Military Retirement Pay
In the Final Pay plan, your monthly pension is based on the amount of pay you received in your last month of active duty service. The longer you serve after 20 years, the larger your monthly pension. In addition, each year your pension is increased by a Cost of Living Adjustment (COLA).
If you retire after 20 years of service, you receive 50% of your final month's pay each month.
Your pension increases by 2.5% for every year of service beyond 20 years. So after 30 years of service, you could retire with a monthly base pension that equals 75% of your final month's pay.
Each year a cost of living adjustment is added to your base pension. The increase is equal to the Department of Labor's consumer price index, a measure of how much more it costs to live in the United States over the past year. So each year, depending upon the rise in the consumer price index, your pension could rise by several percentage points. Over the years these increases add up and could more than double your pension.
Lieutenant John retires after 25 years of service. He served between 1960 and 1985, which qualifies him for the Final Pay plan. In his last month of service he earned $3,852.
Because Lieutenant John served five years past the 20 year mark, add 2.5% for each of those five years to his base 50% pension. Therefore, Lieutenant John's pension will be 62.5% of his last month's pay. His monthly pension is $2,407 because:
Furthermore, each year Lieutenant John's pension will increase with a Cost of Living Adjustment.