REDUX Versus High Three Military Retirement

Understanding The Differences In REDUX And Military Retirement

Man retiring from the military.
Study your military retirement plans carefully. fstop123/Getty Images

While many people understand or have heard of the military retirement system which gives military retirees who have honorably served for 20 years on active duty a 50% pension, they often do not understand the details of the retirement options that are available to members of the military.

There are actually two separate retirement plans available for members of the active duty military. They are the High Three and the REDUX retirement programs.

Even members of the military do not often understand the repercussions of choosing one plan over the other.

High Three Military Retirement Plan

Under the traditional High Three military retirement plan, service Members who entered the service after July 31, 1986, are eligible to receive an average of a 50% pension on their top three earning years of their base pay. Every year that a military member serves after the 20-year mark earns them an additional 2.5% increase to the standard 50% pension. So, for example, if you were to work another 10 years and retire with 30 years of active duty service from the military, you would be eligible for a pension worth 75% (50% + 2.5% x 10 additional years) of your base pay.

Members of the military have several components to their total compensation. A vast majority of their paychecks are comprised of their base pay or salary and additional allowances such as a basic allowance for housing (BAH) and a basic allowance for substance or food (BAS).

BAH and BAS are not included in calculations for retirement. The military only calculates its retirement pension on a service members’ base pay salary.

REDUX Verses High Three Military Retirement Plan

When a member of the military reaches his 15th year of service, he has a choice to accept a one-time $30,000 bonus, which then requires him to enter the REDUX retirement plan.

Under REDUX, the Department of Defense calculates a service member’s retirement at a reduced rate of 40% of his base pay instead of the traditional 50% for 20 years of service.

Other aspects of the REDUX retirement plan slowly erode a service member’s total retirement compensation. Unlike the traditional High Three retirement plan, REDUX also requires a reduction in the cost of living allowance adjustments. Under the regular High Three military retirement plan, the government makes cost of living adjustments every year in line with the increase in the Consumer Price Index (CPI). But, if you choose to accept the REDUX retirement plan, the cost of living adjustments are equal to CPI minus 1% each year.

Why REDUX May Be A Bad Deal

Ten percent of your income from the time you retire (maybe as early as 38 years old) until your death is likely a significant amount of income. The 10% difference lost between the REDUX and High Three retirement plans will most likely be a lot more money than the $30,000 bonus you received even if you earned an incredible rate of return on that bonus.

For example, a Sergeant First Class in the Army (E-7) who retires in 2013 after 20 years of service in the military can expect to earn approximately $2,140 per month for his federal government pension under the traditional High Three retirement plan (50% of the average of his highest earning three years - $4,281) or $25,680 annually.

Consequently, he would only earn $1,712 per month or $20,548 per year if he had taken the REDUX retirement option.

Having taken the REDUX retirement plan option costs service members in this example just over $5,000 per year in lost retirement income. This would equate to over a $150,000 loss of income over the course of a 30-year retirement (age 38 to 68) not including cost of living adjustments. That $30,000 is starting to look very expensive now, isn’t it?

When Taking REDUX Might Make Sense

Despite the $30,000 bonus during a service member’s 15th year of military service, there is a significant financial drawback to accepting the REDUX retirement plan. But, there may be a few instances where accepting the reduced retirement for a partial lump sum might make financial sense.

Many members of the military accept the REDUX retirement plan in an effort to pay off high-interest debt.

Or, they face large college tuition bills for their children that they did not save for during their careers. Or, they may want to consider the lump sum to invest in the hope of making up the 10% difference in annual retirement income.

While the $30,000 bonus that is included with the REDUX retirement plan may seem like a nice windfall five years before you reach the 20-year pension mark, it is important to understand the long lasting effects that will impact your total retirement income. It is often very hard to make up the missing 10% in income and also the 1% lost annually from smaller cost of living adjustments. Often it is not worth the short-term gain at the sacrifices of long-term retirement earnings during your Golden Years.

Guest author Hank Coleman is a Major in the United States Army currently serving on active duty. Hank is a decorated combat veteran of over 11 years with two yearlong tours of duty in Iraq. Additionally, Hank writes about personal finance on his blog Money Q&A. You can follow Hank on Twitter @HankColeman or check out his podcast “Your Money: Your Choices” on iTunes.