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Military retirement pay is calculated by the Department of Defense and is generally based on an individual’s length of service, or their disability percentage if that is applicable. The year an individual entered service and their retirement type also factor into this calculation. How military retirement benefits are taxed depends on whether a service member is collecting regular retirement pay or disability pay.
Understanding how to calculate military retirement pay and estimate tax liability is key for servicemembers and their families.
Key Points
• Military retirement pay is calculated by the Department of Defense and is generally based on length of service.
• An individual’s date of initial entry into military service determines which formula is applied to calculate their military retirement pay.
• Military retirement pay that’s based on age or length of service is taxable income, while military disability retirement pay and Veterans’ benefits may be fully or partially excluded from taxable income.
• At the federal level, military retirement pay is taxed at the same rates that apply to other types of taxable income; state tax rates vary.
Understanding Military Retirement Pay Basics
Military retirement pay is a monthly pension payment for individuals who have completed 20 years of qualifying service. This benefit is available to both active duty servicemembers and reserve members; a separate military disability retirement pay benefit is offered to servicemembers with a permanent and qualifying disability.
Those eligible to collect military retirement collect it for life. Military retirement pay is calculated based on the date service began, the base pay rate at the time of retirement, and a multiplier, which is a percentage amount that’s determined by an individual’s years of service times 2.0% or 2.5%, depending on their retirement system.
There are two systems under which military retirement pay can be calculated: the High-36 Retirement System and the Blended Retirement System (BRS). Here is a retirement planning guide to both systems.
The High-36 Retirement System
The High-36 Retirement System, sometimes called High-3, calculates military retirement pension benefits as 2.5% times your highest 36 months of basic pay, for every year of service. This system applies to servicemembers with an initial date of entry into service on or after September 8, 1980 but before January 1, 2018.
Here’s the formula used to find military retirement pay amounts using the High-36 system:
Retired Pay Base × Multiplier = Monthly Pension
Your retired pay base is the average of your highest 36 months of basic pay. The multiplier is the percentage amount that’s determined by your years of service times 2.5%. So, if you spent 20 years in service your multiplier would be 50% (2.5% x 20 years = 50%).
Benefits received through the High-36 system receive annual cost of living adjustments. If you’re eligible for High-36 benefits, you can still contribute to a Thrift Savings Plan (TSP). However, you’re not eligible for matching contributions.
The Blended Retirement System (BRS)
The Blended Retirement System combines a defined benefit and defined contribution plan. Those eligible to receive military retirement pay under this system receive a government contribution equal to 1% of basic or inactive duty pay, deposited into a Thrift Savings Plan. Covered members can also receive an additional matching contribution up to 4%, beginning their second year of service and extending through their 26th year, if applicable.
Servicemembers who qualify for a retirement benefit based on their length of service also receive a pension benefit that’s 2.0% times the number of years of service, times their highest 36 months of basic pay. For example, a 20-year service period translates to a 40% multiplier. This is the only retirement plan for servicemembers who initially entered service on or after January 1, 2018.
Eligible servicemembers may also collect continuation pay. This is a one-time, mid-career incentive payment that’s offered in exchange for performing additional obligated service. BRS participants can also choose to receive a discounted amount of their future retired pay in cash upfront, with a temporary reduction in monthly pension payments until they reach full Social Security retirement age.
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How to Calculate Military Retirement Pay
The basic process for how to calculate military retirement pay involves multiplying retired base pay by a specific multiplier. But the exact calculation depends on which system’s formula is applied, based on when an individual began service.
Step-by-Step Calculation Process
Let’s consider an example of how to calculate military retirement pay using the High-36 system, for someone who received their first military paycheck in December 2006 and is set to retire in December 2026.
1. Calculate retired base pay: Identify the 36 months in which the individual earned the highest base pay, typically their final three years of service. For this example, we’ll use an E-9 monthly pay rate of $7,777, based on the average of pay ranges per years of service, as listed in the Defense Finance and Accounting Service pay tables.
