Military Pension Optimization: Real Strategies That Work
Military pension planning has gotten complicated with all the different retirement systems, tax considerations, and benefit options floating around. As someone who’s seen how retirees make the most (and least) of their benefits, I learned everything there is to know about what actually moves the needle on your retirement income. Today, I will share it all with you.
Know Which System You’re In
Probably should have led with this section, honestly. Three retirement systems exist, and they calculate your pension differently:
- Final Pay System: For those who entered before September 1980. Uses base pay at retirement times 2.5% per year. The simplest calculation.
- High-36 System: For those who entered after September 1980 but before January 1, 2018. Averages your highest 36 months of base pay, times 2.5% per year.
- Blended Retirement System (BRS): For those who entered on or after January 1, 2018. Uses 2% per year plus TSP matching.
Everything else about optimizing your pension flows from understanding which system applies to you.
TSP: Don’t Leave Money on the Table
If you’re under BRS, your TSP is half the equation. The government matches up to 5% of your base pay. If you’re contributing less than 5%, you’re literally refusing free money.
Beyond the match, decide between traditional (pre-tax) and Roth (post-tax) contributions. Traditional TSP reduces your taxable income now but taxes you in retirement. Roth TSP doesn’t reduce current taxes but comes out tax-free in retirement.
For most military members in lower tax brackets during service, Roth TSP often makes sense. But run the numbers for your situation.
COLA: Understanding Your Inflation Protection
That’s what makes military pensions endearing to us financial planners — they actually adjust for inflation. Your pension receives Cost of Living Allowance (COLA) adjustments tied to the Consumer Price Index. This isn’t guaranteed in most civilian pensions.
However, COLA doesn’t always keep perfect pace with your actual expenses, especially healthcare costs which tend to rise faster than general inflation. Plan accordingly.
Survivor Benefit Plan: The Hard Decision
SBP provides your spouse up to 55% of your pension after you die, in exchange for a premium deducted from your pension (currently 6.5% of the base amount). Is it worth it?
Arguments for SBP:
- Inflation-adjusted survivor benefit
- No medical underwriting
- Premiums stop at age 70 or 360 payments
Arguments against:
- If your spouse dies first, premiums paid are lost
- Other insurance options might offer better value
- Your spouse might not need the income
Compare SBP premiums against term life insurance costs for your situation. No universal answer exists.
Working After Retirement
Your military pension continues regardless of civilian income — there’s no reduction for working. Many retirees double their income by starting second careers.
Federal employment offers additional benefits and veterans’ preference in hiring. Contractor positions, especially with clearance, can be lucrative. Your military skills often translate directly.
State Tax Considerations
Military pensions are federally taxable, but states vary widely. Some states (like Texas, Florida, Nevada) have no income tax. Others specifically exempt military pensions. A few tax everything.
Where you establish residency matters. The difference between a tax-free state and one that fully taxes military pensions can mean thousands of dollars annually.
Healthcare Planning
TRICARE covers retirees and dependents, but costs and coverage change at 65 when TRICARE for Life supplements Medicare. Budget for:
- TRICARE premiums before 65
- Medicare Part B premiums after 65
- Out-of-pocket costs TRICARE doesn’t cover
- Dental care (TRICARE Retiree Dental Program or civilian insurance)
Healthcare costs often surprise retirees who expected free care forever. Plan for the actual costs.
Inflation Beyond COLA
COLA helps, but diversifying income sources provides additional inflation protection. Consider:
- TSP/investment accounts that grow over time
- Part-time work or consulting
- Rental property income
- Social Security (yes, military service counts)
A pension plus other income sources provides more financial resilience than pension alone.
Estate Planning Basics
Get a will, power of attorney, and healthcare directive in place. Military legal assistance offices provide these services for free. Review and update documents as life circumstances change.
Proper estate planning ensures your pension benefits and other assets transfer smoothly to your family.
When to Get Professional Help
Financial advisors specializing in military finances understand the unique aspects of your situation. Look for fee-only advisors (they don’t earn commissions on products they sell you) with military experience.
Complex situations — disability ratings, divorce, second marriages with children from prior relationships — benefit from professional guidance. Simple situations might not need it.
