The Military Retirement System (Part 2)
In Part One we looked the basics of each retirement system. In this article we'll break it down and provide you with some basic comparisons to assist you in making what could be the "choice of a lifetime."
Eligiblity:
If you entered the service after August 1986 you are eligible to choose either the High 36 retirement system, or the Career Status Bonus/REDUX (CSB) retirement system. If you decline to make a choice you will automatically receive the High 36 retirement plan.
The Comparison:
For simple comparison's sake, let's look at three servicemembers who all retire at the same paygrade with exactly 20 years, and make three different choices at the 15-year point of their careers. The CSB is $30,000 before taxes.
- Jones: Decided to take the High 36 option.
- Smith: Decided to take the CSB/REDUX option. However Smith spent the $21K bonus on a new car.
- Cruz: Decided to take the CSB/REDUX and invest the $21K.
Note: Cruz and Smith paid 28% tax on their CSB, but they could have shielded over $10K of their CSB in the Thrift Savings Plan to help protect it from taxes.
Each year during their retirement, all three will receive cost of living adjustments (COLAs) based upon the consumer price index (CPI) which measures inflation. Jones' High-3 COLA is the full CPI (3.5% each year for our example) so Jones gets a 3.5% raise. Smith and Cruz, however, get a 2.5% raise because COLAs under the REDUX system are equal to CPI minus 1%. But, Cruz's CSB investment continues to grow (at an annual rate of 8% for our example).The following table demonstrates the different growth in value for the two options. It also makes it easy to see the the need for investing the CSB.
Jones | Smith | Cruz | |
Time of Retirement | |||
Savings after 5 yr. @ 8% | $0 | $0 | $28,600 |
| Retirement Percentage | 50% | 40% | 40% |
End of first year of retirement | |||
| Savings | $0 | $0 | $30,200 |
| Total Annual Pay | $18,000 | $14,400 | $14,400 |
| Total Retirement Value | $18,000 | $14,400 | $44,600 |
| Age 61 | |||
| Savings | $0 | $0 | $98,000 |
| Total Annual Pay | $37,100 | $24,200 | $24,200 |
| Total Retirement Value | $581,000 | $415,600 | $513,600 |
| Age 62 - REDUX Readjustment year | |||
| Savings | $0 | $0 | $103,600 |
| Total Annual Pay | $38,400 | $38,400 | $38,400 |
| Total Retirement Pay | $620,300 | $454,000 | $557,600 |
Age 75 | |||
| Savings | $0 | $0 | $214,600 |
| Total Annual Pay | $60,000 | $52,900 | $52,900 |
| Total Retirement Value | $1,260,000 | $1,049,000 | $1,264,000 |
| Total Difference | -$211,000 | +$4,000 | |
There are many variables - age, salary, years of service at retirement, spending and saving habits - that should influence your decision. It's up to you, so choose wisely.
No matter which retirement plan you choose, your military retirement will probably not be enough to provide for all your retirement needs. As the previous example demonstrates, it takes discipline and planning to make the most of your retirement.
