Understanding Military Retirement Pay

Veterans posing for a portrait after retirement.
••• Tim Bieber / Getty Images

The military retirement pay system used to be easy to understand: You put in 20 years, and you got 50 percent of your base pay immediately upon retirement. You put in more than 20 years and you got 2.5 percent more for each year of active duty after 20 years (up to 75 percent).

During the draw-down, Congress decided military retirement pay was too simple and decided to complicate it. Congress started with small changes, moving the annual Cost-of-Living Allowance to January 1st, instead of October 1st, but then got serious and dug in to make some major changes. Here are some basics of the military retirement pay system that you should be aware of:

For Navy and Marine Corps members, you are considered to be a "retired member" for classification purposes if you are an enlisted member with over 30 years service, or a warrant or commissioned officer.

Enlisted Navy and Marine Corps members with less than 30 years service are transferred to the Fleet Reserve/Fleet Marine Corps Reserve and their pay is referred to as "retainer pay".

Air Force and Army members with over 20 years service are all classified as retired and receive retired pay.

When a Navy or Marine Corps member completes 30 years, including time on the retired rolls in receipt of retainer pay, the Fleet Reserve status is changed to retired status, and they begin receiving retired pay.

Don't become confused. The above is for information purposes only. The law treats retired pay and retainer pay exactly the same way.

Military retirement pay is unlike civilian retirement pay systems. First and foremost, there is no "vesting" in the military retirement system. There are no special retirement accounts, no matching funds provision, no interest. You either qualify for retirement by honorably serving over 20 years in the military, or you do not. If you are discharged from the military with 19 years, 11 months, and 27 days of service, for example, you do not qualify for retirement pay (other than a few "early retirement" programs, which were designed to reduce the size of the armed forces).

Another significant difference between military retirement and civilian retirement is that a retired military member can be recalled to active duty. According to Department of Defense (DOD) Directive 1352.1:

  • Involuntary Order to Active Duty. The Secretary of a Military Department may order any retired Regular member, retired Reserve member who has completed at least 20 years of active military service, or a member of the Fleet Reserve or Fleet Marine Corps Reserve to active duty without the member's consent at any time to perform duties deemed necessary in the interests of national defense in accordance with 10 U.S.C. 683 (reference (b)). This includes the authority to order a retired member who is subject to the Uniform Code of Military Justice (UCMJ) to active duty to facilitate the exercise of court-martial jurisdiction under Section 302(a) of reference (b). A retired member may not be involuntarily ordered to active duty solely for obtaining court-martial jurisdiction over the member.

    In all honesty, however, the chances that a military retiree would be recalled to active duty after age 60, or who have been retired for more than five years, are slim. DOD categorizes retirees into three categories, with category I as the most likely to be recalled to active duty, and category III as the least likely. Individuals over the age of 60 are in category III, which is the same category as individuals with disabilities. Recall of category III retires is extremely unlikely. According to DOD, the categories are:

    • Category I. Nondisability military retirees under age 60 who have been retired less than 5 years. E1.1.3.2.
    • Category II. Nondisability military retirees under age 60 who have retired 5 years or more.
    • Category III. Military retirees, including those retired for disability, other than categories I or II retirees (includes warrant officers and health care professionals who retire from active duty after age 60).

    Pay Computation

    For members who entered active duty or on prior to 8 September 1980, retired pay amounts are determined by multiplying your service factor (normally referred to as your "multiplier") by your active duty base pay at the time of retirement.

    If you entered active duty after 8 September 1980, the base pay is the average of the highest 36 months of active duty base pay received. Additionally, your initial (first) cost-of-living adjustment will be reduced by 1 percent.

    The "multiplier" for the above two plans is 2.5% (up to a maximum of 75%). For example, a person who entered active duty on or before 8 September 1980, and spent 22 years on active duty, would receive 55% of his/her base pay as retirement or retainer pay. A person who entered active duty after 8 September 1980, and spent 22 years on active duty, would receive 55% of the average of the highest 36 months of active duty base pay.

    Very important note: A little-known provision of the law, changed in 1980, states that if you are a commissioned officer or an enlisted with prior commissioned service, you must have at least 10 years of commissioned service to retire at your commissioned rank. If you have less than 10 years of commissioned service, and voluntarily retire, you retire at your enlisted rank, and only the highest 36 months of active duty enlisted base pay counts for retirement computation. The Service Secretary can waive this to 8 years. Note: The secretarial waiver authority expired on December 31, 2001.

    Just in case things aren't confusing enough, there is a third retirement system for individuals who joined the military on or after August 1, 1986.

    These individuals are required to make a decision at the 15-year point of their career. They can elect to participate in the same retirement program above, or they can choose to receive an immediate monetary bonus ($30,000), and select the "REDUX" system.