2. Determine the multiplier: In the High-36 system, the multiplier is 2.5% times an individual’s years of service. For this example, we’ll use this calculation: 2.5% x 20 years of service = 50%
3. Multiply the High-36 average by the multiplier: Combine the numbers from steps 1 and 2 to find your gross monthly retirement pay: $7,777 x 50% = $3,888.60.
The steps would be the same to find gross monthly retirement pay using the BRS, but with a different multiplier. Instead of 2.5%, you’d use 2% and your final formula would look like this: $7,777 x 40% = $3,110.80.
Note that these numbers are rough estimates only and do not reflect the actual amount you might collect at retirement. Using a military retirement pay calculator can give you a more accurate estimate.
Using a Military Retirement Pay Calculator
The Department of Defense maintains multiple military retirement pay calculators to help servicemembers determine their monthly benefit amount. Let’s run the numbers from the previous example, using the High-3 calculator and assuming:
• A birthdate of January 1, 1988
• A pay entry base date of December 31, 2006
• E-9 pay grade
According to the calculator, the 36-month high average pay is $7,336.74. The multiplier remains 50%, resulting in a gross monthly pay of $3,668.37.
Now, let’s make the same calculation with the BRS calculator, using a 2% multiplier. The High-3 average is still $7,336.74 but gross monthly retirement pay drops to $2,934.70. With both calculators you can supply information for Thrift Savings Plan contributions to see how those affect your total retirement picture.
How Much Is Military Retirement Pay Taxed?
Military retirement pay is treated as taxable income by the IRS. Rather than being taxed as wages, retirement benefits are treated as pensions for federal taxes. States have different rules that determine what portion of military retirement pay is taxable, and at what rates.
Federal Income Tax on Military Pensions
If you receive military retirement pay based on age or length service, it’s taxable and must be included on your tax return. You’ll enter it on lines 5a and 5b of Form 1040 or Form 1040-SR.
How much is military retirement pay taxed? Taxable pensions are treated as ordinary income and are subject to the standard federal tax brackets. For the 2026 tax year, those brackets range from 10% to 37%. Your tax bracket is determined by your filing status and taxable income for the year. For example, if you’re married with a combined income of $100,000 per year, your marginal tax rate works out to 12%, assuming you claim the standard deduction.
If you participated in the BRS, any funds in your TSP account are also taxed as ordinary income in retirement. Note that you can’t withdraw funds from your TSP before age 59 ½ without incurring a 10% tax penalty, unless you qualify for an exception. Regular income tax would still apply.
State Taxes on Military Retirement Pay
Whether you pay state taxes on military retirement pay depends on where you live. Nine states do not have any income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Thirteen states partially tax military retirement benefits: Colorado, Delaware, Georgia, Idaho, Kentucky, Maryland, New Mexico, Oregon, South Carolina, Virginia, and West Virginia. The District of Columbia also imposes partial taxation.
The remaining 28 states don’t tax military retirement pay. If you’re concerned about preserving as much of your military retirement pension as possible, you might consider moving to a more tax-friendly state. Keep in mind that taxes can still apply to other types of income you receive, unless you live in one of the nine states with no income tax.
Why Is Military Retirement Taxed So High?
Military retirement pay is not taxed at higher rates than other types of income. However, it can feel that way if you’re paying taxes on military benefits along with other types of income, or you’re pushed into a higher tax bracket at retirement. Underestimating what you might owe is one of the biggest retirement mistakes to avoid.
The Impact of Additional Income Streams
Once you determine how much you need to retire, you may decide to take on a job for extra income. Just be aware that earning additional income on top of your military retirement pay can increase your tax liability. Whether the income is from a civilian job, self-employment, a side hustle, or investments, it is taxable. For example, civilian wages and self-employment earnings are subject to Federal Insurance Contributions Act (FICA) taxes. For the 2026 tax year, FICA tax rates are:
• 12.4% for Social Security tax (split equally between employers and employees, or paid in full by self-employed workers)
• 2.9% for Medicare tax (split equally between employers and employees, or paid in full by self-employed workers)
Selling investments for a profit can also trigger capital gains tax. The more favorable long-term capital gains tax rate tops out at 20%, while short-term gains are taxed at ordinary income tax rates, which go as high as 37%.
