A reader asks:
“What is your recommendation between early retirement from active duty or a Reserve retirement? I qualify for the Temporary Early Retirement Authority if I get passed over for promotion to major. I have about a total of 16 years of active duty (10 Army commissioned, six enlisted) and about 14 enlisted Reserve years from the Navy. I’m 51 years old.”
Congratulations, it looks like you’re already eligible for a Reserve retirement!
Please check the retirement requirements at the post “Reserve Military Retirement For Active Duty Veterans With Previous Reserve or National Guard Service”. The Navy Reserve may not have tracked your active-duty Army time in your Reserve records, so you’ll have to update your point count with them. Make sure you have your Reserve Notice of Eligibility letter (confirming 20 good years) as well as an accurate Reserve point count.
Your retirement system (Final Pay or High Three) depends on your Date of Initial Entry on Military Service. If you obtained your first military ID card before 8 September 1980 (Navy Reserve) then your retirement system may be Final Pay. If your first military ID was issued after 7 September 1980 then your retirement pay base will be High Three.
Check your service’s TERA message. (A public portion of the Army’s TERA message is at this link, but you’ll need to check your HRC website for the latest MILPER message and other TERA guidance.) If you’re passed over you may still have to apply for TERA, and there’s no guarantee that you’ll be accepted. If you meet the TERA criteria then you can calculate your reduced pension using the DoD Financial Management Regulation TERA tables at this link. You should also consider the financial questions at this link.
Calculate the TERA pension
Now calculate the two pensions. Let’s assume that you retire from active duty at the end of 2014 as an O-3 under TERA with exactly 17 years of service on a High Three pay base. Using the 2012-2014 pay tables, your High-Three monthly pay base would be the average of those three years of pay: $6226.00 = [($6135.60 x 12) +($6240.00 x 12) + ($6302.40 x 12)]/36. The TERA calculation in paragraph 030111 of Chapter 3 of Volume 7B of the FMR (page 3-15) multiplies that number by 2.5% for each year of service and applies a reduction factor. Your 17-year TERA retirement would be 36 months short of 20 years so from FMR Table 3-5 (page 3-38) your reduction factor is 0.97000: your pension is reduced by three percent. Your TERA pension would be $6226 x (17 x 2.5%) x 0.97000 = $2566/month or $30,972/year starting on 1 January 2015. Your pension would rise each year with its cost-of-living adjustment (set at the Consumer Price Index), and unless inflation takes off then the COLA will continue at 1%-2%.
Note that the TERA pension service percentage multiplier is 17 x 2.5% x 0.97000 = 41.23%. This is an important number to compare to your Reserve pension service percentage multiplier, which is coming up next.
Calculate the Reserve pension
Next we’ll calculate your Reserve pension and compare it to your TERA pension. If you’re 51 years old now then we’ll assume that you’ll turn age 52 at the end of 2014, reach age 60 in eight years, and start your Reserve pension on 1 January 2023. You can calculate your Reserve pension with this post (the most popular post on the blog). We’ll assume that your 14 years of enlisted Reserve service gave you 14 good years at 50 points per year, and then your 17 years of active duty gave you another 365 points per year (plus four leap years). That’s a total of 14×50 + 17×365 + 4 = 6909 points. (Note: the Navy Reserve has probably not been tracking these numbers for you, so you’d need to update your point count and your good years to obtain your NOE and be considered qualified for the Reserve retirement that you’ve earned.) Unless you had several years of broken service and a DIEMS date before 8 September 1980, we’ll assume that your Reserve retirement is also under the High Three system.
Your Reserve pension still uses a High-Three average, but you’ll use the pay tables in effect in 2020, 2021, and 2022 with eight more years of seniority. I’m going to make a huge simplifying assumption: I’m going to assume that military pay rises at the same pace as the rate of inflation. If that’s the case, then for eight years (from 2015 to 2023) the active-duty pay tables would rise at the same rate that your TERA pension would rise with its COLA. The reality is that some years inflation would be higher than the military pay raise, but some ranks might get a targeted pay raise that would be higher than inflation.
Since this “simplifying” assumption gives both sets of pension dollars and the pay tables the same inflation factor, I’m going to stop adjusting them for inflation and work with today’s dollars. The pay tables in 2020-2022 would have the same purchasing power as today’s pay tables, and the same High-Three pension pay base.
Now your Reserve pension would be $6226 x (6909 / 360 x 2.5%) = $2987/month or $35,844/year starting on 1 January 2023.
The assumptions for this Reserve pension calculation made it awfully messy, but the critical factor is the service percentage multiplier. Your Reserve pension’s service percentage multiplier is 6909 / 360 x 2.5% = 47.98%.
