When a servicemember retires with disabilities, the Department of Veterans Affairs may pay compensation, known as VA disability, depending upon the disability rating.
The advantage to the servicemember is that VA disability payments are not taxable. Furthermore, since they are excluded from the disposable retired pay, Colorado divorce courts cannot, strictly speaking, divide the disability payments (the reality may be different, however, as explained herein). Also, tax-free should not be confused with invisible for any purpose - VA disability payments count as income for the purpose of calculating child support and maintenance.
Note that the payments are not automatic - like everything else in the military, there is a process, and this one requires that the retiree affirmatively apply for disability payments. 38 U.S. Code §5101. The specific form used is the VA Form 21-526, Veteran's Application for Compensation and/or Pension. This is important on the issue of indemnity for the VA waiver, as it shows that any resulting waiver of retirement to receive the disability payments was voluntary.
And the VA disability election is revocable, per section 120205 of the DOD Financial Management Regulation. Presumably a veteran would have little incentive to do this, unless to facilitate receipt of Combat-Related Special Compensation (CRSC) or per court order. Doing so requires filling out the same VA Form 21-526.
VA Disability Payment Rates
The VA awards a disability rating, which, along with the number of family members, determines the amount of the servicemember's. As an example, as of December 2009, a married servicemember with one child and a 70% rating receives $1409 per month in VA Disability payments. See VA Compensation & Benefits Rate Tables to look up the disability payment amounts.
The disability rating is not the percentage of retirement which is converted to disability. The rating, e.g., 70%, is used strictly to determine the dollar amount of the disability payment, and all veterans with the same rating and same number of family members will receive the same amount, regardless of their rank at retirement.
Retiree and Annuitant Pay: Disability Benefits, on the DFAS web site.
Concurrent Receipt (CRDP) Pay Computation. A chart to calculate the restoration of the VA Waiver during the phaseout period.
Denver, Colorado Military & Veterans Lawyer. Michael L. Shea has a web site with useful information for veterans.