How does US military retirement pay work for people who retire at unusual years (i.e., after 7 years, 16 or 23?)

Factual Questions
1

As a civilian, the only basic grasp I have of retirement for US military folk is that at 10 years, they retire with quarter-pay for life, at 20 years they get half-pay, and 40 years means full pay for life.

What happens at age 30 - three-quarters pay? And what about folks who leave after a non-tidy number of years in the military, such as after 7 years of service, or 16, or 23? Does it go by the previous floor level (so a veteran who did 19 years is still treated the same as someone who did only 10, because he hasn’t hit the true 20 yet?)

2

I’ve never heard of quarter pay at 10 years. When I was in, you needed 20 years to retire. Where are you getting this info?

3

That was news to me also. No program like that 30+ years ago.

4

Can’t recall where. Maybe someone gave mis-info, or I totally misunderstood something.

But then you get no retirement benefits even at 19.99 years, right? It has to be the full 20?

5

Barring disability or some other uncommon circumstance, yes, you need 20 years to get anything. At least when I was in.

6

The pro-rata retirement pay scale does not exist. If you don’t spend a minimum of 20 years active duty, there is no retirement pay.

However, there are other benefits that you might be entitled to for special circumstances, such as disability payments and/or medical coverage.

7

I see, thanks.

I sometimes meet military folks who have served for 23 years, 27 years, something like that, yet have no intention of reaching the full 40. Are they just staying in it because they enjoy the military life, or because some term of enlistment has yet to run out? (presumably you get no more additional benefit for being in 20+3 than you would for 20+0.)

8

when I was in (back in the 80’s) retirement at 20 years was 50%, thirty was 75%.
Not sure about odd years, but I was under the impression they made allowances for that.

9

They might be trying to achieve a certain rank (paygrade) before retiring. Though with 27 in and if in good health, they would probably go for the 30 years. 75% vs. 50% pay for 3 more years is significant.

10

As a military retiree I have some knowledge here, but am hesitant to even begin typing it out. I’ll try to constrain myself on detail.

There are actually currently four military retirement systems and they have different rules.

If you joined before Sep. 8 1980 (this was me), you are part of the “Final Pay” system. This means that if you meet the years of service requirements, you get a lifetime salary based on a formula that uses your final pay as its basis. This means if you got a rank promotion right before retiring, you get to retire with that as your baseline.

The formula is as follows:

You multiply your final monthly pay by 2.5% for each year of military service. The minimum to get benefits is 20 years. At the minimum, 20 x 2.5% = 50%, and at 40 years you hit 100%.

The next system is for people who joined between Sep 8 1980 and July 31 1986. This system is called the “High 36” system. The High 36 system is identical to the Final Pay system, except instead of using your final pay as the basis, it calculates the basis by averaging the highest 36 months of pay during your entire military career. What this functionally does is means if you got a rank promotion and retired a month later, you don’t get a lot of benefit, so you generally have to serve in your highest rank for at least three years for it to fully weight your retirement. The percentages for years of service is the same as for Final Pay, and also has a minimum service years of 20.

The next system is the CBS/REDUX OR High36 system, for people who joined between Aug 1 1986 and Dec 31 2017. This system is basically an OR option, one option is to simply retire using High 36 rules. The other option is you can take a bonus “CBS”, at 15 years of service. This is $30,000. If you take the $30,000 bonus at 15 years of service, you then can retire after 20 years of service under a REDUX system–the REDUX system is the same as High 36, except instead of the 2.5% per year of service multiplier, it is reduced with a convoluted formula. The formula is for EACH year LESS than 30 years of service, your total benefit is reduced by 1%. As a quick example, the basic formula for 20 years, again, nets you 50% retirement, under REDUX, you lose 1% for each year less than 30 years–so 10%, so now you retire at 40% pay instead of 50% pay. If you go to 30 years you essentially neutralize the REDUX. FWIW I think this system is only beneficial if you are really certain you are going past 30 years, and even then I was always suspicious of it, that $30k bonus is subject to taxes, so it’s really $21k.

The next and current system is the “BRS” or Blended Retirement System. This system is a dual-component system. The first component is identical to the High 36 system, you get a life annuity based on years of service and a multiplier EXCEPT under BRS, it isn’t 2.5% per year of service–it is 2%. To “compensate” for that lost .5%, service members in the BRS get in the TSP, which is like a government 401k–and the Department of Defense actually contributes a matching payment to each of your TSP contributions. You are automatically enrolled in the TSP at a 1% contribution rate, and the government matches your contributions dollar for dollar up to 4%. It is up to the servicemember how much to contribute to the TSP, but most prudent people recommend you absolutely do no less than 4% to get the full match, and most say you should consider putting in around 10%.

