We previously wrote an article about the pros and cons of taking the military REDUX retirement option. Service members who joined the military after August 1986 are eligible to choose from one of two retirement plan options: the High 36 retirement system (also called High-3) and the REDUX (CSB) retirement option, which gives eligible military members the opportunity to receive a$30,000 Carer Status Bonus when they achieve 15 years of service. This Career Status Bonus comes at a cost, however. Military members who elect to receive the bonus also receive a reduced pension in retirement and a reduced annual Cost of Living Adjustment (COLA).
Here is what a military pension looks like under the The High-3 Average Retirement System and with REDUX:
- High-3: No bonus; REDUX: $30,000 Career Status Bonus.
- High-3: 50% at 20 years, plus 2.5% per additional year; REDUX: 40% monthly retirement at 20 years, plus 3.5% per additional year.
- High-3 & REDUX: *Maximum monthly retirement benefit 75% of base pay at 30 years.
- High-3: COLA = CPI; REDUX: COLA = CPI -1%.
*The maximum retirement pay of 75% can be exceeded under limited circumstances; these are general guidelines. CPI = Consumer Price Index.
The COLA percentage makes all the difference. On the surface, it appears as though REDUX may come out ahead when a military member stays to 30 years, since they would receive 75% of their base pay and the $30,000 Career Retention Bonus. But it still fails to take into account the decreased COLA, which is 1% lower. Think of it as settling for a 1% lower pay raise each year while your peers automatically receive a larger raise. Since raises are cumulative, it doesn’t take long for the raises to exceed the difference in the Career Retention Bonus (especially when you take taxes into consideration). Note, there is a one time adjustment at age 62 to bring the cost of living in line with the non-REDUX option, but the rate remains at CPI-1%, and the gap again widens.
Is REDUX a Good Option if You Invest the Bonus?
This is a popular question, and one I will answer with another question: Can you beat the stock market?
I don’t mean, can you find a winning stock and turn a few hundred dollars? Anyone can get lucky. I am asking if you can consistently beat the stock market year in and year out for decades. Can you take that $30,000 bonus, deduct taxes from it (leaving you with just over $24,000 or so, depending on your tax bracket), and turn it into hundreds of thousands of dollars?
And that is assuming you remain in the military for 30 years and max out your pension at 75%. If you retire at 20 years and receive a 40% pension, then you will potentially need to turn the Career Retention Bonus into millions of dollars to make up the difference in lost earnings between the High 3 retirement plan and the REDUX option.
Taxes are bigger than you think
Keep in mind when making these calculations that taxes are an important consideration. Unless you receive the lump sum payment of $30,000 in a tax free zone, you will need to pay taxes on the $30,000 income you receive, which leaves you with much less than $30k to begin your investments. In virtually every case, you would need to far exceed market returns to beat the difference between the REDUX and High-3 retirement systems. Then you need to take into account the taxes which will be assessed on your investment earnings, since you won’t be able to shelter the entire $30,000 in retirement accounts.
Don’t gamble with retirement
You can argue for investing all day long, but if you are a good enough investor to beat consistently beat the market for decades, you are among the top 0.001% of investors in the world and should be on Wall Street or working for Warren Buffett. The simple fact is that is not likely the majority of people will be able to do that. But why would you want to risk it anyway? The purpose of a pension is to earn a secure income, not gamble.
Without changing anything, a military retirement is worth millions. By the time you factor in health care and other benefits, it is worth several million dollars.
A military retirement pension is a stable income stream and anything you can do now to increase your retirement payments will have a lasting and cumulative effect on your retirement security. On the flip side, anything you do now that potentially decreases your retirement income reduces your long term security.
You can think of your retirement plan as very secure bonds in your investment portfolio – the reason you invest in bonds is for a more stable income stream. If you want (or feel you need) more risk, then use your other investments to satisfy that need. Since your pension is considered ultra secure, you may be able to take more investment risk in the rest of your portfolio including in your retirement accounts like your Thrift Savings Plan, IRA, 401ks, or taxable investments. (that isn’t to say you should take more risk, just that you can make a case for it more easily than you can with taking a reduced pension so you can play the stock market).
When is REDUX a good idea? There may be limited circumstances when it makes sense to take REDUX, but in most cases, the math never works. If you are considering taking the REDUX retirement option, I highly recommend meeting with a financial planner who understands the ins and outs of this retirement plan. Sit down with the planner and run the numbers several times. Here is a High-3 and CSB/REDUX Comparison calculator provided by the DoD. Run your situation through different scenarios and see how it looks.
Why does the government offer REDUX?
The reason REDUX is offered is simple: it saves the government millions of dollars every year in reduced pension payments, and since military pensions often last decades, the potential government savings each year can top hundreds of millions of dollars. If this wasn’t a good option for the government, they wouldn’t offer it in the first place.
But don’t take their word for it, or my word for it – run the numbers yourself. One resource to use is the REDUX calculator, which can help you better understand how much you can earn with each retirement system. Then you can use this information to determine how much your investments would need to earn to make it worth taking the REDUX option