9153 / What is the legacy retirement system for active servicemembers?

To participate in the legacy retirement system, both reserve and active component servicemembers must complete of 20 years of qualifying service.¹ Active duty servicemembers must complete 20 years of honorable service to qualify for retirement. Upon qualification for retirement, the servicemembers can calculate their retirement pay by determining which of the three active duty, legacy pay structures they fall under. The first legacy retirement pay plan is called the Final Pay plan. This plan pays a pension to the servicemember of 2.5 percent times the number of years of service times the servicemember’s final basic pay on the day of retirement. The Final Pay plan is only available to servicemembers who entered service before September 8, 1980.The second legacy retirement pay plan is called the High-36. The High-36 pays a pension to the servicemember based on a formula. That formula equals (1) 2.5 percent times the number of years of service (2) times the average of the member’s highest 36 months of basic pay. The 2.5 percent multiplier is increased as the servicemember continues to serve beyond 20 years and caps at 41 years of service. At 30 years of service, using any of the three retirement pay plans, servicemembers receive 75 percent of their base pay. The High-36 is the most widely seen for servicemembers who are entered service between 1980 and 2017.

A lesser-known retirement plan option for servicemembers who entered service after July 1986 but before January 2018 is the REDUX plan. REDUX allowed, until January 2018, servicemembers to opt for a career status bonus of $30,000 in a lump sum payment at their 15th year of service with an obligation to serve at least another five years. Upon retirement, the servicemember then has their defined benefit pension pay at 2.5 percent the number of years of service times the average of their highest 36 months of basic pay, but the multiplier is reduced by 1 percent for each year less than 30 years of service until age 62. After age 62, the retiree receives the full multiplier, 2.5 percent. The lump sum payment can be contributed to the servicemember’s thrift savings plan or receive the distribution outright.²

Upon retirement, active duty servicemembers are entitled to receive their defined benefit pension payments.

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Planning Point: For a typical active duty servicemember who retires after 20 years of service, this means that they begin to receive their pension somewhere between the ages of 38 to 42 assuming that they enter active duty shortly after high school or upon graduation from an undergraduate program. Assuming a life expectancy of 80 years of age for retirees, the active duty veteran must make a pay plan decision at retirement that will serve as the foundation of over 40 years of retirement pay. Justin L. Baker, JD, MBA, Army Reserve Lieutenant Colonel, Candidate for LLM in Wealth Management and Masters in Strategic Studies at the U.S. Army War College;https://www.bakerwealthstrategies.com/welcome/

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1.“Military Pay.” Military Compensation, militarypay.defense.gov/Pay/Retirement.aspx