    If they elect the "REDUX" system, The factor is determined by taking 2 ½ percent times your years of service then reduce that factor by 1 percent point for each year less than 30 years. Using the same examples, as above, a person with 22 years of active duty service would retire at 47 percent of the average of their highest 36 months of base pay. The "REDUX" ends at age 62, and the individual then begins to receive his/her "normal" retirement pay.

    Additionally, folks who elect "REDUX" will have their annual cost of living allowance reduced by 1 percent. At age 62, those percentage points are added back to the retired pay, however.

    For all plans, years of service includes credit for each full month of service as one-twelfth of a year. "Years of service" for officers includes all active service, periods of inactive reserve service prior to June 1, 1958, ROTC active duty time prior to October 13, 1964, constructive service credit for Medical and Dental Corps, and drills performed while in the inactive reserve after May 31, 1958. "Years of service" for Fleet Reservists and all other enlisted retirements include all active service, active duty for training performed after August 9, 1956, any constructive service earned for a minority or short-term enlistment completed prior to December 31,1977, and includes drills performed while in the Active Reserves.

    Just to confuse you a little more, your pay will be computed according to provisions of the Tower Amendment if it applies to your situation. The Tower Amendment was enacted to ensure that you will not receive a lesser amount of retired pay than you would have received if you had retired on a prior date, because of a recent retired pay cost-of-living (COL) adjustment. In the past, there have been times where the retiree COL exceeded the annual military pay raise, which would have resulted in more pay, had the member retired prior to the COL date.

    The Tower eligibility date is usually the day prior to the effective date of an active duty pay increase. Tower pay is computed by utilizing the active duty pay rates in effect on that date, your rank/rate on that date, total service accumulated on that date, and all applicable cost-of-living increases.

    For example, assume a member at the rank of E-8 with 22 years, 7 months service on June 30, 2000. The member's pay would be computed as follows:

    • 2 1/2% x 22.58 years = 56.45%. 56.45% x $3,119.40 (January 1, 2000 active duty rate for an E-8 over 22 yrs) = $1,760.90 = $1,760.00  

    Since the E-8 was eligible to retire on December 31, 1999, DFAS would also compute the entitlement as of that date.

    The E-8 has 22 years, 1 months service as of December 31, 1999. The pay would be computed as follows:

    • 2 1/2 % x 22.08 = 55.20% 55.20% x $2,976.60 (1/1/99 active duty rate for an E-8 over 21 yrs) = $1,643.00 + 2% (COL Increase) = $1675.00  

    In this situation, therefore, this retiree would receive monthly retainer pay of $1791.00 since the Tower Amendment computations are not more beneficial than the current pay computation.

    Just for information, by law, all military retirement pay is rounded down to the nearest dollar.

    Disability Retirement

    If you have been found to be physically unfit for further military service and meet certain standards specified by law, you will be granted a disability retirement.

    Military members with 20 or more years of active service (service retirement eligible) can retire, regardless of the percentage level of disability, if they are found to be unfit and removed from the service by reason of physical disability. People with less than 20 years of active service at the time they are removed from the service by reason of physical disability may be either separated or retired, based on the following:

    If you have a disability that is rated by the military disability evaluation system at 20% or lower, you can be discharged (most likely with severance pay, unless the condition existed prior to service and was not permanently aggravated by service or misconduct is involved). Those who are separated for disability may be eligible for monthly disability compensation from the Veterans Administration (VA).

    If the condition is rated at or above 30%, and other conditions are met, you will be disability retired.

    Your disability retirement may be temporary or permanent. If temporary, your status should be resolved within a five-year period.

    The amount of your disability retired pay is determined by one of three methods:

    1. The first method is to multiply your multiplier by your base pay or the average of highest 36 months of active duty pay at the time of retirement by the percentage of disability which has been assigned. However, the minimum percentage for temporary disability retirees will equal 50%. The maximum percentage for any type of retirement is 75%.
    2. The second method is to multiply only your years of active service at the time of your retirement by 2.5% by your base pay or the average of highest 36 months of active duty pay at the time of retirement.
    1. The third method applies to you if you were eligible to retire/transfer under any other law. DFAS will compute your entitlements using both methods above, and use the one which results in the greatest amount of retired pay. If you desire that another method be used, you may request (in writing) that the other method be used.

    The difference between temporary and permanent disability is the stability of the medical condition. If your condition is not deemed "stable" by the PEB, they will recommend you be placed on the TDRL (temporary disability retirement list). When on the TDRL, you are subject to reevaluation every 18 months and limited to 5 years max on the TDRL. At the 5 year point, if not sooner during a re-eval, you are removed from the TDRL and either found fit; permanently retired, or discharged with severance pay.