The TSP is actually a much better system for a large % of the military, because a large % of the military doesn’t serve to that 20 year, many people do 1-2 enlistments and are out. The TSP funds are portable, you take them with you when you leave the service, no matter how short or how long you’re in service.

Note that people in the military before BRS was the norm, can also join and contribute to the TSP–but they are not eligible for matching funds because they aren’t in the BRS.

The other final difference with the BRS system is you can “lump sum” your guaranteed annuity, there is a complex formula where basically you can reduce your annuity benefit by like 50% in exchange for a lump sum payout. While opinions vary, my understanding is most people think the lump sum payout is not a good option for most people, but there are cases where it can be.

11

I’ve never understood US pensions - basically in Canada, pensions vest at 2 years, and in some circumstances if you quit early you can take a locked in savings amount instead of a pension at 65. But pension is something you earn as part of your pay (theoretically) so cannot be taken away from you no matter what.

I was watching a show The Contractor and in this show, the person is self-medicating a knee injury with assorted pain-killers and steroids (presumably to avoid being booted from the Rangers for the injury) when the new CO calls a surprise drug test for everyone - then gives the guy a discharge with no pension because he failed the drug test. I also read about assorted police and other services taking away a member’s pension rights when they are fired. (IIRC Trump did that to McCabe?)

Is this a real thing in the military or is this more of a trope in Hollywood?

12

If that Ranger didn’t already serve 20 years, there is no earned pension to “take away”. If the Ranger did, then it can only be taken away via court martial, but yes, a servicemember can lose rank, pay, allowances, benefits, and pension.

The “US Pension” you seem to be thinking about is the Social Security system. This is what everyone pays into with each paycheck (even also service members), and once they turn 62 they get a small social security retirement check every month. That’s a completely different thing than the pension a service member gets.

The great thing about a military pension, as opposed to other forms of retirement, is a person can collect it immediately upon retirement. There is no “retirement age”. Someone who joins at 17 and retires at 37 starts collecting their pension at 37. Then, at 62, they can start collecting their social security payments and cash in any IRAs, etc.

13

Off topic, but wanted to comment on this. There is no “surprise drug test”. Drug tests are occur at least monthly, with at least 10% of the formation being randomly selected. Sure, a commander can choose to do 100% for various reasons, but every Soldier knows he or she can be tested at any moment. That’s never really surprise. No one would self-medicate in order to “avoid being booted”, since that’s a surefire way to actually get booted. In fact, I know people who have used drugs just so they could get kicked out.

14

The McCabe thing wasn’t reported very well. Not that I am in any way defending what Trump did - but what McCabe lost was the ability to retire and immediately collect a pension under special provisions that only applied to law enforcement employees who retire at age 50 with 20 years of service. He was still able to collect a pension when he reached his minimum retirement age under the ordinary rules that apply to all Federal employees.

I don’t believe it’s possible in the US to lose a pension after you are vested except in one specific case - when a public official (including members of the military) is convicted of a job-related crime , and even then it’s only possible in some jurisdictions. I know it’s common to hear people talk about “losing my pension” , even in real life but that doesn’t mean it actually happens. I was a state employee and heard it all the time, even though there were plenty of former state employees collecting their pension while in prison for job-related crimes.

( How much is a pension that vests after 2 years worth, anyway? I vested in my pension after 5 years, but the benefit would have been something like 8% of my salary.)

15

In the United States there are broadly speaking two types of pensions–private pensions offered by companies, and government pensions.

Private pensions offered by non-governmental entities are regulated by a 1974 law called “ERISA”–Employee Retirement Income Security Act. Under ERISA, there are Federal rules about how you have to manage a pension program if you are a private employer. Prior to ERISA, the situation you describe could and did happen–a pension plan might have onerous vesting requirements that required many years of service, and if you were fired right before vesting you got nothing. After ERISA, while it’s a little convoluted and has changed a few times, the basic rule is you have to make people fully vested at 5 years if you want to have your plan be “all or nothing” vesting like that, otherwise you have to start partially vesting them by year 3 under a graduated vesting plan, and full vesting can take no longer than 7 years under that.

