Calculating a Reserve retirement

I recently answered a couple of questions on calculating the amount of a Reserve retirement for both Final Pay and High Three pay systems. If you’re eligible for a Reserve/Guard pension then let me repeat the questions & answers so that you can confirm your own math. If you’ve had a different experience, please post about it in the comments!  I’ve read the references and checked them with an expert, but I haven’t personally gone through the process.

When you’re in the Reserves or Guard, your time toward a pension is credited on two factors: the number of points you build up, and the number of “good years” you’ve completed. You accumulate points for drill weekends, active duty periods, and some special circumstances like online/correspondence courses or funeral honors detail. Each service is a little different in their point calculations– for example a Navy Reserve drill weekend awards two points per day because a Reserve weekend counts for four drill points.

Points

Points accumulate from both active duty and the Reserve/Guard system. Each day of active duty counts as one point. Each drill counts as one point, as do the days of active duty in the Reserve/Guard for training or mobilizations. It’s possible to get points for other purposes but they’re generally limited. (It’s possible for officers commissioned from NROTC to receive points for the days they were on active duty for midshipman summer training, but they’ll need to supply the documentation.) You’re also limited by the number of points you can get in a category– you can’t do 52 drill weekends in one year and get points for every one. Of course you can certainly be mobilized during a leap year and receive 366 points of active duty.

Good year

A “good year” ensures that you show up each year for a certain minimum amount of work. Again each service has their individual requirements, but generally if you show up for drills on at least 10 of the 12 months (or complete enough other assignments) then you’ve met the intent of a good year. You may be required to earn a certain minimum number of points within 12 months, and to maintain your mobilization readiness (like completing the medical checklists). When you do that, you’re credited with your “good year”.

This status is tracked in your service’s Reserve/Guard databases, and you may be issued occasional updates. Every year you can earn a certain number of points and get a “good year”. However you’ll still have to verify that your service correctly credits you with that accomplishment.

You’re considered eligible for retirement when you’ve completed 20 “good years” of service. (But of course you can usually choose to continue to serve.) If you have a combination of active duty and Reserve/Guard duty, then your active-duty service time counts toward the 20 good years. There are also special circumstances (mainly medical) when you may be eligible to retire before reaching 20 good years. However for purposes of this post we’re going to assume that your retirement eligibility is based on the main requirement of 20 good years.

When you reach 20 good years, your service will eventually formally notify you that you’re eligible for retirement. (You may still have to finish other obligations like an enlistment, a minimum time in rank, or a set of orders.) When you complete those requirements (or have them waivered, or agree to retire at a lower rank) then you can apply for retirement. The key to your retirement is that “notice of eligibility”.

Retire awaiting pay, or resign

There are two ways to retire, and they require you to consider a certain amount of risk. The first option is to “retire awaiting pay”. Over 99.99% of Reserve/Guard retirees choose this option. When you retire awaiting pay you’re not required to perform any duties or maintain any readiness in the “gray area” between the time you retire and the start of your retired pay, but the risk of this option is that you could still be recalled to duty for a full mobilization. A full mobilization requires the President and Congress to declare a war that’s bad enough to require the entire armed forces, and it’s more severe than the Presidential mobilization that was declared after 9/11.

Most Reserve/Guard retirees are willing to take this risk because the Department of Defense pays for it. If you retire awaiting pay then your seniority within your rank continues to accumulate, and when you reach your pension start date (generally age 60) then your retirement pay will be drawn at the active-duty pay table in effect that year. In other words, DoD covers you on both seniority and inflation.

If you’re not willing to accept the risk of a full mobilization, then the only way to completely avoid it is to resign. You’ll still receive your pension at your start date (generally age 60) but it’ll be at the seniority you had in that rank when you resigned– and in the pay scale in effect when you resigned. This may not be much of a difference if you resign at age 59, but if you resign at age 37 then you’ll be facing over two decades of inflation erosion before your pension starts.

For the purposes of this post, we’re going to assume that you “retire awaiting pay”.

Final Pay or High Three?

The next question is whether you’re retiring under the pay base system of “Final Pay or “High Three”. Both of them depend on the “Date of Initial Entry into Military Service” or “Date of Initial Entry into Uniformed Service”. For most servicemembers it’s considered the day that you first raised your hand, took the oath, and received an ID card. If your DIEMS/DIEUS date is before 8 September 1980 then you’re Final Pay. Otherwise you’re “High Three”.

One loophole to this involves commissioned officers. If your commissioning source was a service academy, then your DIEMS date is the date you started at the service academy. However when the services consolidated their pay systems in the 1990s, some members of the service academy classes of 1981-1984 were not properly credited with the correct DIEMS/DIEUS date. If you’re one of the few in this situation then make sure that your date is before 6 September 1980.

Once you determine which retired pay base system you’re under, you’re ready to calculate your service percent multiplier.

Service percent multiplier

If you had retired under the active-duty system, your multiplier would have been 2.5% per year of service. For 20 years of service this is the “50% of base pay” that you’ve seen so much in the media.

The Reserve/Guard retirement system calculates the multiplier from your total points. Divide your grand total career point count by 360 (because pay is based on 30-day months) and multiply by 2.5% to come up with your service multiplier. For example, 2134 points / 360 * 2.5% = 14.82%. That’s your service percent multiplier, just as an active-duty retirement at 20 years would be 50%.

