Your First Military Retirement COLA
Is Not the Full COLA

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How the adjustment on retired pay actually works

Military retired pay carries an automatic annual cost-of-living adjustment. There is no election, no form, and no application. It is effective December 1 each year and shows up in the payment you receive the following January.

The size of it is set by prices. DoD states the rule plainly: the adjustment "is determined by the percentage increase, if any, between the average 3rd quarter Consumer Price Index (CPI) of the current year over the average 3rd quarter (CPI) of the prior year." If prices fall, the adjustment is not negative. It is zero.

The statute behind it, 10 U.S.C. section 1401a, tells the Secretary to raise retired pay "by the percent (adjusted to the nearest one-tenth of 1 percent)" by which the current price index exceeds the base index. Worth knowing that the statute and the published administration of it use slightly different names for the index, so when you read about this, read carefully and take each source at its own word.

The adjustment effective December 1, 2025 was 2.8 percent for someone already retired, measured on the CPI-W through the third quarter of 2025. That is the same index and the same quarters Social Security used for its own 2026 adjustment, which is a useful cross-check when you see a number quoted somewhere and want to know whether it is the right one.

Why your first one is prorated

If you retire partway through the measurement year, you were not retired for the whole window the adjustment measures. So you do not get the whole adjustment.

DoD is unusually direct about why. The first adjustment after retirement uses a different formula, and the reason given is "to preclude the advantage of receiving a retirement based on both a new pay raise and full COLA in the first year of retirement." You already got the benefit of the pay raise that set your retired pay. The prorated adjustment stops you from being paid twice for the same year of inflation.

The mechanics follow from that. A first-time recipient's starting point is the index for the quarter just before the one in which the retired pay began. Retire early in the year and your window is long, so your first adjustment is close to the full one. Retire late in the year and the window is short. Retire in the final quarter and the starting point and the measuring point are the same quarter, so there is no growth to measure and your first adjustment is nothing at all.

One warning, because it is all over the internet and it is wrong. Several sites publish a tidy rule that the first adjustment is 75 percent, 50 percent, or 25 percent of the full one depending on your quarter. It is not a fixed fraction of anything. It tracks the real path prices took over your particular window, which is different every year. In one recent year the published third-quarter figure happened to land on exactly a quarter of the full adjustment, which is how a rule like that survives: check one number, it agrees, and you never check the others.

What a prorated first year actually costs, twenty years on

Here is the part that changes decisions, and it is not obvious.

A smaller first adjustment sounds like a one-year problem. It is not. Every adjustment after it is applied to the figure you are standing on, so a smaller first step means every later step is measured from lower ground. The gap does not shrink as the years go by. It does not compound away. It just sits there, the same size in today's dollars, for as long as you draw the pension.

Take a $3,000 a month pension and suppose prices run at 2.8 percent a year. Someone who retires in the final quarter, and so receives no first adjustment at all, ends up roughly $82 a month behind in today's dollars against the same pension with a full first adjustment. Not $82 in year one and then better. About $82 at ten years, about $82 at twenty, about $82 at thirty. Run it in the calculator and click between the ten, twenty, and thirty year views: the number barely moves. That is the whole point.

Two things follow. The first is that most retirement projections are quietly wrong. If you built yours from a DFAS estimate and assumed a normal adjustment every year including the first, your projection runs high for the rest of your life, by roughly that constant amount. It is a small error that never corrects itself.

The second is bigger. Your retirement date is a money question, not just a paperwork question. Most people pick a separation date around orders, terminal leave, a job start, or a school year. Those are real considerations and they may well win. But the quarter you leave in has a permanent price attached, and it is worth knowing what that price is before the date gets chosen for you.

We do not guess your first-year percentage for you, and you should be suspicious of any tool that does. It depends on your retirement quarter and on the price path in your particular year, and the authoritative figure comes from DFAS. What the calculator does is let you put your own number in and see what it does to the next thirty years.

If you took the Career Status Bonus

REDUX retirees carry a second, permanent drag. When the adjustment is above 1 percent, a REDUX retiree receives that percentage reduced by one full percentage point. At a 2.8 percent adjustment, that is 1.8 percent.

Read that as a subtraction from the percentage, not a haircut on the dollars. It is not 1 percent less money and it is not 99 percent of the adjustment. One percentage point off the rate, every year, which is a very different and much larger thing over thirty years.

There is a carve-out worth knowing, and it is the piece that usually gets written up wrong. In a year when the adjustment is 1 percent or less, a REDUX retiree receives the same adjustment as every other retirement plan. The one percentage point reduction applies only when the adjustment is above 1 percent. So in the low-inflation years, the REDUX drag simply does not apply, which is the opposite of what most summaries imply.

REDUX also carries a one-time recomputation of your retired pay at age 62. We are not going to put a number on that here, because we have not read it off a primary source and we are not going to describe a benefit we have not verified. Confirm it with DFAS. Our calculator does not model it either, which means a REDUX projection in our tool reads low from 62 onward, and we would rather tell you that than have you find it out later.

The parts of your paycheck that never get an adjustment

Once you start thinking in terms of what keeps up with prices, your retirement income splits into three groups, and the split is more useful than the total.

Your retired pay is adjusted. So is your VA disability compensation, and so is Social Security. Those three roughly hold their buying power over time. Note that VA and Social Security are not prorated by your military retirement date the way retired pay is; those rate tables apply to whoever is receiving them.

Then there is the money you draw from your TSP. If you take a flat dollar amount every year, it is not adjusted by anyone. Holding it steady in dollars means cutting it every single year in terms of what it buys. Twenty years of 2.5 percent inflation turns a $1,000 monthly draw into about $610 of today's money.

That is not an argument for drawing more. It is an argument for knowing which part of your income is doing the eroding, because that is the part you actually have levers on. The pension and the VA rating are what they are. The draw rate, and how the money behind it is invested, are decisions you get to make.

What the adjustment does not change: the tax lines

A cost-of-living adjustment carries the tax character of whatever it is increasing. It never changes it. An increase to a taxable payment is taxable; an increase to an excluded payment is excluded.

So: military retired pay is taxable, and so is the adjustment to it. VA disability compensation is excluded from income, and so is its increase. Restored retired pay under CRDP is taxable. CRSC is tax-free. Those four lines get blurred together constantly, and a COLA article is exactly where the blurring tends to happen, because it is the one event that moves all four at once.

Whether a given year's adjustment pushes you into a different bracket, changes what you should be withholding, or moves you across an IRMAA threshold is a question about your return, not about the adjustment. That one goes to your tax professional.

Common questions

Do I get a COLA in my first year of military retirement?

You get one if you retire during the first three quarters of the year, but it is prorated rather than the full percentage. If you retire in the final quarter, you receive no adjustment in that cycle. Only someone already retired before the measurement year began receives the full amount.

Does my VA disability compensation go up with it?

VA compensation rates are adjusted too, and unlike retired pay they are not prorated by your military retirement date. The rate table applies to whoever is receiving compensation.

Is the increase taxable?

It carries the same tax character as the payment it increases. The increase to military retired pay is taxable, because retired pay is taxable. The increase to VA disability compensation is excluded from income, because the compensation is excluded. What that means for your particular return is a question for your tax professional.

Where do I confirm my own first-year percentage?

DFAS. It depends on your retirement quarter and on the price path in your specific year, and it is published each autumn before it takes effect. We deliberately do not estimate it for you.

Is the reduced REDUX adjustment ever zero?

No. In a year when the adjustment is 1 percent or less, a REDUX retiree receives the same adjustment as every other retirement plan. The one percentage point reduction applies only when the adjustment is above 1 percent.