Keeping track of military retirement pay can seem complicated, but understanding how annual cost of living adjustments, or COLAs, work can help me get the most out of my retirement benefits. COLAs help my military pension keep up with inflation. That means the money I get each year stays more in line with the rising costs of things like groceries, gas, and healthcare. In this article, I’ll break down the key concepts that make a difference in optimizing military retirement pay over time, so making financial choices after leaving service feels less overwhelming.
What Is a Cost of Living Adjustment and Why Does It Matter?
A cost of living adjustment is an increase added to my military retirement pay every year to help offset the effects of inflation. The federal government uses the Consumer Price Index (CPI) to figure out how much everyday expenses are rising. When the CPI goes up, my retirement pay usually sees a raise as well. COLAs are crucial because even a small percentage increase can make a big difference in my long-term purchasing power.
If inflation causes prices to rise but my pension stays the same, my money would buy less over time. With COLAs, retirement pay gets adjusted to help me keep about the same standard of living I had when I started collecting my pension. For military retirees who may get a fixed monthly income for decades, these annual increases play a key role in my long-term financial stability.
How Military Retirement Pay COLAs Are Calculated
Understanding how COLAs are calculated helps me know what to expect from one year to the next. The most common way the government figures out COLAs for retired military is by looking at the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPIW). The percentage change from one third quarter to the next is used as the COLA for the following year.
The Department of Defense puts out the official COLA each fall, and it takes effect in January. For instance, if the CPIW increased by 3 percent over the previous year, then my military pension would get a 3 percent boost. However, when I retire also matters—as different retirement systems handle COLAs a bit differently.
- Final Pay and High36 Systems: If I retired under one of these plans, I get the full COLA as measured by the CPIW.
- REDUX System: If I chose the $30,000 Career Status Bonus and retired under REDUX, my COLAs are reduced by 1 percent compared to full COLA recipients.
- Blended Retirement System (BRS): Starting with BRS for those who joined after 2018, COLAs still track the CPIW without the REDUX reduction.
Getting Ready for Retirement: What I Need to Consider
Planning for retirement pay involves more than figuring out what my monthly payments will look like the first year. I try to think ahead by checking out a few key points related to COLA and long-term financial well-being:
- Start Date of Retirement: The earlier I retire, the more years of COLAs I may receive. Over time, these increases can add up to a much larger income compared to my initial pension amount.
- Impact of Lower COLA with REDUX: The REDUX plan offers a $30,000 upfront bonus but reduces future COLAs, which could mean losing out on thousands of dollars during a 20 or 30 year retirement.
- Compounding Effect: COLAs apply to my full base retirement pay annually, so increases build on each other and grow my income faster than a flat raise would.
- Taxes and Healthcare Costs: COLAs help buffer inflation, but I need to also consider taxes and rising healthcare expenses, which can chip away at my take-home pay.
Simple Strategies for Optimizing Military Retirement Pay with COLAs
Getting proactive can help me make the most of my military retirement pay. Here are a few ways I strengthen my retirement strategy:
- Think About the Pros and Cons of Retirement Pay Systems. If eligible for more than one plan (like REDUX versus High36 or BRS), I look beyond the immediate bonus and think about how long-term COLAs will impact my future income. I sometimes use retirement calculators from the Department of Defense or sites like militarypay.defense.gov to view a comparison.
- Update Your Budget Every Year. Each new COLA means my income changes, so I review my budget after the COLA announcement, making room for any new expenses, savings, or investments.
- Plan for Large Purchases or Expenses. Healthcare costs, home maintenance, or helping kids with college are common large expenses for retirees. Factoring COLA projections into my long-term savings goals can make these costs easier to handle.
- Save and Invest Thoughtfully. While COLAs help with day-to-day costs, I also want to look for ways to preserve and grow my money over time. This involves having emergency savings, considering low risk investments, or using tax-advantaged accounts like IRAs or the Thrift Savings Plan (TSP).
Common Pitfalls and How to Avoid Them
Every plan comes with some hurdles. Here are a few missteps I see and how I try to steer clear:
- Overestimating COLA Increases: COLAs change every year and can be low sometimes. I never count on COLAs alone to keep up with all my costs.
- Underestimating Healthcare Spending: Medical costs often rise faster than COLA or Social Security. I prepare by looking into Tricare, Medicare, and supplemental insurance options early.
- Missing State Tax Considerations: Some states tax military retirement pay, others do not. I check my state’s tax rules, especially if I plan to move after retiring, to avoid surprises.
- Spending Beyond My Means: It’s tempting to spend more each year as retirement income grows. I stick to a budget so my savings last for the long haul.
Beyond COLAs: Extra Ways to Protect Your Purchasing Power
COLAs give a boost, but depending only on my military retirement check may not cover everything. Here are more ways I work to keep my retirement comfortable:
- Adding Social Security: Military retirees usually qualify for Social Security as well as a pension. When I start benefits impacts total retirement income. Useful info and tools are at ssa.gov.
- Healthcare Benefits: Tricare for Life and similar programs can help ease the pain of medical bills. Checking out my options ahead of time gives more control as things change.
- Preparing for Long-Term Care: I consider insurance or extra savings to cover support costs if I end up needing help later in life. Planning now makes decisions less stressful down the road.
- Consider PartTime Work or Hobbies: Some retirees take on a parttime job or turn hobbies into income, which can supplement retirement pay and make financial bumps easier to handle if inflation is high.
Frequently Asked Questions
Here are some questions I often hear from people thinking about military retirement pay and COLAs:
Question: Will my COLA ever be zero?
Answer: Yes. If the CPIW doesn’t show an increase, there may be no COLA that year. If prices actually drop, the government won’t cut your pay. COLA just stays flat until inflation goes up again.
Question: Is my survivor (spouse or dependent) affected by COLA?
Answer: If you’ve chosen the Survivor Benefit Plan (SBP), your survivor’s benefits will rise with COLA, just like your retirement income does.
Question: How can I predict future COLAs?
Answer: There’s no exact way to know future inflation, but looking at historical information from the Department of Labor gives a ballpark idea. Years with high inflation lead to bigger COLAs; lower inflation means smaller or no increases.
Pulling It All Together
Making the most of military retirement pay takes some planning. Understanding cost of living adjustments gives me a clearer picture of my financial future. Reviewing my retirement system, staying up to date on annual COLA announcements, and updating my budget and savings plans help me handle whatever comes next. Staying flexible and informed helps me enjoy life after service, with the security that my retirement pay can keep up with a changing world.