8.4 Military Retirement Benefits: High-3, the Blended Retirement System, SBP & VA Benefits

8.4 Military Retirement Benefits: High-3, the Blended Retirement System, SBP & VA Benefits

Core Principle: Military retired pay is one of the most valuable income sources a client can have. It is a lifetime, inflation-adjusted annuity backed by the federal government, often starting in a retiree's 40s. Planners must understand which retirement system applies, the one-time Survivor Benefit Plan election, how VA disability pay interacts with retired pay, and the health coverage rules around Medicare.

Active-Duty Retirement Systems

Example (High-3): A retiree with 24 years and a high-36 of $9,000 a month receives 2.5% × 24 × $9,000 = $5,400 a month before deductions. Example (BRS): Same service and pay: 2.0% × 24 × $9,000 = $4,320 a month, plus the TSP balance built with government contributions.

BRS Components

• TSP contributions: An automatic 1% of basic pay, plus matching up to another 4% (dollar for dollar on the first 3% and 50 cents on the next 2%), for a maximum government contribution of 5%.
• Continuation pay: A mid-career retention bonus in exchange for additional service. For calendar year 2026, the Army set eligibility at 7 to 12 years of service and an amount of 2.5 times monthly basic pay for active component and AGR soldiers. Each service sets its own eligibility window and multipliers, and reserve component amounts are lower.
• Lump-sum option at retirement: The retiree may take 25% or 50% of the discounted present value of future retired pay. Monthly retired pay is then reduced (to 75% or 50%) until full Social Security retirement age, when full retired pay (with COLAs) resumes. The discount rate makes the lump sum worth much less than the pay given up, so it generally makes sense only for a specific high-value use.

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Reserve and National Guard Retirement

• Members need 20 qualifying years (a "good year" requires at least 50 retirement points).
• Retired pay is based on total points ÷ 360, which converts points into equivalent years, times the multiplier (2.5% High-3 or 2.0% BRS) and the high-36 pay.
• Pay generally starts at 60; the "gray area" years before that are unpaid. For each 90 days of qualifying active-duty service (such as mobilizations) after January 28, 2008, the start age drops by 3 months, but not below 50.

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The Survivor Benefit Plan (SBP)

Military retired pay stops at the retiree's death unless SBP is elected.

Evaluating SBP: SBP provides an inflation-adjusted survivor annuity at a subsidized cost, with no health underwriting. Life insurance is an alternative, but it rarely replicates an inflation-adjusted lifetime benefit as cheaply for a healthy spouse. SBP also tends to favor younger spouses.

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VA Disability Compensation and Concurrent Receipt

• VA disability compensation is paid for service-connected disabilities and is tax-free.
• Historically, retired pay was reduced dollar for dollar by VA compensation. Two programs now restore it:
  • Concurrent Retirement and Disability Pay (CRDP): For retirees with 20+ years and a VA rating of 50% or higher, both are paid in full.
  • Combat-Related Special Compensation (CRSC): For combat-related disabilities, at any rating. It is tax-free. A retiree who qualifies for both chooses the better one.
• Planning effect: Replacing taxable retired pay with tax-free VA compensation lowers taxable income, which can reduce the taxation of Social Security and IRMAA exposure.

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Health Care: TRICARE and Medicare

• Before 65, retirees and families use TRICARE plans (for example, TRICARE Prime or Select), which carry enrollment fees and cost-sharing.
• At 65, TRICARE For Life (TFL) acts as secondary coverage to Medicare, but only if the beneficiary is enrolled in Medicare Part B, which means paying Part B premiums ($202.90 a month in 2026, plus any IRMAA). Failing to enroll in Part B causes loss of TRICARE coverage.
• Pharmacy: TFL beneficiaries use the TRICARE pharmacy program, so a separate Part D plan is usually unnecessary.

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Coordinating With Social Security and Savings

• Social Security: Military service after 1956 is covered by Social Security, and retired pay does not reduce Social Security benefits. Retired pay is not wages for the earnings test.
• Second careers: Many military retirees start civilian careers in their 40s. Their retired pay creates an early inflation-adjusted income floor, so civilian savings and Social Security can be managed for growth and later claiming.
• State taxes: Many states exempt some or all military retired pay. Consider this in relocation decisions.

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Advisor-Client Case Scenario: Colonel Ruiz Retires at 46

Colonel Ana Ruiz retires at 46 after 24 years under the High-3 system with $5,400 a month of retired pay. She has a VA rating of 60%, a spouse age 44, and a new civilian job paying $140,000.

Advisor analysis:

1. CRDP: Her 60% VA rating qualifies her for full concurrent receipt, so her tax-free VA compensation does not reduce her retired pay.
2. SBP: Full-base SBP costs 6.5% × $5,400 = $351 a month. It guarantees her spouse $2,970 a month (55%) for life with COLAs. A comparable inflation-adjusted life insurance solution would cost more. Elect full SBP.
3. Savings strategy: Retired pay covers the household's essential expenses, so she maxes out civilian 401(k) and Roth IRA contributions in growth investments and plans to delay Social Security to 70 for her own benefit.
4. Medicare at 65: She enrolls in Part B on time to keep TRICARE For Life.

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Exam Tip

• High-3: 2.5% × years × high-36. BRS: 2.0% plus TSP (1% automatic + up to 4% match).
• BRS lump sum: 25% or 50% of the discounted value; pay is reduced until full Social Security retirement age.
• Reserve retired pay starts at 60, earlier by 3 months per 90 days of qualifying active duty after January 28, 2008 (not below 50).
• SBP: 55% of base amount; premium 6.5%; paid up after 30 years and age 70. The SBP-DIC offset was eliminated as of 2023.
• CRDP requires 20+ years and a 50%+ VA rating; VA compensation is tax-free.
• TRICARE For Life requires Medicare Part B.