Maximizing Your Military Retirement Income
Maximizing Your Military Retirement Income
Retirement income strategies have gotten complicated with all the investment options, benefit programs, and side hustle opportunities flying around. As someone who retired after 24 years and built multiple income streams to supplement my pension, I learned everything there is to know about maximizing what you earn after hanging up the uniform. Today, I will share it all with you.
Understanding Military Retirement Pay
Probably should have led with this section, honestly. Your military pension is calculated based on your years of service and the average of your highest-earning months. There are three main systems: Final Pay (pre-September 1980), High-36 (September 1980 to December 2017), and the Blended Retirement System (BRS) for anyone who joined after January 2018.
- Final Pay uses your last month’s base pay
- High-36 Month Average takes your highest 36 consecutive months
- Blended Retirement System (BRS) combines a pension with TSP matching
The High-36 and Final Pay systems give you 2.5% per year of service, so 20 years equals 50% of your base pay. BRS drops that to 2.0% per year (40% at 20 years) but adds government TSP contributions to make up the difference. Understanding which system you’re under is critical because it affects every other financial decision you make.
Thrift Savings Plan (TSP)
The TSP is your military 401(k), and if you’re under BRS, the government matches up to 5% of your contributions. That’s free money—literally a 100% return on investment the moment you contribute. Even if you’re under the legacy systems without matching, TSP is still one of the best retirement investment vehicles available because of its incredibly low fees.
Max out your TSP contributions if you can afford it. The 2026 limit is $23,000 for regular contributions, plus catch-up contributions of $7,500 if you’re 50 or older. Traditional TSP contributions reduce your taxable income now, while Roth TSP gives you tax-free withdrawals in retirement. Most financial advisors recommend Roth TSP for junior enlisted and junior officers who are in lower tax brackets, then switching to traditional TSP as you promote and hit higher tax brackets.
Healthcare Benefits
TRICARE is one of the most valuable benefits of military retirement, and choosing the right plan can save you thousands annually while ensuring quality coverage for your family.
- TRICARE Prime: Lowest cost, managed care, requires referrals
- TRICARE Select: Higher cost, more flexibility, any TRICARE-authorized provider
- TRICARE For Life: Age 65+, works with Medicare as secondary payer
If you live near a military treatment facility, TRICARE Prime is hard to beat—you’ll pay minimal copays and deductibles. If you want to choose your own doctors and don’t mind paying a bit more, TRICARE Select gives you that freedom. Once you hit 65, TRICARE for Life becomes your secondary insurance to Medicare, and between the two you’ll have essentially zero out-of-pocket costs for most healthcare needs.
Additional Income Sources
Here’s the reality: your military pension probably won’t cover all your retirement expenses, especially if you retire at 20 years and you’re only in your early 40s. Most military retirees work second careers, start businesses, or build side income streams.
Your military skills translate directly to civilian jobs—project management, logistics, leadership, technical specialties. Defense contractors actively recruit military retirees for their security clearances and operational experience. Consulting work lets you set your own schedule and leverage decades of specialized knowledge. Rental properties provide passive income and tax benefits. That’s what makes second careers endearing to us retirees—we’ve still got 20-30 productive years ahead, and the pension gives us the financial cushion to be selective about what work we take on.
Veteran Benefits
Don’t confuse DoD retirement benefits with VA benefits—they’re two completely separate systems. File for VA disability compensation if you have service-connected conditions. The VA rates disabilities from 0% to 100%, and the monthly compensation is tax-free. If you’re rated 50% or higher, you qualify for Concurrent Retirement and Disability Pay (CRDP), which lets you receive both your full military pension and VA disability without offset.
The Post-9/11 GI Bill can be used by you or transferred to dependents for education. VA home loans offer zero down payment and competitive interest rates. These benefits can add thousands of dollars annually to your effective retirement income.
Social Security Benefits
Your military pension doesn’t reduce your Social Security benefits—you’ll receive both. The question is when to start claiming Social Security. You can start at 62, but you’ll get reduced monthly payments. Wait until your full retirement age (67 for most current retirees), and you get 100%. Delay until 70, and your monthly benefit increases by 8% per year past full retirement age.
If you’re working a second career after military retirement, those earnings count toward your Social Security calculation. Military service after 1957 also adds to your Social Security credits, potentially increasing your benefit amount.
