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Comparing Options

The following fictitious story, about twin brothers Harry and Richard, shows the differences between the High-36 and CSB/REDUX retirement plans, the potential worth of the Career Status Bonus and insight of the lifetime value of the two retirement options. How this story plays out for you depends upon your personal situation and assumptions about your career and the economy. A planning calculator is available on this website for you to make some comparisons of your own.

 

In August 1986, Harry and Richard, twenty-year old twins, enlisted in the military. As Harry and Richard had always done everything together, they continued to do so by being promoted with identical dates for their entire career. But, one event is about to make their careers and futures different.

 

In 2001, Harry and Richard face a choice. They are nearing their 15th year of service and may retain the High-36 retirement plan or they may take a $30,000 Career Status Bonus and the REDUX retirement plan.

 

Harry chose High-36 and Richard chose the single lump sum CSB/REDUX option. Immediately, their finances changed. Richard now had $30,000 more in cash. This money was his to spend as he wished -- a down payment on a house, college tuition for the kids, a new car, or invest for use later.

 

This $30,000 is taxable unless placed into the Thrift Savings Plan (TSP) or other qualified investment. Under current rules, Richard may place a maximum of $10,500 in a TSP account. Taxes would not be paid on this $10,500 nor its earnings until withdrawal. This is a very positive feature that Richard would be well-advised to consider. To simplify this story, however, Richard decided not to invest in the TSP, but instead to pay tax on the entire amount now and invest the entire after-tax balance in a mutual fund earning 8% annually. As the $30,000 is taxable income and Richard is in the 28% tax bracket, he will pay $8,400 in taxes on this bonus leaving $21,600 to invest.

 

In 2006, Harry and Richard retire with 20 years of service. Since they both had an average (High 36-month) base pay of $3,000 per month, Harry, under High-36, gets 50% or $1,500 per month, and Richard, under REDUX, gets 40% or $1,200. Although Harry has a larger retirement check than Richard, Richard has been building up the savings on his $21,600 of Career Status Bonus for the past five years -- it is now worth $28,600 (after paying taxes on its earnings).

(Note: Retirement income is generally taxable. Tax implications on the retirement income are not reflected in this story.)

 

Each year during their retirement, Harry and Richard will receive cost of living adjustments (COLA) based upon the consumer price index (CPI) which measures inflation. Harry's High-36 COLA is the full CPI (3.5% each year in our story) so Harry gets a 3.5% raise. Richard, however, gets a 2.5% raise because COLAs under the REDUX system are equal to CPI minus 1%. But, Richard's Career Status Bonus is still growing in his mutual fund.

 

This story continues the same way until 2028 as they near their 62nd birthday. Up to this point, Harry has received nearly $582,000 in retirement income and his current monthly amount is now about $3,100. Richard has collected $415,000 total and now gets a bit more than $2,000 each month. But, Richard is still saving that Career Status Bonus -- it's now worth $98,000. Counting both the mutual fund value and what he's collected in retirement, selecting the CSB/REDUX plan netted him $513,600 -- close, but $68,300 less than what Harry has received.

 

Their 62nd birthday also brings retirement adjustment for Richard. Richard's retirement pay is recomputed as if he had been under High-36 all these years. This means that he will now get 50% of his original base pay plus full 3.5% COLAs added to it for his past retirement years. So, for one year, Harry and Richard receive the exact same retirement pay -- about $3,200 per month. This is for only one year because the following year, Harry gets his 3.5% COLA and Richard gets his 2.5% COLA, but it's added to his newly adjusted retirement salary of $3,200. This "catch-up" adjustment impacts Richard's total accumulation and by the end of the year, his total is within $63,000 of Harry's total accumulation. The following year Richard's total retirement accumulation and the balance of his mutual fund begins to surpass Harry's total accumulation.

By now some people would have spent some or all of the money that Richard put in the mutual fund on vacations, cars, or to augment their retirement income, but Richard wants to pass the money to his heirs and keeps saving. When they are seventy-five, Harry has received over $1,260,000 in retirement income; his current monthly amount is $5,000. Richard has collected over $1,049,000 in retirement income and now earns $4,400 each month. But, Richard is still saving that Career Status Bonus -- it's worth over $214,600. Counting both the mutual fund value and what he's collected in retirement, selecting the CSB/REDUX retirement option is worth $1,264,000, surpassing Harry's total amount by $4,000. From this point forward, Richard will continue to outpace Harry's total accumulation.

 

The following chart summarizes Harry and Richard's story. Remember that this is an example that shows what the differences between the CSB/REDUX and High-36 options. These results are dependent upon the assumptions built into the story and the choices that Richard made.

Point of Comparison

Harry
(High-3)

Richard
(CSB/REDUX)

15th Year of Service

Bonus
Taxes

$0
$0

$30,000
-8,400

Total

$0

$21,600

Time of Retirement

Savings
Cumulative retired pay

$0
0

$28,600
0

Total

$0

$28,600

End of First Retirement Year

Savings
Cumulative retired pay

$0
$18,000

$30,200
14,400

Total

$18,000

$44,600

Retirement pay for the year

$18,800

$14,400

Age 61

Savings
Cumulative retired pay

$0
$581,000

$98,000
415,600

Total

$581,000

$513,600

Retirement pay for the year

$37,100

$24,200

Age 62 -- REDUX Readjustment

Savings
Cumulative retired pay

$0
$620,300

$103,600
454,000

Total

$620,300

$557,600

Retirement pay for the year

$38,400

$38,400

Age 75

Savings
Cumulative retired pay

$0
$1,260,000

$214,600
1,049,000

Total

$1,260,000

$1,264,000

Retirement pay for the year

$60,000

$52,900

Now, on the other hand, if Richard had taken REDUX and used his CSB to buy that new car in 2001, his cumulative would be over $200,000 less than what his brother has received at age 75.  And if his mutual fund earned less than 8%, well ???

 

Many individual differences --- age, salary, years of service at retirement, spending and saving habits --- will and should influence your decision and will make your story with a fictitious twin different than Harry and Richard's. A calculator that allows you to enter your personal situation into it is available at this website so you may do some comparison of options for yourself.

 



 

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