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Retirement check shrinkage

December 27, 2012 • J.J. Montanaro

Q: May you please tell me what the Defense Finance and Account­ing Ser­vice (DFAS) pol­icy is for col­lect­ing Vol­un­tary Sep­a­ra­tion Incen­tive (VSI) from retired reservist’s retire­ment pay? I am a Grey Area(not yet draw­ing retired pay) retired reservist and I am try­ing to deter­mine how much retire­ment pay I will be get­ting when I retire. It is my under­stand­ing, once I start draw­ing my reserve retire­ment, DFAS will recoup money from my retired pay to repay the VSI I have received over the years. Please let me know if you need any other infor­ma­tion to answer my ques­tion. Thank you.

–Brian, Indi­anapo­lis, Indiana

A: I can tell you, but you’re prob­a­bly not going to like the answer a lot! You are cor­rect; you will be required to repay the full amount of the VSI you’ve received (and may receive). DFAS accom­plishes this by recoup­ing 40 per­cent of each monthly retire­ment check. The good news is that the recoup­ment is done on a pre-tax basis so you won’t pay taxes on both what you received and the money that you use to repay. That should help you get a han­dle on your retire­ment income scenario.

Here’s a link to infor­ma­tion on VSI recoup­ment at the DFAS web­site. There is some flex­i­bil­ity in the pro­gram. For exam­ple, you can choose to make larger monthly pay­ments or in the case of finan­cial hard­ship, request that the repay­ment rate be reduced. Lump sum repay­ments are not allowed. I hope this infor­ma­tion helps you get a bet­ter han­dle on your retire­ment plan.  Good luck.

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