How Does Military Retirement Pay Work?
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Final Pay System
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After a minimum of 20 years of service, a military member is eligible for retirement. If he entered service before September 8, 1980, his retirement pay will be determined under the "Final Pay" system. In this system, the member's final base pay is adjusted based on the total number of years he served on active duty. After 20 years, his retirement pay is 50 percent of his final base pay. Each year after that, the multiplier is increased by 2.5 percent. This means that after 21 years of service, the member's retirement pay would be 52.5 percent of his final base pay, and so on.
High-3 System
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If the military member entered service after September 8, 1980, she would use the "High-3" system, unless she opted to take the Career Status Bonus (CSB) after August 1, 1986. The High-3 system uses an average of the highest-paid 36 months in the member's time on active duty and the same multipliers as the Final Pay system, but the multipliers are applied to this 36-month average rather than the member's final active duty pay.
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CSB/REDUX
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After August 1, 1986, any military member who opted to receive the $30,000 career status bonus (CSB), uses the REDUX retirement system. This system uses the same 36-month average as the High-3 system, but the multipliers are changed. Instead of 50 percent at 20 years, the REDUX system starts at 40 percent. Instead of adding 2.5 percent for each additional year on active duty, the REDUX system adds 3.5 percent per year.
Cost of Living Adjustments (COLA)
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The Final Pay, High-3, and CSB/REDUX systems are only used to calculate a member's initial retirement pay. To help offset the effect of inflation, a cost of living adjustment (COLA) is made every year. This adjustment is the same as the Consumer Price Index (CPI) for the Final Pay and High-3 systems. For the CBS/REDUX plan, the COLA is equal to the CPI minus 1 percent. For example, in 2008, the CPI was 5.8 percent, so the COLA for the Final Pay and High-3 systems was 5.8 percent and the COLA for the REDUX plan was 4.8 percent.
Other Issues
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There are other modes of retirement, like medical retirement, and special cases that may not exactly fit these general descriptions. The DefenseLink Military Compensation website is a great resource for this and other military pay issues. The site has extensive FAQs and is very easy to navigate. The dates and example calculations in this article were obtained from that website.
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