National Guard and Reserve Retirement at the Maximum Pay

A reader writes:

I need some clarification regarding your article that describes the calculation of a Reserve/Guard retired pay benefit. I’ve relied on this description in the past, but am troubled by one aspect of the calculation/description.

Assume a Guard member has the requisite 20 “good years” to qualify for a retired pay benefit at age 60. Let’s further assumed this individual will receive his/her benefit under the “High-3” formula. And finally let’s also assume this individual leaves the Guard at age 45 with 20 years of seniority.

Your article says that this individual’s retired pay benefit will be calculated using the “maximum pay” for his/her pay grade. Is that accurate? Am I reading that correctly? Someone who leaves with 20 years seniority will have his/her benefit calculated using the maximum pay for the pay grade? (Which could be 30 years of seniority.)

Is the determining factor whether the individual at age 45 resigns or retires awaiting pay?

Thanks for asking the questions– that post is the most popular one on the blog, yet many servicemembers overlook the importance of the benefit behind “retired awaiting pay”.

You’re absolutely right: you use the maximum pay column for that paygrade. And you’re also absolutely right about the determining factor: it’s because the individual chooses to retire awaiting pay instead of resigning.

That determining factor means their retirement pay is calculated by assuming that they’ve been on active duty the entire time between their retirement application and eligibility age (age 60 for most). Even though they applied for retired awaiting pay at age 45, DoD assumes that their years of seniority in their retired rank continue to accumulate until age 60. This means that they effectively end up using the maximum longevity (and maximum pay) for their rank.

That maximum column of the paytable is a great advantage of “retire awaiting pay”, but it pales by comparison to another advantage: using the pay tables in effect at age 60. 15 years of inflation (between ages 45 and 60) at 2% per year could reduce the buying power of a pension by nearly 35%. Congress has spent most of the last decade linking military pay raises to the Employer Cost Index (for wages), which is different than the Consumer Price Index (inflation) but is reasonably close. Each year’s pay raise may be different than the actual rate of inflation, but the net result after 15 years is that the pay tables at age 60 have largely kept up with inflation and boosted the value of that pension by nearly 35%. Even if the pay tables lag inflation by 1% per year, that still reduces the difference from 35% to 16%.

Why is DoD being so nice to us? It’s because “retire awaiting pay” also makes you eligible for recall to duty during a full mobilization. The last time the country did a full mobilization was WWII.

For some ranks, it’s even better. In 2007 DoD expanded the military pay tables to 40 years. Most of the columns top out at 20-30 years but these days E-9s, W-5s, and flag officers/general officers get pay raises between 30-40 years. That was intended to motivate them to remain on active duty, but it also gives the Guard members of those ranks a nice retirement boost.

The 20 years of seniority (or 22, 24, 26, or 30) may still be the maximum pay for your rank, even though the pay tables go out to 40 years. However, the pay tables that count for “retired awaiting pay” are the ones in effect at the age that the pension starts, and nobody knows what those will look like.

The High Three pension rules mean that the “retired awaiting pay” retiree uses the maximum pay columns of the pay tables in effect for the 36 months before turning age 60. (Or before whatever age their pension starts, if they deployed for at least 90 days to a combat zone after 28 January 2008.) I’ve done this calculation for a couple of people, and it’s so miserably complicated that everyone either uses their service’s online calculator or asks DFAS to provide the estimate.

I’ve only seen one situation where a servicemember “resigned” instead of “retired awaiting pay”. They were caring for her elderly father (who had dementia) and had been unable to muster with their Guard unit for drills. The situation deteriorated to the point where instead of applying for retirement (or transferring to the IRR), the unit discharged them. The Guard member wasn’t familiar with the system and just signed the papers. It will probably take an appeal to the corrections board (and perhaps a lawsuit) to recharacterize the “resignation” as “retired awaiting pay”, but the member had told the unit that they were not available for mobilization due to caring for the father.

