By Laura Roler, Military Saves Associate, AFC® Candidate, FINRA Military Spouse Fellow
A few weeks ago Military Saves published The Basics of Active Duty Retirement, which discussed retirement plans and military pensions for active duty service members. Similar to active duty retirement, members of the National Guard and Reserve also qualify for a military pension after completing 20 years or more of qualifying military service.
Planning for retirement is a must when balancing both military and civilian careers, and luckily, if you are in the National Guard or Reserve, you have multiple options. By putting those options to work early, often, and wisely, you will ensure that you have enough money to retire comfortably.
There are some key differences between active duty and reserve component retirement benefits that must be understood in order to adequately plan for retirement; most importantly, the age at which you will be eligible to draw payments, which is generally age 60. There are also some differences in how the years of qualifying service are determined.
In order to determine how much you will receive from your military pension, you need to determine your qualifying years of service. Due to the multiple missions and time requirements for reservist duty, a points system is used to more accurately convert reserve service to active service. To determine equivalent years of service for reservists' retired pay at age 60, see the calculation below:
Total number of Creditable Retirement Points ÷ 360 = Equivalent Years of Service
Reserve service points can vary greatly per year, depending upon the drilling status, training schedule, and active duty mobilizations and deployments. At least 50 Creditable Retirement Points must be earned in order to be a qualifying year. Inactive points may be added to any active duty points earned for a maximum of no more than 365 total points per year (366 points in a leap year). After the Equivalent Years of Service are determined, that number is multiplied by 2.5 percent to calculate the Service Percent Multiplier.
Similar to active duty service members, you will generally be expected to choose your retirement plan between 14 ½ and 15 years of service. There are two retirement formulas to choose from; each one results in the percentage of the basic pay that will paid in retirement pension. See the calculation below (courtesy of DFAS):
Retired Pay Formula
Retired Pay Base
x Service Percent Multiplier
= Gross Retired Pay
Below is a brief summary of each plan:
Final Pay Plan – You are eligible for this plan if your entry to military service was before September 8, 1980
Retirement pay is based upon your final rank and length of service as of your retirement date. For each year of service beyond 20, retired pay increases by 2.5 percent of basic pay, up to a maximum of 100 percent of basic pay for 40 years of service.
High-3 Plan (or High 36 Plan) – You are eligible for this plan if your entry to military service was on or after September 8, 1980
Retirement pay is based on your average basic pay over the 36 highest earning months (usually your last three years), multiplied by your Service Percent Multiplier, up to a maximum of 100 percent of basic pay for 40 years of service. Most current service members, both active duty and reserve, fall under the High-3 Plan. Because most reservists select the "retire awaiting pay" option rather than separation or discharge, most will transfer to the Retired Reserve until age 60, which allows their seniority within rank to continue to accumulate, and for retirement pay to be drawn at the active-duty pay table in effect that year. Because of this, the highest 36 months for a member who transfers to the Retired Reserve will normally be the 36 months before they turn 60.
A reservist who has accumulated the minimum 50 Creditable Retirement Points per year for 20 years has a total of 1000 points.
1000 Creditable Retirement Points ÷ 360 = 2.77 Equivalent Years of Service
2.77 Equivalent Years of Service x 2.5 = 6.94 Service Percent Multiplier
Retired Pay Base
x 6.94 Service Percent Multiplier
= Gross Retired Pay
As previously mentioned, reservists are eligible to begin drawing retirement pay at age 60. However, for certain active duty service performed after January 28, 2008, that age requirement may be reduced by 3 months for each cumulative period of 90 days performed in a fiscal year.
Other Retirement Options
Your military pension and Social Security alone will likely not provide a comfortable standard of living upon retirement. Luckily, you have the opportunity to participate in other retirement plans that will also provide extra income:
Thrift Savings Plan: As a uniformed service member, you have the opportunity to enroll and automatically contribute a portion of your basic pay to your account each pay period.
Employer-sponsored retirement plans: As a reservist, you have the advantage of holding a civilian job and potentially qualifying for a 401(k) or other retirement plan offered by your employer. You have the option to contribute automatically from your paycheck each month, and in some cases, your contributions may be matched by your employer. Assuming you continue your civilian career after retiring from the Guard or Reserves, you could potentially have 20 or more years to continue saving and building your retirement nest egg.
Individual Retirement Account (IRA): You also have the option to create a retirement account outside of your civilian job and the military. There are eligibility restrictions based on income and employment status, but an added benefit of this plan is that your spouse can also contribute.
With multiple options for retirement savings, you have your choice of where to save, and what you want your retirement years to be like. Make a plan. Set a goal. Save automatically.