I was helping a Warrant Officer in my shop on a mission to turn in some vans we borrowed from another unit about two hours away. This involved driving out there in a convoy and carpooling back. While we were waiting in a traffic jam that had occurred on the Autobahn, I had decided to listen to a book on tape about Alexander of Macedonia and his adventures. I had a hard time paying attention, because one of the NCO’s with us was discussing his plan to take the REDUX retirement plan and use it to pay off his mortgage. I started eavesdropping about his situation and I became very interested.
Now, I am going write about this topic through several blogs. But to save you time if you do not care to follow it all the way through, here is my “Too Long; Didn’t Read” summary:
TL;DR- The CSB/REDUX retirement plan is not worth it except in unusual and very specific situations. I highly recommend that you avoid it.
So, to understand the CSB/REDUX retirement plan, first you have to understand the normal, or “High 36”, retirement plan. Once a service member has accumulated 240 months (20 years) of active duty time (can be combined with reserve time, but it only counts days actually served and it is a complex formula), he or she is eligible for retirement pay.
Retirement pay is calculated as follows:
OK, let’s do some math! Let’s say that, at the time of retirement, you are a Major with 20 Years of Active Federal Service (YAFS). You were a prior service NCO and two years ago you were promoted to Major (when you were at 18 YAFS). Assuming you were never paid higher than the last three years, we will go with the pay tables as if you retired 31 December 2014:
I simplified the High 36 for convenience, adding the three years of highest pay and then dividing by three instead of adding 36 months and dividing by 36, going with the assumption that the past three years were our highest paid.
Not too Shabby, eh? One more thing I want you to notice is the 2.5 x YAFS part. This means that if you choose to stay in past the 20 year mark, that part of the equation gets larger. Effectively, this part of the equation calculates your percentage, or your retired pay multiplier. So, let’s change the numbers a bit. Let’s say that you are in a similar situation, but retiring as a LTC with 27 years in. You were promoted to LTC last year, so you only received LTC pay for one year. Let’s see the numbers:
Did you notice the difference? The high 36 only went up by about $700, but the monthly retirement payment went up by about $1700! That is some major money. But just FYSA, once you hit 30 YAFS, the retirement multiplier stops increasing yearly except in very specific circumstances (like you are asked to be a four star general or something). So your retirement multiplier is capped at 75%.
Remember, though, that the 36 months of average highest base pay means the highest in your career, not the highest at the end. So, if you are a Sergeant First Class and you get in trouble and get reduced causing you to take a pay cut, that may be irrelevant in the end. It is all about the average of the highest 36 months of your pay while in the army (not necessarily consecutive).
But there is one more component to retirement pay that you need to know, and that is the Cost of Living Adjustment (COLA).
COLA for retirement is different than overseas COLA, but the concept is similar. As time goes on, the value of the US dollar is changed due to inflation or deflation in the economy. When the economy is experiencing inflation, the purchasing power of the US dollar goes down. This is the normal order of things, and nothing to be too worried about. Because of this, the Military will adjust retirement pay according to the inflation.
The COLA increase is tied to the Consumer Price Index (CPI). Without getting to far in the weeds, the CPI measures the purchasing power of the dollar. When the CPI for the current year is higher than the CPI for the previous year, they calculate the percentage difference and increase retirement pay for the next year by that percentage. So if the CPI goes up by 1.5%, the pay will go up accordingly.
So, with this in mind, the equation to find out what your monthly payments will be in the given year is as follows:
So, if you were paid $4000 per month in 2013, the calculation for what you are paid per month in 2014 (With a CPI increase of 1.5%) looks like this:
The increase is $60 a month, or $720 annually. That is not huge, but over time the percentages can add up. Every year should be slightly different, but the one thing you can count on is that it will never go negative. What I mean by this is that should the CPI go down (meaning the economy is in deflation), there will not be a reduction COLA or reduction in your pay.
So now you have the basics on how it works. You can calculate this on your own if you like to do the math (I do). But, if you would rather have the internet tell you, check out this DOD military compensation page. It will give you lots of information, along with some handy figures for the total value of your retirement over your lifetime.
Next time, I am going to introduce the concept of CSB/REDUX and how that changes our calculations, where we will see a small up front benefit at the cost of a later reduction in your monthly retirement pay.