Military retirement marks a significant transition, both professionally and financially. Understanding the financial implications of retirement, including how retirement pay works, tax implications, etc. is essential for planning a secure future.

With the right preparation, you can make the most of your military benefits and set the foundation for a successful retirement.

Understanding Military Retirement Pay

By providing a steady income based on their rank and years of service, military retirement pay is a major benefit for servicemembers who have served long enough to qualify.

Retirement Pay Eligibility

Servicemembers become eligible for retirement pay after completing at least 20 years of active-duty service. Those who qualify under the Legacy High-3 or Blended Retirement System (BRS) receive a monthly pension based on their years of service and the highest average pay of their career.

How to Calculate Military Retirement Pay

If you qualify for military retirement pay, determine what your new income will be.

Use the Department of Defense (DoD) calculator tool to help you calculate your retirement pay. The longer you serve, the more retirement pay you will be qualified to receive.

Retirement pay is different from active-duty pay. The difference this makes to your income will impact many areas of your life, especially if you’re not transitioning into a civilian job or career.

Is Military Retirement Taxable?

Each state has its own laws concerning military retirement pay. When searching for your retirement location, check to find out if the state you currently live in or are considering living in taxes military retirement income.

The following states do not tax military retirement: 

Do Disability Benefits Affect Military Retirement Pay?

Disability benefits can affect military retirement pay depending on the rating assigned by the Department of Veterans Affairs (VA). If a servicemember is approved for VA disability compensation, they may receive these benefits tax-free in addition to their military retirement pay.

However, if the disability rating is below 50%, their retirement pay may be offset (reduced) by the amount of the VA compensation to avoid double compensation for the same service.

Those with a rating of 50% or higher may qualify for Concurrent Retirement and Disability Pay (CRDP), which allows them to receive both full military retirement pay and VA disability benefits without any reduction.

Financial Planning for a Successful Retirement Transition

Financial planning for a successful transition to military retirement involves several steps:

Getting Out of Debt

If you have debt, getting out of it should be your top priority. Once you’re in the black, you can focus on saving for the future.

Setting Money Aside

A great goal is to set aside 20% of your family’s disposable income (the money your family has available after income taxes). Put 10% toward retirement and 10% toward your emergency fund. You can add or subtract from these amounts based on your financial situation and goals.

Take advantage of the Thrift Savings Plan (TSP), which allows military members to contribute to retirement savings and investment plans. Make the most of your money by investing early and often so that you can earn more over time. You can leave your funds in your TSP account after retirement.

If you plan to contribute to or fully fund your child’s education, set money aside for that as well. Expenses to consider include private school, study abroad opportunities, college tuition, books, room and board, etc. Talk with your family about their educational goals so you can determine how much you’ll need to save, then make a plan and contribute regularly.

Creating a Retirement Budget

Create a comprehensive retirement budget that accounts for your military pension, TSP withdrawals, and any other income sources. Include projected expenses such as healthcare costs, housing, and lifestyle changes to ensure you have a clear plan for managing your finances post-retirement.

Assessing and Setting Goals

Once your emergency fund contains at least 6 months’ worth of income, you can start saving for other retirement goals. When you and/or your spouse retire from the military, what do you want to do?

Some common goals are:

• Buying an RV or a boat
• Planning a vacation
• Buying a new home
• Funding a new hobby (e.g., golfing, biking, gardening, etc.)

Prepare Your Finances for Retirement with AAFMAA

Take charge of your financial future with a clear understanding of military retirement pay and benefits. Whether you’re calculating your pension, exploring tax implications, or planning for life after service, AAFMAA is here to support you. Get started today by downloading our retirement transition timeline today or contact us to start preparing for a smooth transition and a secure, fulfilling retirement.