    If on 24 Sep 1975, you were either a member of an Armed Force or was under a binding written commitment to become a member and are discharged/retired by reason of disability by the MILITARY disability evaluation system (not VA), your retirement pay may not be taxed. Otherwise, for a tax-free retirement, you'd have to have a combat-related disability. If you go through the VA disability evaluation system and they grant you disability compensation, that will not be taxed, regardless of whether or not you were in the service on 24 Sep 75.

    Veterans Administration (VA) Disability Compensation

    Don't confuse VA Disability Compensation with Military Disability Retirement Pay. They are two separate animals. The VA uses completely different standards for determining service-connected disability than the military uses for its disability retirement system.

    All retiring members who believe they have a service-connected disability can apply for VA benefits prior to, or after retirement. (In some cases, before retirement, military personnel offices may even help you apply). If you are eligible, a service-connected disability is established. While you are required to relinquish military retirement pay on a $1 to $1 ratio in order to receive VA Disability pay, the following benefits accrue as a result of VA compensation:

    1. VA compensation is nontaxable
    2. VA approved disability gives you a priority admittance to VA hospitals for medical treatment for your disability
    3. VA outpatient facilities are available for treatment of your disability
    4. If you die as a result of the service-connected disability, your surviving spouse is eligible for Dependency and Indemnity Compensation (DIC) from the VA
    5.  Even a rating by VA of 0% (although of no monetary benefit) documents your physical condition as service-connected.
    6. A rating by VA of 30% or higher allows you to receive additional tax-free allowances for your dependents.
    1. Annual cost-of-living increases to your compensation amount.
    2. VA disability percentage (and VA compensation) can be increased, based on a request and approval of reevaluation, resulting in increased tax-free compensation.
    3. The possibility of purchasing up to $10,000 of National Service Life Insurance without a physical exam. If you are awarded VA compensation, the gross amount of the compensation is deducted from your retired pay.

    The VA advises DFAS - Cleveland Center of all changes in VA compensation amounts. However, if the amount of your VA compensation does not match the amount deducted from your retired paycheck, you should immediately notify the DFAS - Cleveland Center and the VA to resolve the discrepancy.

    IMPORTANT: The Comptroller General has ruled that you will be held responsible for any overpayment even if it is the result of an administrative error.

    Special Compensation for Severely Disabled

    Under a brand new law, certain severely disabled retirees of the uniform services that have a disability rating as reported by the Department of Veterans Affairs (VA) are entitled to special compensation. The special compensation is paid for that month in accordance with the following schedule:

    • 70% or 80% = $100.00
    • 90% = $200.00
    • 100% = $300.00 

    You must meet the following requirements for entitlement to special compensation for severely disabled:

    1. You are NOT retired from the military for a disability.
    2. You are in a retired status and on the retired payrolls. Members recalled for more than 30 days to active duty are not in a retired status.
    3. You have 20 or more years of service for the purpose of computing retired pay. A reservist must have 7,200 or more points to qualify.
    4.  The VA rating for disability of m70% or higher must be awarded within 4 years of retirement.
    5. The VA rating must be 70% or higher for each month. If the rating falls below 70% any given month, then the retiree has no entitlement to special compensation for that month.

      When/How You Get Paid

      Unlike active duty pay, retired/retainer pay is only paid once per month. Your net retired/retainer pay should be sent to your financial institution by Direct Deposit unless you either reside in a foreign country, which Direct Deposit is not available. Your retired pay will be deposited to your account on the first business day of the month following the end of the month.

      Your first payment for retired pay normally will arrive 30 days after your release from active duty, or, on the first business day of the month following the month of first entitlement to pay. In a separate mailing, you will receive a letter which will show you how your pay was computed. This will include your deductions for SBP, federal/state income tax, and allotments.

      After you retire, you will need to notify The Defense Finance & Accounting Service (DFAS) whenever you change your financial institution. Do not close your old bank account until you receive the first deposit in the new financial institution.

      Foreign Employment

      Any applicant who accepts employment with a foreign government without approval is subject to having reserve or retired pay withheld for the period of unauthorized employment.

      If you are retired and contemplating employment by a foreign government, you must obtain approval from the Secretary of the service concerned and the Secretary of State. For more information contact:

      • Navy - The Office of the Judge Advocate General, 200 Stovall Street, Alexandria, VA 22332-2100.
      • Air Force - HQ AFMPC/DPMARR3, 550 C Street West, Suite 11, Randolph AFB TX 78150-4713.
      • Marine - HQMC (MMSR-6), 2 Navy Annex, Washington, D.C. 20380-1775 or call 1-800-336-4629 if there are any questions.
      • Army - U.S. Army Reserve Personnel Command, Attn: ARPC-SFR-SCI, 1 Reserve Way, St. Louis, MO 63132-5200.

