The typical situations shown here depend on our fixed set of assumptions, each of which influence the result. This web page has an interactive calculator that allows you to change any of these assumptions to see what happens. For now we will just discuss the impact of these assumptions in general terms.
Choice on Use of the Bonus: In these typical situations, we show the member investing in a combination of a Thrift Savings Plan and a mutual fund. But, that is not the only option.
- Expenses: You could elect to spend all or part of it. Some items, such as a car, would be used up after a period of time and have little to show for the long term. Used as a down payment on a home, the bonus money would have a much longer utility. Only you can "value" the worth of such options --- and the long-term benefit or value to you and your family.
- Education: You could use the bonus for education, either for yourself (to help you qualify for a better second career, with a higher income) or for your children and thus prepare them for a more successful future or avoid large college loans.
- Business Investment: Using the bonus as seed money for a second-career business may be critical in order to start that business. However, the risk is not insignificant, but this may be an important venture that you have been waiting for.
Inflation: Inflation affects the COLAs that increase retired pay. It is hard to say what impact a higher than assumed rate of inflation would do in terms of which option is better. Because the COLAs for the REDUX option are reduced by one percent (although the age 62 re-adjustment will create equality in retirement pay for that year) whether inflation is high or low, the net impact will not vary dramatically. The REDUX option will provide a reduced level of retire pay in every case.
Return on Investment: This assumption is highly volatile in terms of impact on which option will provide you the best financial picture in the years ahead. The typical situations assume that the bonus money invested in a mutual fund will receive an 8 percent return annually. Mutual fund returns may vary widely from one year to the next. The return on investment assumption is critical to how fast and how much earnings accumulate on the bonus. If this assumption is incorrect, the estimate of the future value of the bonus could be significantly under or over-stated. Investment options come with a variety of risk versus benefit. Savings accounts may be less risky, but the return on investment will likely be lower.
Length of Military Career: Comparing the typical situations may show you the value of a longer versus shorter career. The more years of service a member has the less difference there is between the initial REDUX retirement pay and the High-3 retirement pay. This is because the REDUX retirement multiplier becomes progressively closer to the High-3 multiplier each year until they are both 75% at thirty years. Therefore, the longer you stay in, the more your use of the bonus (only available under the CSB/REDUX option) will determine the best option.
Choice on Bonus Payments: If you choose to take the bonus you may elect to receive it in 1 lump sum payment of $30,000 or in equal annual installments as follows: two payments of $15,000; three payments of $10,000; four payments of $7,500; or five payments of $6,000.
Caution: Remember you will live with this decision for the rest of your life. If you take the REDUX retirement plan and do not judiciously invest your bonus in something that will result in long term financial gain (stocks, bonds, education, starting a business, etc.) you will not have a retirement as good as taking the standard High-36 retirement plan.