Survivor Benefit Plan (SBP)
SBP costs 6.5% of your gross retirement pay, but it guarantees your spouse receives 55% of your pension for their entire lifetime after you die. For most retirees with families, this is essential protection. Run the numbers comparing SBP to commercial life insurance—in most cases, SBP provides better value for long-term survivor protection, especially if your spouse is likely to outlive you by many years.
The premiums are deducted pre-tax, reducing your taxable income. And critically, SBP includes annual COLA adjustments, so the survivor benefit keeps pace with inflation.
Tax Implications
Military retirement pay is federally taxable, but many states offer partial or complete exemptions. States like Florida, Texas, Tennessee, and Washington have no state income tax at all. Others like Alabama, Hawaii, Illinois, and Mississippi completely exempt military retirement pay from state taxes. If you’re deciding where to retire, state tax treatment of military pensions should be a major factor.
Moving from a high-tax state like California (13.3% top rate) to a no-tax state like Florida can effectively give you a 10%+ raise on your retirement income without changing anything else about your finances.
Investment Strategies
Your military pension provides baseline income, which lets you take more calculated risks with your investment portfolio. Younger retirees (40s and 50s) can afford heavier stock allocation for growth. As you age, gradually shift toward bonds and more conservative investments to preserve capital.
Diversification is critical—don’t put everything in one asset class. TSP lifecycle funds automatically rebalance as you age, which is a solid set-it-and-forget-it approach. If you’re more hands-on, consider index funds for broad market exposure with low fees. Work with a financial advisor who understands military retirement and can help you build a strategy tailored to your specific situation.
Paying Off Debt
High-interest debt kills retirement income faster than anything else. Credit card interest at 18-25% APR will drain your pension before you can invest or save. Prioritize paying off credit cards, personal loans, and any other high-interest debt before you retire if possible.
Mortgage debt is different—if you’ve got a 3% mortgage rate, you might be better off keeping that debt and investing the money elsewhere for higher returns. But entering retirement without credit card debt and car loans gives you so much more financial breathing room.
Transition Assistance Programs
The military’s Transition Assistance Program (TAP) is mandatory for separating service members, and you should treat it seriously. TAP covers resume writing, job searching, financial planning, VA benefits, and entrepreneurship. The financial planning track specifically addresses retirement income strategies, budgeting, and benefit coordination.
Beyond TAP, most installations have Personal Financial Management programs offering one-on-one counseling. Use these free resources—they’re staffed by professionals who understand military benefits inside and out.
Utilizing Military Discounts
Military discounts might seem small, but they add up. Home Depot and Lowe’s offer 10% off every day to veterans. Many restaurants give 10-20% discounts. Hotels, rental cars, theme parks, and retailers all have veteran discount programs. Always ask—the worst they can say is no, and you’d be surprised how many places offer discounts that aren’t widely advertised.
Commissary and Exchange shopping saves 20-30% on groceries and eliminates sales tax on other purchases. If you live within reasonable distance of a base, use these facilities regularly—the annual savings can easily reach thousands of dollars.
Long-Term Care Insurance
TRICARE and VA healthcare don’t cover long-term care like nursing homes or assisted living facilities. These costs can easily run $80,000-$120,000 per year and can devastate your retirement savings if you’re not prepared. Long-term care insurance premiums are expensive—especially if you wait until your 60s to buy coverage—but they protect your assets from catastrophic healthcare costs.
The Federal Long Term Care Insurance Program (FLTCIP) is available to military retirees and often offers better rates than commercial policies. Evaluate whether long-term care insurance makes sense for your situation based on your assets, family health history, and risk tolerance.
Understanding Inflation
Inflation erodes purchasing power over time, but military pensions include annual Cost-Of-Living Adjustments (COLA) that help maintain your income’s value. COLA is tied to the Consumer Price Index and typically runs 1-3% annually. That’s what makes military pensions endearing to us retirees—the COLA protection means our income keeps pace with rising costs, unlike fixed annuities or other retirement income sources that lose value over time.
Your investment strategy should also account for inflation. Stocks historically outpace inflation over long periods, which is why younger retirees benefit from equity-heavy portfolios. As you age and shift toward bonds, you’re trading growth potential for stability.
Staying Informed
Military benefits change constantly due to new legislation, policy updates, and program modifications. Subscribe to Military Times, MOAA newsletters, or veteran organization publications to stay current. Legislative changes can directly impact your retirement pay, healthcare costs, or eligibility for new programs.
The 2017 elimination of the SBP-DIC offset is a perfect example—retirees who weren’t paying attention missed out on thousands in retroactive payments. Stay informed, and you won’t miss opportunities to maximize your benefits.
