How Much Do Retired Military Members Make?

Military retirement pay provides a stable income stream for former service members. This compensation is a significant financial benefit, influenced by factors such as years of service, rank, and the specific retirement system. Understanding these components is crucial for both current and retired service members.

Understanding Military Retirement Pay

Military retirement pay is a pension calculated based on a service member’s career length and pay history. Full retirement benefits typically require at least 20 years of qualifying service.

The calculation uses a multiplier applied to years of service, then multiplied by the retired pay base. This base is the average of the highest 36 months of basic pay, known as “High-3.”

Under High-3, the multiplier is 2.5% per year of service. For example, a service member with 20 years of service receives 50% of their High-3 average basic pay. Rank at retirement also influences the final amount, as higher ranks generally correspond to higher basic pay.

Military retirement pay is subject to annual Cost of Living Adjustments (COLAs) to maintain purchasing power against inflation.

Impact of Different Retirement Systems

The specific retirement system under which a service member retires significantly influences their retirement pay amount. Historically, the primary system has been the “High-3” or “High-36” system, which applies to those who entered service before January 1, 2018, and did not opt into the newer system. This system provides a defined benefit pension upon reaching the minimum service requirement, typically 20 years.

The Blended Retirement System (BRS) was introduced on January 1, 2018, for new service members, and offered as an opt-in for those already serving. BRS combines a reduced pension with a defined contribution component through the Thrift Savings Plan (TSP). Under BRS, the pension multiplier is reduced to 2.0% per year of service, meaning a 20-year retiree would receive 40% of their High-3 average basic pay, rather than 50%.

To compensate for the reduced pension, BRS includes automatic and matching government contributions to a service member’s TSP account. The government automatically contributes 1% of basic pay to the TSP, and matches service member contributions up to an additional 4%. This means service members can receive up to 5% of their basic pay in government TSP contributions.

BRS also features a mid-career continuation pay, a one-time bonus offered between 8 and 12 years of service in exchange for an additional service obligation. This bonus varies by service branch and can range from 2.5 to 13 times the monthly basic pay for active-duty personnel.

Additionally, BRS offers a lump-sum payment option at retirement, allowing service members to receive a portion of their future pension payments upfront in exchange for reduced monthly payments until age 67, when the full amount is restored. While the legacy High-3 system provides a larger pension multiplier, the BRS aims to provide a retirement benefit to a broader percentage of service members, as even those who do not serve 20 years can take their vested TSP contributions with them. The overall financial outcome for retirees under BRS includes both the reduced pension and the accumulated TSP funds.

Additional Financial Considerations

Beyond military retirement pay, other financial programs contribute to a retired service member’s overall financial landscape. Concurrent Retirement and Disability Pay (CRDP) and Combat-Related Special Compensation (CRSC) allow eligible retirees to receive both their military retired pay and Department of Veterans Affairs (VA) disability compensation without an offset. Previously, VA disability compensation would reduce military retired pay dollar-for-dollar.

CRDP is available to military retirees with at least 20 years of service and a VA-rated disability of 50% or higher. CRSC is a tax-free benefit for retirees whose disabilities are deemed combat-related, such as those sustained in armed conflict or hazardous service. Retirees cannot receive both CRDP and CRSC simultaneously but can choose the benefit that is most financially advantageous to them.

The Survivor Benefit Plan (SBP) is another significant consideration, allowing retirees to provide a continuous income stream to their eligible survivors after their death. Military retired pay ceases upon the retiree’s death, so SBP ensures that a portion of that income continues for spouses or children.

Retirees pay premiums for SBP coverage, which are deducted from their gross retired pay, potentially reducing their taxable income. The SBP annuity can provide up to 55% of the service member’s retired pay to a beneficiary and is adjusted for inflation through COLAs.

While not direct income for the retiree, SBP is a financial protection that significantly impacts the financial security of their dependents. Many retired service members also pursue second careers or part-time employment, which adds to their overall income after leaving the military. This additional income supplements their retirement pay, further enhancing their financial stability in retirement.

Taxation of Military Retired Pay

The taxation of military retired pay varies depending on federal and state laws, directly impacting the net amount a retiree receives. At the federal level, military retired pay is generally considered taxable income by the Internal Revenue Service (IRS). This means it is subject to federal income tax, similar to other pension income, and is reported to retirees on Form 1099-R.

The specific tax rate depends on the retiree’s overall taxable income and their applicable federal income tax bracket. State taxation of military retirement pay exhibits significant variability across the United States. Some states fully exempt military retired pay from state income tax, while others partially exempt it, and some tax it fully. This diverse landscape means that the state in which a retired service member resides can greatly influence their net retirement income.

It is crucial to distinguish military retired pay from VA disability compensation regarding taxation. VA disability compensation is entirely tax-free at both federal and state levels. This non-taxable status applies to disability compensation and pension payments for disabilities paid to veterans or their families. This distinction is particularly relevant for retirees receiving concurrent benefits like CRDP or CRSC, as only the retired pay portion is subject to taxation.