Note that this vesting schedule is for employer contributions to the pension plan, under the law if the plan required employee contributions (which for private pensions some do, some don’t), the employee contributions have to be paid back out as cash if the employee separates prior to vesting, with I believe some sort of nominal interest returned as well.

The other type of pension is a government pension (for the purposes of this discussion this also includes the Railroad Retirement System), ERISA does not directly regulate government pension plans. However, most governments at the State & Local level look to ERISA as a best practice guideline and do often implement many of its rules, however this is voluntary. While I can’t know every State and Localities system, I can say that the military has not implemented most of ERISA’s guidelines, while many State governments have for their pension system. The Federal government for non-military employees has also adopted several ERISA-like policies. But, government pensions like the military’s system which I was in, indeed have the scenario where you can leave service at say, 12 years and get nothing. Note that under the system I was in I paid nothing towards my retirement at all, I had no contributions. Under the new blended system servicemembers are paying into TPS which is like a 401k for part of their retirement, and that money is theirs even if they leave aftera single enlistment.

At the State & Local level, some people pay into their plans, and some don’t. Typically, if you’re paying into the plan and separate early, you get your contributions back with interest. I say typically but not always. After I retired from the military, I took a job with the commonwealth of Virginia, my plan was to become a “double dipper.” I would retire around my early 60s with a full Virginia pension, meanwhile collecting my military retirement all that time as well. There are also some structural things you can do, in Virginia you can “buy” vested years in the Virginia retirement system based on having been in the military for x number of years, it’s a pretty good system for retired military if you retire after 20ish years from the military and then do another 20ish years with Virginia, you have two decent pensions going. In Virginia when I worked there you paid 5% of your check into VRS, and the commonwealth also contributed. You fully vest after 5 years, meaning if you quit you are pension eligible. You also can get a lump sum payout of your contributions into the VRS, with interest, once you’re fully vested, but not before.

In my personal case, I did work there a bit over 5 years, but then started my own business that was more financially rewarding than what I could get out of doing another 15 years of work for the government, and while I had a vested VRS pension, with only 5 years of service it would have been for a very low monthly benefit that would only started once I was in my 60s–I opted to cash out my contributions into that system.

Also–the big government pensions system, Social Security, is something most people pay into in addition to any private pension plan or other pension they are in. Social security doesn’t have a concept of vesting. You have to work enough to have a certain number of “points” and then once you reach eligible retirement age you get a check for life. As one final caveat–some State and Local pension plans are “Social Security exempt”, this means that those employees don’t pay into social security at all. Where this is the case, the State pension plan will generally involve larger contributions into the system from employees and larger contributions from the State. For example Ohio’s public employee retirement system, OPERS, its employees don’t pay into social security. However you do pay like 10% of your pay into OPERS if you work for an Ohio government entity. In Virginia we only paid in 5%, and we were part of social security. The military retirement system you also pay into social security as well, just as a point of reference.

16

To add on to this for others, one issue with “Social Security Exempt” public pensions is that if you are also eligible for social security through a different job, your social security benefit is reduced via a complicated formula. This is different from military, private, and government plans where you also pay into social security; in those, you can double-dip. You can also double-dip from two social security exempt plans, if, say, you teach in one state for 25 years and in a second for 20.

17

Nicely done. I, like you, retired under the first option. I had 23 years, so it was 57.5%. Sounds like a sweet deal to get that at age 43, but the pay was pretty poor (about $21K/yr in 1990 for an E-7), so it only amounted to about $12K/yr. At this point, 32 years later, I think it’s up to about $24K/year and my ex-wife gets half of that, so military retirement pay has only ever been just a supplement to my income.

I think it’s great that the military can now use the TSP like other government agencies can. The only contributory option available when I was active were savings bonds.

18

Yeah, it’s frankly the norm that if you join the military at a relatively young age, and then retire with 20ish years, you keep on working full time. The nice thing about the military retirement system, and few other retirement systems have similar provisions, is you start collecting your benefits the moment you retire if you have your years in.

Most State retirement systems have a concept of a “retirement age”, which is usually at least 55, but often 62 or older. In those system you could, for example, work from age 20 to 50 and then “retire”, but you don’t get to collect your retirement until years later when you hit the defined retirement age. I think a lot of law enforcement pensions tend to have a lower retirement age though.