      Federal Civil Service Retirement

      If you retire from the military and are retired/retiring from Federal Civil Service, you can elect to waive your military retired pay in order to include your military service in the computation of your civil service annuity. (Which, depending on the circumstances can be financially worth it). However, for retired reservists, this is true only if you are service retired years of service or disability retired. If you are age retired (age 60) then there is no waiver or offset (a technical "loophole" in the law).

      If you choose to do so, you need to notify DFAS, in writing, at least 60 days prior to your planned civilian retirement date. It is suggested that you contact your civilian personnel office prior to the submission of your waiver request to ensure that you are aware of all the available options.

      If you elect survivor coverage from your civil service annuity, your military SBP participation will be suspended while you receive the civil service annuity. If you want to retain military SBP you may do so, but you must then decline survivor annuity from the Office of Personnel Management. If your pay is subject to court-ordered distribution, you must authorize an allotment in an amount equal to the distribution, in order to include military service in the civil service annuity computation.


      In most cases, retired pay is fully taxable. The amount of taxable income is reduced by SBP costs and any waiver for VA compensation or deduction for dual compensation (federal civil service employment). The amount deducted from your pay for federal withholding tax is based on the number of exemptions you indicate on either your pay data form or your W-4 after retirement.

      To change your withholding tax status or to request an additional withholding amount after retirement:

      • You must forward an IRS Form W-4 to DFAS - Cleveland Center.
      • Use Employee Member Self Service (See DFAS Web Site)
      • Air Force retirees can visit their local Financial Services Office or Air Force Base to change their Federal Income Tax Withholding information. Some Navy Personnel Support Detachments (PSDs) and Army Retirement Service Offices (RSOs) also offer this service.

      Disability retirement payments (Not VA Disability) are taxable for those members with either total military service after September 24, 1975, or who were in the service before this date but were not on active military service or under binding written commitment to become a member of the armed services on September 24, 1975.

      Disability retirement payments are nontaxable for those members with military service or under binding written commitment to become a member of the armed services on September 24, 1975, or members whose disability retirement has been deemed as combat-related, regardless of their active military service.

      If your disability retirement is calculated based on the second method (See above), only that portion of your pay which would have been received under the actual percentage of disability calculation is nontaxable The amount of taxable income may be further reduced by any SBP cost and deduction for dual compensation (federal employment).

      If your disability retirement was combat-related, you are not subject to the provisions of dual compensation. If, after retirement, you waive a portion of your pay in favor of VA compensation, your taxable income will be reduced by the amount of VA compensation or the amount of percentage of disability calculation, whichever is greater.

      State tax withholding is on a voluntary basis and must be in whole dollar amounts. $10.00 is the minimum monthly amount. Before making your request in writing, you must contact the taxing authority in the state in which you have established residence to determine if you are required to pay state income tax.

      If you are an Air Force retiree, your local Financial Services Office at the Air Force Base. Some Navy Personnel Support Detachments (PSDs) and Army Retirement Service Offices (RSOs) can adjust your state tax withholding information. Navy personnel should check with their local PSD to see if this service is available.

      Retired/retainer pay is not subject to FICA (Social Security) deductions, nor is your retired pay reduced when you become entitled to social security payments.


      Unlike active duty pay, military retired/retainer pay cannot be garnished for commercial debts (i.e. credit cards, automobile loans, etc.) Military retirement pay can, however, be garnished for alimony, child support, IRS Tax Levies, and debts owed to the government (i.e. student loans, PX/BX Deferred Payment delinquencies, Officer/NCO Club payment delinquencies, etc.)

      Additionally, under the provisions of the Uniformed Services Former Spouse Protection Act (USFSPA), state courts *may* treat military retired pay as joint property between the member and the spouse during divorce proceedings.

      Contacting DFAS

      Once retired, it is important that you keep DFAS informed of any changes in your account. Toll-Free Number. The toll-free number which may be used for any calls made within the Continental United States, including Alaska and Hawaii is 1-800-321-1080. The commercial number for calls made from outside these areas is (216) 522-5955 or DSN 580-5955. All telephone lines are staffed Monday through Friday from 7:00 a.m. - 7:30 p.m., Eastern Time. The above numbers can be used for general questions about your account and notifications such as a change of address.

      You must sign requests that involve monetary changes. Therefore, this type of change cannot be handled by phone. If the monetary change will prevent an overpayment to you, an exception will be made to this rule.

      DFAS Mailing Address. The address that must be used for requests for monetary changes is:

      Defense Finance & Accounting Service, Cleveland Center Retired Pay Operations (Code PPR), PO Box 99191, Cleveland OH 44199-1126 6.

      You can also visit the DFAS website at http://www.dfas.mil