Each year, approximately 200,000 military personnel retire from active duty, according to the Department of Veterans Affairs. Some elect to join the reserves after their full-time commitment. Others might join the National Guard.
But in that process, some misconceptions come into play, according to Doug Nordman, a Navy veteran and author of The Military Guide blog that informs retired military personnel about the means to better financial security.
Primarily, the financial value of a pension.
“When people look at the reserves, they see that they don’t get the pension until age 60,” Nordman said. “And they see you’re only doing one weekend a month and two weeks a year, so you don’t really accumulate a lot of credit toward that pension.”
People, according to Nordman, assume their pensions will be much less than they really are and don’t understand that pensions are based on future pay tables. If, for example, someone in their late 30s or early 40s retired from the reserves after “20 good years” that included active duty and reserve service – or all reserve and National Guard service – Norman said the “reality” is that the Department of Defense uses pay tables “that are in effect at age 60.”
The pension model comprises pay-table maturity as if one was on active duty the entire time.
“What I mean by that is people retire as like an E-7 enlisted rank with 20 years of service, and then when they retire awaiting pay for their reserve pension at age 60 that longevity continues to accumulate,” Nordman said.
Reserve pension paid out at age 60 keeps up with inflation and the employer cost index, according to Nordman. (Employers use the index to evaluate the labor market and the number of raises they can furnish each quarter).
In addition, the points earned on active duty transfer directly to the reserve component.
“So at age 60, you’ve got about the same buying power as you would have had if you had received that pension at age 40,” he said.
Nordman said it’s difficult for people to appreciate these benefits because the system is confusing and not promoted.
“There’s very little education on how well the reserve pension works, even among people that are in reserves or National Guard,” he said.
However, some states — California, Virginia and Vermont — and Washington, D.C., tax military pensions as income, and 16 offer a partial tax exemption. The remainder either don’t have a state income tax, or provide total exemptions for military pay. But some income-tax-free states might have high property-tax burdens that could offset the benefit of income-tax exemptions.
Post active-duty health insurance is another area with some lack of clarity.
“When leaving active duty, there are some transition health care benefits — about six months — if you go into the reserves or National Guard,” Nordman said.
If a service member begins in the reserves or Guard right after separating from active duty, they’re immediately eligible for insurance from TRICARE Reserve Select,” he said. “It’s more expensive than active-duty policies but still cheaper than civilian-priced insurance.”