The Regulation for Calculating an Active-Duty Pension

I read a good question on a discussion board:

Are years of service for retirement rounded by months? For example, if you serve for 20 years and 6 months, is it only 20 years for retirement (or 21 years)? Or is the 2.5 percent per year adjusted a bit higher to account for a half of a year? So for 20.5 years you get 1.25 percent for a total of 51.25 percent of your base pay?

The answers to those questions are hard to find because they’re not always conveniently listed on the individual services’ websites. Retirement pay is funded by DoD, not the services, so the rulebook is a DoD publication.

The reference for retirement pay is in the Financial Management Regulation (DoD 7000.14-R) Volume 7B, Chapter 3, “Gross Pay Computation”. *  I’ve heard it referred to as the “FMR” or “the pay manual”, although pay clerks may have less complimentary names for it. This is one of those fascinating 40-page documents that you never seem to have the time to read. When your personnel department tells you that a pension regulation is “in the manual”, this is probably the manual that they’re referring to. If you ask them to show you the reference, then you might get a blank stare before they try to figure out how to display the website.

But back to the original question:  The active-duty service multiplier for Final Pay and High Three retirements is 2.5% times the servicemember’s years of service, but the years of service are actually calculated monthly.

The number of months is based on the date you entered the service, not just the calendar month. So for example I was commissioned on 26 May 1982 and reached 20 years of service on 26 May 2002. Officer retirements (generally) start on the first of the month, so the next month that I could retire was 1 June. By then I actually had 20 years and five days of active-duty service.

You get credit for each full month of service, but days of service less than a month are truncated. (One day of service is zero months, and so is 29 days. My five days didn’t count either.) Each month of service beyond a whole year is divided by 12, taken to three decimal places, rounded to two decimal places, and added to the 2.5%xYOS figure. There’s an example in Table 3-4 on page 3-35:

Example 1: 20 years, 7 months, 13 days.

  • (The 13 days are not counted.)
  • 7 months ÷ 12 = .583 (.58)
  • 20.58 × .025 = 51.45%

Or you could just pull the service multiplier from the monthly tables on pages 3-32 through 3-35. In the original question of “20 years six months”, it’d indeed be 51.25%.

For those of you calculating your first pension estimate, there are three basic active-duty retirement systems: Final Pay, High-3, and CSB/REDUX. If you entered active or reserve military service before September 8, 1980 (even if you had broken service), then your retired pay will be based on your final basic pay. (If you’re a service academy cadet/midshipman from the classes of 1981-1984 then you first entered active military service before the cutoff and you’re Final Pay.) There are very few of these servicemembers still on active duty.

If you entered active or reserve military service on or after September 8, 1980, then your retired pay base is the average of the highest 36 months of basic pay. (A very rough– but very fast– estimate is 95% of your latest pay scale.) At this point, most servicemembers groan quietly and use a website retirement calculator.

Once you have your basic pay amount (Final Pay or High-3) you multiply that number by the service multiplier. The result is rounded down to the nearest dollar to determine your monthly pension payment.

The third retirement system, CSB/REDUX, is such a bad deal that I’m not even going to waste the thousand words needed to describe it. (See the last of the related links at the end of this post.) It works out for E-9s and O-6s who have at least 30 years of service, but nobody should make the CSB/REDUX decision at 15 years of service with that expectation. It’s just too much time to commit yourself, and the financial penalties for falling short are too harsh.

The FMR was updated about six months ago to include the exact calculation for the Temporary Early Retirement Authority legislation that Congress passed in the last defense authorization bill. (This includes the “reduction factor” applied against the service multiplier.) Not all of the services are using TERA this year, yet when they do this is where the retirement numbers come from. The FMR also includes the CSB/REDUX TERA retirement calculation (another truly horrible deal, even worse than the full CSB/REDUX system). Finally, the FMR even includes the calculation for “Enlisted members credited with an act of extraordinary heroism in the line of duty” that raises their retired pay by 10%.

If you have the spare time (or if you’re retired and curious about the historical aspects of retirement!) then read the short discussion on the history of military retirement pay computations starting on page 3-9. It explains how retired pay was calculated all the way back to the beginning of the 20th century, because DoD is still paying pensions to a few centenarians– and survivor’s benefits to widowed spouses.

Related articles:
Retire at 17 years of service or 20?
Calculating a Reserve retirement
Effect of inflation on a REDUX military pension

WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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