Having a good idea of the average military pension is essential for service members planning their retirement. Military retirement pay depends on several factors, including years of service, rank, and the specific retirement system under which a service member retires. This post will explore how these factors influence the calculation of military pensions, what the average payout might look like, and strategies to maximize retirement benefits.

Understanding Military Retirement Systems

Legacy High-3 Retirement System

The Legacy High-3 retirement system is one of the traditional methods of calculating military retirement pay. Under this system, the average military pension is based on the average of the highest 36 months of basic pay. This figure is then multiplied by a percentage based on the number of years served. For example, a service member with 20 years of service receives 50% of their High-3 average pay, with an additional 2.5% for each additional year of service.

Blended Retirement System (BRS)

The Blended Retirement System (BRS) was introduced in 2018 and combines elements of the Legacy High-3 system with a defined contribution plan similar to a 401(k). Under the BRS, service members receive a smaller pension payout (2% per year of service instead of 2.5% under the High-3) but are eligible for matching contributions to their Thrift Savings Plan (TSP). This approach aims to provide more flexibility and savings opportunities for service members who may not complete a full 20-year career.

Calculating the Average Military Pension

Factors Affecting Pension Amount

Several factors impact the calculation of a military pension, including:

• Years of Service: The length of service directly affects the retirement pay percentage. A service member retiring after 20 years will receive a lower percentage of their High-3 pay compared to someone retiring after 30 years.
• Rank at Retirement: The rank at which a service member retires plays a significant role in determining their pension. Higher ranks command higher base pay, resulting in a larger pension.
• Retirement System: Whether a service member retires under the Legacy High-3 system or the Blended Retirement System will significantly affect their pension payout.

Average Pension by Years of Service and Rank

To provide a clearer picture, let’s consider the average military pension for various ranks and years of service:

• 20 Years of Service: For an enlisted service member (E-7), the average military pension under the High-3 system is approximately $30,000 to $35,000 annually. For an officer (O-5), the pension could range from $60,000 to $70,000 annually.
• 30 Years of Service: An E-9 enlisted member could receive a pension of around $45,000 to $50,000 annually, while an O-6 officer might receive between $90,000 and $100,000 annually.

These estimates can vary based on specific circumstances, such as specialty pays or cost-of-living adjustments (COLA).

Maximizing Your Military Pension

Understand Cost-of-Living Adjustments (COLA)

Military pensions are subject to annual cost-of-living adjustments (COLA), which help protect the purchasing power of your retirement pay against inflation. Understanding how COLA works and how it affects your pension over time is crucial for long-term financial planning. These adjustments are typically tied to the Consumer Price Index (CPI) and can significantly impact your total retirement income over the years.

Leverage Additional Savings with the Thrift Savings Plan (TSP)

For service members retiring under the Blended Retirement System, maximizing contributions to the Thrift Savings Plan (TSP) is a vital strategy for enhancing retirement savings. The government provides matching contributions up to a certain percentage, allowing you to build a more substantial retirement fund. Even if you are not under the BRS, using the TSP as a savings vehicle can provide additional financial security in retirement.

Utilize VA Benefits to Supplement Your Pension

VA Disability Compensation

VA disability compensation is a tax-free benefit available to active-duty personnel with service-connected disabilities. This compensation can supplement your military pension, particularly if your disability rating is high. The amount you receive is based on the severity of your disability and the number of dependents you have. Leveraging VA benefits effectively can help you maximize your total retirement income and provide additional financial stability.

Healthcare Benefits and TRICARE

Retired service members are eligible for TRICARE, a comprehensive health insurance program. TRICARE offers several plans, including TRICARE Prime, TRICARE Select, and TRICARE for Life, which serve as primary or secondary coverage depending on your situation. Enrolling in TRICARE can help reduce out-of-pocket healthcare costs and provide valuable coverage in retirement, particularly when used in conjunction with VA healthcare benefits. Do note that TRICARE Enrollment should be completed within 90-days of retiring.

If you have Dental and Optometry needs, you can apply through BENEFEDS.

Understanding Tax Implications and Planning

Federal and State Tax Considerations

Military retirement pay is generally taxable at the federal level, but state tax treatment varies. Some states exempt military retirement pay from state income taxes, while others offer partial exemptions or no exemptions at all. Understanding your state’s tax laws and how they apply to your military pension is crucial for financial planning.

Optimize Tax-Advantaged Accounts

Using tax-advantaged accounts like Roth IRAs or Health Savings Accounts (HSAs) can provide additional financial flexibility in retirement. Contributions to these accounts offer tax benefits that can help manage your retirement income effectively. Consult with a financial advisor to determine the best strategy for utilizing these accounts in conjunction with your military pension.

Seek Professional Financial Guidance

Work with a Military-Focused Financial Advisor

Given the complexity of military retirement benefits and the various factors that affect your pension, consulting a financial advisor who specializes in military retirement planning can be invaluable. Advisors who understand the intricacies of military pay and benefits can provide tailored advice to help you make the most of your retirement. Zero Nexxus offers military transition services specifically designed for active-duty service members, helping them navigate the complexities of retirement planning and benefit optimization.

Regularly Review and Update Your Retirement Plan

Your retirement plan should evolve with your changing needs and circumstances. Regularly reviewing and updating your plan ensures that you stay on track to meet your financial goals. This process involves reassessing your budget, investments, and benefits to adapt to any changes in the economic landscape or personal life circumstances.

Want to Make the Most of Your Military Pension?

By leveraging additional benefits, optimizing savings plans, and staying informed about tax implications, you can maximize your military retirement and enjoy a financially stable future. For personalized support on maximizing your military pension and navigating the complexities of military retirement, consider partnering with Zero Nexxus. Our process includes one-on-one active-duty military consultations, personalized client portals for managing tasks, and automated reminders to ensure that every step of the transition—from understanding healthcare benefits to finding employment and enrolling in school—is handled effectively. Our comprehensive approach is designed to address both immediate needs and long-term goals, providing a structured, supportive framework for veterans during this critical time!