Pay scale

Now you need your pay scale. If you “retired awaiting pay”, then your pay scale is on the pay table at the maximum longevity for that rank during the year that you turn age 60. (A few Reserve/Guard veterans may be eligible to begin receiving their pension earlier than age 60. We’ll get to that near the end of this post.) The problem with this calculation is that Reserve/Guard members who “retired awaiting pay” have to wait until they turn age 60 to know exactly what amounts are on that pay table. (If you’re only 37 years old when you retire, then you’d have to wait nearly 23 years to find out.) The only suggestion I have for this situation is to assume that your pension will keep up with the current pay tables. In specific terms, you’re assuming that military pay maintains pace with the Employment Cost Index. For a spreadsheet or a calculator, you could assume that military pay grows with the rate of inflation. This is not a very accurate assumption but it’s the best available for calculating future dollars.

A better assumption would be to convert your retirement income and expenses to today’s dollars and use today’s pay table. Take a look at the second page of the 2012 pay table. If you retired as an O-6, there are pay longevity raises at 20 years of service, 22 years, 24 years, 26 years, and 30 years. It tops out at 30. If you retired as an O-6 awaiting pay then you’d choose the maximum pay of that rank– in this case O-6>30 or $10,557.30/month. If you retired as an O-5 then it’d be $8446.20. At E-7 it’d be $4815.90.

The Final Pay pension

Whatever max pay you find for that rank, multiply it by the service percent multiplier and round it down to the nearest dollar. That’s your monthly pension. For an E-7 with 2134 points starting their pension in 2012 it’d be $4815.90 * .1482 = $713/month.

The High Three pension

That’s a messier calculation.

Here’s what the Association of the U.S. Navy website says about High Three Reserve retirement in one of their articles (behind a membership login):

This system applies to anyone with a DIEMS of 8 September 1980 to present. Retired pay is calculated based on a figure derived from the average of the last 36 months of basic pay for the approved retired grade (highest grade satisfactorily held), and from the length of service (longevity) prior to reaching age 60. In other words, it is the basic pay in effect when you were ages 58, 59, and 60. The percentage of that figure (36-month average) you will receive is calculated by dividing your total points by 360 and multiplying that figure (equal to years and months) by 2.5 percent.

So you still start with your total points, divide by 360, and multiply by 2.5% to get the service percent multiplier.

But then the pay calculation is painful. You have to have 36 months of pay charts (the years you turn ages 60, age 59, age 58, and age 57). For each one you’ll take the max pay at that rank (max longevity) and the number of months of that year. Then you’ll add them all together and divide by 36.

Let’s say you turn age 60 in June 2012. You’d use six months (January-June) of pay for that rank at the max longevity in the 2012 pay table. For a High Three E-7 that’s $4815.90/month * 6.
Then you’d use 12 months of max pay for that rank in the 2011 pay table: $4740.00 * 12.
You’d add another 12 months of max pay for that rank in the 2010 pay table: $4674.60 * 12.
Finally you’d add another six months of max pay for that rank in the 2009 pay table: $4521.00 * 6.
Now that you have the final 36 months of pay, you add all those numbers up and divide to get the final average monthly high-three pay:

($4815.90 * 6 + $4740.00 * 12 + $4674.60 * 12 + $4521.00 * 6) / 36 = $4694.35.

Note that it’s 97.5% of the Final Pay amount– only a 2.5% reduction.

That base pay number is multiplied by the service multiple to get the monthly pension amount.

$4694.35 * .1482 = $695/month.

Seems like a lot of work to shave 2.5% off your pension, but “high three” is commonly used in today’s defined-benefit pension systems to avoid the employee syndrome of “pension spiking”, a final year of work with exceptionally high pay. Congress and DoD just took advantage of a common civilian practice that doesn’t happen to be common to the military.

AUSN’s website doesn’t even have a calculator for the High Three Reserve retirement. They have a “Contact us” form that you fill out with the pertinent data, and then AUSN’s staff calculates the pension amount by hand.

By the way, if you join AUSN you’ll have access to all their website tools for Reserve planning, including the latest on when you’ll hear from your service and the pay center. You’ll be able to use their calculators and their guides on the Survivor Benefits Plan and their articles on retiree taxes. For a fee, AUSN will even review your record to determine how much you’ll be getting and what steps to take. I haven’t researched the question, but the other services should have similar Reserve/Guard advocacy organizations with similar support.

Starting retired pay before age 60

Some Reserve/Guard members may actually be eligible for a retirement earlier than age 60. The current legislation (passed in early 2008) reduces the age 60 retirement requirement by three months for every 90 consecutive days of mobilization during a fiscal year for war or national emergency. In other words, a Reservist volunteering to deploy to the desert for a fiscal year would be eligible to start their Reserve pension at age 59. A member of the National Guard who deploys with their unit for 24 months of the next five years (at least 90 days in the fiscal years) would be able to draw their pension at age 58. But this law only applies for deployment time served after Jan. 28, 2008. Several amendments have been proposed to retroactively extend this benefit to September 11, 2001, but none of these modifications have yet been approved by Congress.

Related articles:
Retiring from the Reserves and National Guard
Estimating your retired military pay
Air Force Reserve retirement website
Army Reserve retirement website
Comparing an E-7 active-duty pension to an E-7 Reserve pension

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