of your military pension), as well as your family situation, and deductions or credits for which you may be entitled. When you do your annual tax return, you’re actually calculating your tax liability and reconciling it with the estimated payments that have already been made to the IRS. Your refund (or payment due) is really the final calculation that tells you how close you were.

Recognize that your first year or two of post-retirement will be a huge adjustment, and you may find yourself in a completely tax situation than what you’re used to. If you don’t feel comfortable doing this yourself, you should talk with a tax professional (not just a tax preparer), such as a CPA, attorney, or enrolled agent to discuss in more depth. However, if you do this by yourself, just keep in mind that you may need to revisit this.

State Tax Withholdings for Military Retirement Pay

You’ll notice we haven’t hit upon state taxes yet. This is because many states tax military retirement pay differently. There are 23 states that either don’t have an income tax or don’t tax military retirement pay, and over 20 that offer special considerations on pensions or military retirement income. You should consider your situation based on your state of residence.

Other Withholdings from Your Military Pension

Once you’ve determined your estimated tax withholding, you’ll want to account for the other programs that you’ll sign up for, such as:

  • Survivor Benefit Plan – 6.5% of your pay. However, this is deducted from your pay prior to taxes.
  • Tricare Prime – $23.55/month for single or $47.10 for family plan for 2016 (rates subject to change annually)
  • Tricare Dental – depends on location. Tampa rates range from $30.29/month for a single-member plan to $108.98 for a family plan.
  • VGLI-Rates tables are here. However, for a 42-year old to replace $400K in SGLI, the monthly cost is $68.00 per month.

Let’s Put Everything Together!

Let’s look at a fictional scenario using the numbers I outlined above. My estimated pre-tax, pre-deduction pension was approximately $4,048, give or take. Below are the costs that I would take into consideration:

Military Retirement Pay BreakdownAmount
Gross Retirement Pay$4,048.00
Survivor Benefit Pay (SBP) Deduction$263.12
Taxes (a 28% withholding rate on my post-SBP pension):$1,059.76
Tricare Prime$47.10
Tricare Dental$108.98
VGLI$68.00
Expected take-home pay:$2,501.00

As you can see, this would be quite a shock if you’re not expecting it—a 40% drop, right when you’re getting used to not having a full job. This doesn’t take into consideration all of the other items.

Your best bet is to do the math in advance, budget for it, and move on. You can try to cut out some of these items to make the most out of your pension. However, VGLI, Tricare, & SBP are all very important insurance aspects of your post-military life, and you should consider the cost of replacing them or going without before you make your decision.

Additional Considerations – VA Disability Compensation

This article serves as a basic overview of what your military retirement pay will look like. But as with all military pay issues, your situation is unique to you and may be different. One common topic is how VA Disability Compensation affects your military retirement pay.

In some cases, such as when you qualify for CRDP or CRSC (see below for links), you will continue to receive your full military pension, while also receiving your disability compensation from the VA.

In other situations, such as when your disability rating is 40% or lower, a portion of your military retirement pay is offset by VA disability compensation, and is withheld from your retirement pay. In turn, you receive that same amount from the VA. The net effect is the same dollar amount, but a portion comes from DFAS and a portion comes from the VA. The VA compensation is tax-exempt, so you make out better in the end by paying fewer taxes.

Ryan has written multiple articles on this topic, so in lieu of trying to cover each possible situation in this article, we’ll provide links so you can dive deeper into each program and see how receiving VA disability pay may impact your military retirement pay.

VA disability ratings can have a big impact on your military retirement pay, and as you might imagine, can be complicated. It is highly recommended you contact DFAS, the VA, or a Veterans Service Organization with specific questions, as they have the ability to provide more individualized assistance than can be done via a comment on this site, or via email.

Putting it All Together

Many retirees are surprised when they see their first military retirement paycheck. It is often much less than they were expecting to receive. It’s important to be aware of what your military retirement pay will be so you can properly plan for your military transition.

If you are reading this before your military transition, then try to run some calculations based on your pay grade, years of service, and expected tax situation. This will give you a rough idea of what to expect with your military retirement pay.

If you are reading this after your retirement, be sure to review your pay stubs and check your tax withholdings. You want to make sure there aren’t any errors or miscommunications between DFAS and the VA (if receiving VA disability compensation). And you want to make sure your tax withholdings are set up correctly. Many veterans fail to withhold enough taxes, especially if they transition into a second career. The tax bill can be shocking if you aren’t prepared for it!

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About Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and financial planner with Lawrence Financial Planning, a fee-only financial services firm. As a retired naval officer, Forrest helps veterans, transitioning servicemembers and their families address the financial challenges of post-military life so they can achieve financial independence and spend more time doing the things they love.

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  1. Matt Hipple says

    This article is bs! All the links are strait spam. I don’t trust any advise that comes from some posing website that is used to collect information from you. This website also has old out of date information. User beware of the information.

  2. John says

    If you are under high 36, how is retirement pay calculated if you were demoted 3 years before retirement? Do you get the pay based off the higher rank pay or based off the lower rank pay?

    • Ryan Guina says

      Hello John, my understanding is that the High 36 reflects your highest 36 months of base pay, regardless of when you received them. For most people, that will be the final 36 months they served. That said, you can contact DFAS to verify this. They should be able to help you understand what your retirement pay will be. I wish you the best, and thank you for your service.

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