Your TERA service percentage multiplier is smaller (41.23%) but the TERA pension will still have an eight-year head start on your Reserve service percentage multiplier (47.98%). That head start might be the most important factor in this decision.
Is it worth waiting eight years for a higher percentage? Let’s see how that head start works out.
After eight years of a smaller TERA pension, you’d have 8 x $30,972/year = $246,336. Most of you would stop reading this post right now to grab the TERA money and run, and your instincts would probably be correct. You’d have more money right now, you wouldn’t have to wait eight more years of pay raises to see how your Reserve pension would pay out, and you would not have to spend down your other investments while you waited for the Reserve pension to kick in. Heck, you might even get run over by a bus before you reach age 60! Humans have a hard time calculating the difference of waiting for the future value of money, and this is why so many people start their Social Security payments at age 62 instead of waiting until age 70.
But what if you waited eight years, everything worked out as assumed, and your pension included the higher service percentage multiplier?
The Reserve retirement would include eight more years of seniority in the pay tables because the gray area “retired awaiting pay” status assumes that the servicemember has been available for active duty the entire time before their pension starts. However, in this case the O-3 pay tables had already topped out at the “Over 14” years of service column, so there’s no longevity benefit.
The only significant difference between the TERA and Reserve pensions (after all of these assumptions and other factors) is the service percentage multiplier. Waiting eight years earns a Reserve pension that’s 6.75 percentage points higher (= 47.98% – 41.23%), or an extra $2090/year. It’ll take nearly 118 years– over a century– to make up for losing that $246,336 head start.
Here’s a couple of other ugly truths:
- Healthcare. The TERA retiree has Tricare Prime insurance immediately, and at a very low annual enrollment fee. The Reserve “gray area” retiree has to pay for their own health insurance for eight years, either with Tricare Retired Reserve (nearly $400/month) or a state Affordable Care Act health insurance exchange.
- Pay raises. By federal law the military retiree COLA is set to the CPI. (Admittedly Congress can change the military retiree COLA at any time.) Military pay is negotiated each year with the Congressional budget, and it’s more likely to fall short of the retiree COLA.
Back to our original instincts: Take the TERA.
What if the fun stops?
As we pointed out at the start of this post, the TERA program has to be applied for. If the reader fails to select for O-4 and is not approved for TERA, then they would face involuntary separation. In that case they’d immediately file for a Reserve retirement, which is why it’s important to update their Reserve point count now and get the NOE. That proves to the Army that their prior Navy Reserve service (and Army active duty) renders them eligible for the Reserve pension.
What if they promote to major after all? Everyone lives happily ever after, right? I hope so. As a new O-4 they would probably not be approved for TERA, and it’s very tempting to stick around for three more years to earn an active-duty pension.
What if they get a horrible set of orders at 17 years? Ah, now there might be a problem. They’d have to balance their personal priorities (family, quality of life) against the financial ones (active-duty pension). However, the key to that discussion is: it’s only money. This post shows how to calculate the difference between gutting it out for an active-duty retirement versus retiring right now and waiting for a Reserve pension. In this case the decision is worth hundreds of thousands of dollars over their lifetime, but passing up that money now may enable them to preserve their mental, emotional, and physical health. The Reserve pension will include inflation protection and affordable healthcare, so the extra money of an active-duty pension (and the extra years of active-duty pay) just might not be worth the personal & family stress. It’s a highly individual decision. However, when my spouse was confronted with a similar decision, our savings and investments gave her the financial confidence to leave active duty for her own Reserve pension.
We’ve been there. If you’re facing a similar decision then contact me and we can talk through the issues.
This reader has prior enlisted military service. Whenever that happens, talk to a military lawyer who’s familiar with Title 10 of the U.S. Code for military retirement law. You want to make sure that your retirement occurs as an O-3. You need solid legal advice on this before you can count on the numbers.
It’s also possible that your deployments after 28 January 2008 may make you eligible to start a Reserve retirement earlier than age 60. In this case, however, starting a Reserve pension a few months (or even a few years) earlier would not overcome the head start of a TERA pension.
Finally, decide what you want to do with your GI Bill. Once you apply for retirement then you may no longer be able to transfer your GI Bill benefits to your spouse or kids. However, you might want to keep those GI Bill benefits for yourself or your spouse. If you use your GI Bill for an advanced degree and earn a higher income at a bridge career, then your years of higher income may do more to save for college than the value of the GI Bill for your kids.
Thanks for asking the question, and please let us know how your promotion works out!
Reserve Military Retirement For Active Duty Veterans With Previous Reserve or National Guard Service
Calculating A Reserve Retirement
Retiring from the Reserves and National Guard
The regulation for calculating an active-duty pension
Retire at 17 years of service or 20?
Military Reserve and National Guard Retirement Calculators
Reader story: “My Road to a Reserve Retirement”