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The Retirement System

If you are considering making the military a career -- or you have already made that decision, and just want to know more about your benefits -- then this will be of special interest to you.

This feature article is the first of a two-part report looking at the current Military Retirement Systems and the choices facing most today's active duty members. The following is a summary of what you need to know regarding Military Retirement Systems:

  • Military Retirement Overview
  • Factors That Determine Your Pension
  • The Similarities and Differences of Retirement Systems
  • The Basis for Calculating Your Basic Pay
  • Calculating Retired Pay
  • The Multiplier
  • The Cost of Living Adjustment (COLA)
  • The Bonus and the BIG Decision

Military Retirement Overview

The military retirement system is arguably the best retirement deal around. Unlike most retirement plans, the Armed Forces offer a pension, with benefits, that starts the day you retire, no matter how old you are. That means you could start collecting a regular retirement pension as early as 37 years old. What's more, that pension check will grow with a cost of living adjustment each year.

Factors That Determine Your Retired Pay

However there are many factors that determine exactly how much your pension (technically a reduced payment for reduced service) will be. Over the past twenty five years, the government has made some significant changes to the military retirement system.

If you entered the service:

  • Prior to September 1980 you are eligible for the Final Pay retirement system.
  • Between September 8th, 1980 and August 1986 you are eligible for the High 36 system.
  • After August 1986 you are under the REDUX system, which means you have the option 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 Similarities

All of these retirement systems have a common thread: if you stay in the armed forces for 20 or more years, you are eligible to receive a pension based on a percentage of your basic pay, and if you stay in for a 40 years, you are eligible for 100% of your basic pay. But that's where the similarities end and the confusion really begins, because each of these systems determines your amount of pension differently.

The Differences

There are four major differences between the retirement systems. If you joined the military after August of 1986 you especially need to thoroughly understand these differences, because when you reach the 15 year mark in your military career you will have to make a choice of a lifetime about which plan you want for yourself.

The major differences are the basis for determining your highest earnings, the multiplier, the Cost of Living Adjustment, and theCareer Status Bonus.

The Basis for Calculating Your Basic Pay

Although you have no choice in the basis for calculating your basic pay, it is a very important detail. For instance the Final Pay retirement system bases the amount of pension on a member's last month of pay.

For Example:if you retired at twenty years of service on the final Pay retirement system, you received 50% of your final months pay as your pension, and that percentage increases by 2.5% for each additional year of service.

Under the High 36 and CSB/REDUX systems a member's pension is based on the average of the highest 36 month's base pay. So if you retire at twenty years under these systems you would get a percentage of the average of 36 months (3 years) of your highest basic pay, and like the "final pay" system you would get an increase of 2.5% for every year that you stay in (past twenty years of service).

The Multiplier

The multiplier is the percentage of your base pay you receive for each year of service. For the Final Pay and High 36 systems you earn 2.5% per year of service. That means you get 50% for 20 years of service up to a maximum of 100% for 40 years.

The multiplier for the CSB/REDUX system is 2% per year for the first 20 years, but you get an increase to 3.5% for each additional year passed 20. That means you get 40% for 20 years, but up to 100% for 40 years.  That is a significant difference.

Note: Although rare, those who stay in past 40 years can continue to increase their retirement rate beyond 100%.

Learn more about how your Retired Pay is Calculated including a link to calculators to help you determine your retirement pay.

The Cost of Living Adjustment (COLA)

All three retirement systems have an annual cost of living adjustment. This is a subtle, yet very important detail. Over the lifetime of your retirement the cost of living adjustment could more than double your retirement check.

The COLA for the final pay and high 36 systems is determined each year by the national Consumer Price Index. But the COLA for the CSB/REDUX retirement system is the Consumer Price Index minus 1%.

For Example: A retiree under the High 36 may see a COLA increase in their retirement check of 3.5% in 2007, while a retiree under the CSB/REDUX plan would get a COLA increase of only 2.5%.

Note: There is one more twist to the COLA for the CSB/REDUX retiree. At age 62 the COLAs and multiplier are readjusted so that the High 36 and CSB retirees get the same monthly pay.

The Bonus and the BIG decision

Now the CSB/REDUX system gets a bit more complicated. Under this latest system when you reach your 15th year of service, you must choose between taking the "CSB/REDUX" with a $30K cash bonus (approximately $21K after taxes) and a 40% pension check, or the High 36 retirement system with no bonus and a 50% pension check. This is a huge decision and cannot be made without some serious consideration and a clear understanding of the details.

The following table gives a quick summary to help understand the differences between the retirement systems:

Retirement System Basis Multiplier COLA Bonus
Final Pay Last Month's Basic Pay 2.5% for each Year of Service CPI No
High 36 Average of the Highest 36 Months Basic Pay 2.5% for each Year of Service CPI No
CSB REDUX Average of the Highest 36 Months Basic Pay 3.5% for each Year over 20 CPI - 1% Yes

 

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.

 

McCrystal
Clark
Powell
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.

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