When estimating how much tax you might owe when collecting military retirement, it’s important to factor in every income source. Keep in mind that even gig work income must be reported to the IRS if it exceeds $400 or more.
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Tax Bracket Adjustments in Retirement
Earning more income in retirement, along with collecting military retirement pay, can potentially push you into a higher tax bracket. That could make you feel like you’re paying more taxes now than you were before you retired if you end up with a larger tax bill each year.
If you’re working a civilian job, you may want to review your tax withholding information to make sure your employer holds back enough during the year to cover your tax obligation for that income. You can also consider whether it makes sense to itemize deductions to try to reduce your total taxable income for the year.
Are There Any Tax-Free Military Retirement Benefits?
Some military retirement benefits are only partially taxed or not taxed at all. They include military retirement disability pay and veterans’ benefits. Military retirement disability pay can only be excluded from taxable income if certain conditions apply. For example, you wouldn’t be taxed if you receive disability payments for a combat-related injury.
VA Disability Compensation Exceptions
Veterans’ benefits paid in the form of disability compensation are not taxable, whether they’re paid to the veteran or their family members. It’s possible to take advantage of this exception if you get a retroactive service-connected disability rating from the VA after you retire. If you qualify for this exception, your retirement pay is excluded from taxable income, up to the amount of VA disability benefits you would have been entitled to.
If you paid taxes on military retirement pay but later qualify for a disability exception, you can claim a refund on the amount paid. You’ll need to file an amended Form 1040 for each tax year during the retroactive period.
Strategies for Investing Your Military Pension
What you choose to do with your military retirement pay once you leave service can depend on your age, your post-service plans, and your other financial resources. If you don’t need this income to pay bills, you might consider investing it instead.
Some options for investing military pension benefits include:
• Putting some or all of the money into a taxable brokerage account to invest in stocks and bonds
• Investing in mutual funds and/or exchange-traded funds (ETFs) through a brokerage account
How you invest may be dictated by your age and risk tolerance, as well as your goals. Before you invest, consider how much you might pay in management fees or other costs, and how easy it might be to liquidate those investments should you need cash in a hurry.
One thing to note is that individuals can’t use military retirement pension funds to open a traditional IRA or Roth IRA. They must have earned income to open and contribute to an IRA.
However, as long as an individual has earned income from other sources, like a civilian job or side gigs, they can open an IRA online and fund it with that income.
It can be helpful to learn more about where to keep retirement money to potentially maximize growth while minimizing the tax burden.
The Takeaway
Military retirement pay is calculated based on the date military service began, the base pay rate at the time of retirement, and a specific multiplier, depending on which one of two military retirement pay systems an individual falls under.
It’s generally a good idea for individuals to calculate how much their monthly military retirement pay might be to see if they’ll have enough for their needs, or whether they might need another type of retirement account to help fund their future.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Help build your nest egg with a SoFi IRA.
FAQ
How much is military retirement pay taxed on average?
A typical range for military retirement pay taxation is 12% to 22% on average, though some taxpayers may pay more while others pay less. The amount of tax you pay is determined by your taxable income and filing status.
Do I have to pay state taxes on my military retirement?
Whether you have to pay state taxes on military retirement depends on where you live. Nine states have no income tax at all, while 13 states impose partial taxation of military retirement benefits. That leaves 28 states in which military retirement pay is not taxed.
Why does my military retirement seem to be taxed at a higher rate?
The tax rates applied to military retirement benefits are no different than the rates applied to other forms of taxable income. However, it may feel like military retirement pay is taxed at a higher rate if you’re pushed into a higher tax bracket when you retire, or if you start bringing in income from other sources.
What is the best military retirement pay calculator to use?
The best military retirement pay calculator to use is the one that’s easiest for you to navigate and that provides the most accurate numbers. That being said, the Department of Defense offers several reliable and detailed online calculators that you can use to determine your military pay retirement using the High-36 and BRS systems.
Does SoFi Invest offer retirement accounts for veterans?
SoFi does not offer retirement accounts that are exclusive to veterans. However, veterans with earned income can open an IRA with SoFi if they choose.
Photo credit: iStock/Courtney Hale
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