My base pay as an O-6 when I retired was around $65k/year, that gave me a monthly retirement payment that I could have lived on, but as is typical in the military you join when you’re very young and you hit your # of years for retirement when you’re still in prime working age, so I wanted to keep working primarily to help grow my wealth and income.

19

Great post overall. Thank you.

I’ll just add that one big additional factor in the US is the ability for corporations to declare bankruptcy in a way that they and management survive, but the pension plan for the workers is “frozen” or “terminated”. Which terms I’ll define more fully below.

This has been done with many of the large corporations that had blue chip reputations, large workforces, and generous pensions in the 1980s or before. Which expense has since become, in our “leaner” era, something management wants to escape from. Perhaps after years or decades of strategic underinvestment in the corporate savings necessary to pay their contracted future obligations.

In a “frozen” pension situation, folks stop earning new benefits, but keep what they have. E.g. if you were enrolled in a system that would pay out 2.5% per year of service after 20 years, and they froze it when you had worked just 15 years, then that 2.5%*15 is all you would eventually get whenever you did finally retire even if that was 20+ years farther in the future.

In a “termination”, the corporation throws up its hands like Old Mother Hubbard: My children are hungry and Oh Noes, my cupboard is bare. (Often due to careful looting of the fund over the preceding decade(s)). At this point a federal agency (PBGC) steps in and tries to divide whatever pot there may be by the number of mouths to be fed.

When my first major employer’s pension plan was terminated, my lifetime benefit came to a one-time payment of $56.00. Yup, fifty six dollars. Not the $130K/year every year for life I had expected under the contractual terms when I was hired.

When my second major employer’s pension plan was frozen my benefit upon retirement will be some $5,000 per year for life. Not the $175K/yr for life I had expected under the contractual terms when I was hired.

But at least while I was in the military for 8 years under the oldest system so well-described by @Martin_Hyde a couple posts ago I’d have needed to stay in 20 years to earn any pension, but the entire time I was in I could not contribute to an IRA because I was “covered” by a pension plan.

Color me a wee bit cynical about US pensions.

20

This is actually a “distress” termination, only. A standard termination the company is not asserting that it cannot fund the pension going forward, it is just indicating it wants to end the plan. Under a standard termination (and around 140,000 plans have gone through standard terminations since the 1970s), the company has to have enough funds to pay all accrued benefits, vested or not.

Under standard termination the plan has to offer either a lump sum payout, or the option of taking an insurance company annuity. Note that in a standard termination you are only getting what you have vested or contributed as your “base”, so at say 10 years in (as an example) you obviously would not have accumulated enough years or made enough contributions to get an annuity equivalent to what you might have expected if you had worked a full 30-year career with the company.

Under a distress termination the PBGC guarantees payouts to plan beneficiaries where the company is “unable” to do so. The PBGC also generally takes “aggressive” action to try and pursue any company funds to help fund the plan, however as noted there are plenty of legal maneuverings that companies can take to structure it so that some portion of the company can continue as a going concern while the pension debt ends up spun off into an entity with little or no assets.

The reason that people who are in a distress termination often end up with terrible payouts is the PBGC guarantees payouts, but not under the terms of the original plan, the PBGC guarantees are far smaller. The maximum that the PBGC will pay out by law is set in annually adjusted amount to $67k a year if you take retirement at age 65 (it goes up if you wait until you’re older.) Note that this is a maximum guarantee, you are not guaranteed the maximum.

If your company terminated your plan when you were 30, your guarantee (at age 65) is the lesser of the PBGC guarantee or what your guarantee would have been under the employer plan, which for someone age 30 you likely had only established a relatively small guarantee based on a smallish number of years of service.

There’s a lot of avenues for essentially screwing over the employees in all of this, for example there have been instances where an entire pension plan gets “restructured” to a lower overall payout, which is the first layer of getting screwed. Then the company some years later does some financial wrangling and disposes of that pension, often by doing a type of bankruptcy or etc, that spins it out so that PBGC steps in, so now the employee is getting only PBGC guaranteed maximum on an already reduced pension. There’s a lot of complicated scenarios involved, and history has largely shown that the more ruthless and unscrupulous employers have been able to find ways to significantly slash how much money their retirees receive while unloading the pension debt from their books and leaving the government on the hook for the remainder.

Obviously, that isn’t every distress termination, some distress terminations are more akin to what the Congress likely intended with the PBGC–a genuinely defunct company that simply doesn’t have money anymore.