“Resigned” or “discharged” means that they’re no longer subject to a full mobilization. Their pension still starts at age 60. However, it starts at the pay tables and seniority in effect at the time of their discharge, not when they’re age 60. Their longevity pay in their rank does not accrue and their pay tables are frozen for 15 years when they reach age 60. Right away their pension has been eroded by inflation, and they’ve missed out on all the longevity pay during the years between being discharged and starting their pension.

That’s a high price to pay to guarantee that you won’t be recalled to duty during a full mobilization.

The reader responded:

Thank you for the very thorough and thoughtful response to my question.

I wanted to be sure that I understood the calculation as I am often called upon to determine the accrued retired pay benefit of Guard members.

I can tell you (assuming your explanation and analysis is correct) that there seems to be a fundamental lack of understanding of how this benefit gets calculated, even on the part of persons who otherwise counsel Guard members on this issue.

That’s the first time I’ve ever met someone in that position, and I wanted to give them more references for their skeptical audience. I’m not a lawyer or a financial advisor. However, my first confirmation of that “retired awaiting pay” question came over a decade ago from a magazine issue of the Association of the U.S. Navy (which unfortunately does not seem to be available online without membership). AUSN has plenty of lawyers and financial advisors on their staff, and their members include thousands of happily retired Reserve members whose pay is based on the maximum years of service in their paygrade.

Because AUSN’s reference is not easily available I’ve always used the DoD website on military compensation, where their Reserve Retirement page says:

“A unique feature of Reserve retirement is that the pay base is determined as though the Reserve member were serving on active duty immediately prior to retirement, thus the years of service continue to accumulate even after the member has entered the Retired Reserve and continue until they actually begin receiving such pay (usually at age 60).”

I decided to try to find the specific words of the reference.

I finally found it in the DoD Financial Management Regulation (DoD 7000.14-R). (Newly revised in March 2013!) Again I’m not qualified to interpret federal law, let alone review DoD’s interpretation of federal law, but I believe the source of the “maximum pay column for that paygrade” is in Volume 7B paragraph 030105.A.2 at the bottom of page 3-10:

Nonregular Service Retirement (Table 3-1, Rule 13)

The retired base pay for a nonregular retirement is determined as follows:

For a member who entered service after September 7, 1980, the retired pay base is determined as prescribed in subparagraph 030101.A. The high 36-months of such a member are the 36-months for which the pay was the highest, whether or not consecutive, out of all the months before the member became entitled to retired pay or would have become entitled to retired pay. This will generally be the 36-months immediately preceding receipt of retired pay even though the member may not have been in an active status during such time.

Subparagraph 030101.A says:

In the case of a Reserve component member, this is the total amount of basic pay to which the member was entitled during the member’s high 36-months or to which the member would have been entitled if the member had served on active duty during the entire period of the member or former member’s high 36-months.

Following the note in Table 3-1 Rule 13 (page 3-28) leads to federal law in Title 10 U.S. Code section 1407(d)(1)(A):

“… the total amount of monthly basic pay to which the member or former member was entitled during the member or former member’s high-36 months (or to which the member or former member would have been entitled if the member or former member had served on active duty during the entire period of the member or former member’s high-36 months)…”

In other words, when a Reserve or Guard member chooses to “retire awaiting pay” (and be subject to recall during a full mobilization) their longevity (years of service) continues to accumulate until they’re drawing retired pay. For the vast majority of “gray area” servicemembers, that longevity reaches over 30 years.

Related articles:
Military retirement from the Individual Ready Reserve
Retiring from the Reserves and National Guard
Reserve military pension for “discharge” instead of “retired awaiting pay”
Calculating a Reserve retirement
Military Reserve and National Guard retirement calculators
Sanctuary and military retirement during a Reserve career
Should you join the Reserves or National Guard?
Reader questions on Reserve retirement Tricare and points

About Doug Nordman

Author of "The Military Guide to Financial Independence and Retirement" and co-author of "Raising Your Money-Savvy Family For Next Generation Financial Independence."
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