Is The REDUX Career Status Bonus Retirement Worth It?

We have received multiple reader questions regarding the CSB / REDUX Retirement System and whether or not it was worth it to take the cash and reduced retirement pay or stick with the High 3 Retirement System.

In almost every situation, the High 3 Retirement System results in a higher monthly pension for military retirees. But let’s break it down so you can learn how to make your own decision and decide whether you should choose the CSB / REDUX Retirement System or the High 3 Retirement System.

Table of Contents

1. What is the CSB / REDUX Retirement System?
2. How REDUX works:
1. REDUX Retirement System Overview:
3. The High 3 Average Retirement System
1. High 3 Average Retirement System Overview:
4. Which Military Retirement Plan is Better – REDUX or High 3?
1. REDUX Adjustment at Age 62.
5. REDUX vs. High 3 Comparison
6. Is REDUX a Good Option if You Invest the Bonus?
1. Taxes are Bigger Than You Think
7. Don’t Gamble With Retirement
8. Why Does the Government Offer REDUX?
9. Military Retirement Calculators

What is the CSB / REDUX Retirement System?

The CSB / REDUX Retirement System was created by the Military Reform Act of 1986 and applies to all military members who joined on or after August 1, 1986. The system was designed to save the government money when paying out military retirement pensions to the ever-growing number of military retirees.

Service members who joined the military after August 1, 1986, are eligible to choose from one of two retirement plan options:

1. The High 36 retirement system (also called High-3) and
2. the REDUX (CSB) retirement option, which allows eligible military members to receive a $30,000 career-status bonus when they achieve 15 years of service.

This Career Status Bonus comes at a cost, however. Military members who elect to receive the bonus also receive a reduced pension in retirement and a reduced annual Cost of Living Adjustment (COLA).

How REDUX works:

The REDUX Retirement System pays out a $30,000 Career Status Bonus at the 15-year mark to military personnel who select the REDUX retirement plan. In addition to the $30,000 Career Status Bonus, military retirees will receive a reduced military pension compared to the High 3 retirement plan, and a lower annual Cost of Living Adjustment (COLA).

Cost of Living Adjustments (COLA) for retired pay are given annually based on the increase in the Consumer Price Index (CPI), a measure of inflation. Under REDUX, the COLA is equal to CPI minus 1%. Here are more details about the REDUX Retirement System.

REDUX Retirement System Overview:

• $30,000 Career Status Bonus.
• 40% monthly retirement at 20 years, plus 3.5% per additional year.
• *Maximum monthly retirement benefit 75% of base pay at 30 years.
• COLA = CPI -1%.

*Some military members may be eligible to retire at 100% base pay after 40 years of service, depending on high year tenure status, military needs, and other factors.

The High 3 Average Retirement System

The high 3 Average retirement System pays an average basic pay for the highest 36 months of the individual’s career. The High-3 Average Retirement System does not come with a cash bonus, but base retirement pay and COLA accrue more quickly than under the REDUX plan.

Cost of Living Adjustments (COLA) are given annually based on the increase in the Consumer Price Index (CPI); under the High-3, the annual COLA is equal to CPI.

High 3 Average Retirement System Overview:

• 50% monthly retirement at 20 years, plus 2.5% per additional year.
• *Maximum monthly retirement benefit 75% of base pay at 30 years.
• COLA = CPI.

*Some military members may be eligible to retire at 100% base pay after 40 years of service, depending on high year tenure status, military needs, and other factors.

Which Military Retirement Plan is Better – REDUX or High 3?

You can receive the same percentage of your final pay with both retirement plans. However, you would need to serve 30 years under REDUX to receive the same amount as you would receive if you retire under the High 3 retirement plan.

Retirees under the REDUX plan will accrue lower COLA increases to their retirement pay, so even if the retiree completed 30 years and ended with the same base pay they would have had under the High-3 retirement system, a gap will steadily grow between the amount they receive under REDUX vs. what they would have had under High-3.

REDUX Adjustment at Age 62.

To counter the pay gap between the two retirement systems, retirees under REDUX receive an adjustment at age 62 to bring their retirement pay up to the level it would have been under the High-3 retirement system. However, the COLA remains at CPI – 1, and the gap begins to widen once again. Throughout a lifetime, the difference can easily reach hundreds of thousands of dollars, and for higher-ranking individuals, the difference can reach well into the million-dollar range.

REDUX vs. High 3 Comparison

Here is what a military pension looks like under the The High-3 Average Retirement System and with REDUX:

• High-3: No bonus; REDUX: $30,000 Career Status Bonus.
• High-3: 50% at 20 years, plus 2.5% per additional year; REDUX: 40% monthly retirement at 20 years, plus 3.5% per additional year.
• High-3 & REDUX: *Maximum monthly retirement benefit 75% of base pay at 30 years.
• High-3: COLA = CPI; REDUX: COLA = CPI -1%.

*The maximum retirement pay of 75% can be exceeded under limited circumstances; these are general guidelines. CPI = Consumer Price Index.

The COLA percentage makes all the difference. On the surface, it appears that REDUX may come out ahead when a military member stays for 30 years, since they would receive 75% of their base pay and the $30,000 Career Retention Bonus. But it still fails to consider the decreased COLA, which is 1% lower. Think of it as settling for a 1% lower pay raise each year while your peers automatically receive a larger raise. Since raises are cumulative, it doesn’t take long for the raises to exceed the difference in the Career Retention Bonus (especially when you consider taxes). Note there is a one-time adjustment at age 62 to bring the cost of living in line with the non-REDUX option, but the rate remains at CPI-1%, and the gap again widens.

Is REDUX a Good Option if You Invest the Bonus?

This is a popular question, and one I will answer with another question: Can you beat the stock market?

I don’t mean, can you find a winning stock and turn a few hundred dollars? Anyone can get lucky. I am asking if you can consistently beat the stock market year in and year out for decades. Can you take that $30,000 bonus, deduct taxes (leaving you with just over $24,000 or so, depending on your tax bracket), and turn it into hundreds of thousands of dollars?

That is assuming you remain in the military r 30 years and max out your pension at 75%. If you retire at 20 years and receive a 40% pension, you will potentially need to turn the Career Retention Bonus into millions of dollars to make up the difference in lost earnings between the High 3 retirement plan and the REDUX option.

Taxes are Bigger Than You Think

Keep in mind when making these calculations that taxes are an important consideration. Unless you receive the lump sum payment of $30,000 in a tax-free zone, you will need to pay taxes on the $30,000 income you receive, which leaves you with much less than $30k to begin your investments.

In virtually every case, you would need to greatly exceed market returns to beat the difference between the REDUX and High-3 retirement systems. Then you need to consider the taxes which will be assessed on your investment earnings since you won’t be able to shelter the entire $30,000 in retirement accounts.

Don’t Gamble With Retirement

You can argue for investing all day long, but if you are a good enough investor to beat consistently beat the market for decades, you are among the top 0.001% of investors in the world and should be on Wall Street or working for Warren Buffett. The simple fact is it is unlikely that most people will be able to do that. But why would you want to risk it anyway? The purpose of a pension is to earn a secure income, not gamble.

Without changing anything, a military retirement is worth millions. When you factor in health care and other benefits, it is worth several million dollars.

A military retirement pension is a stable income stream, and anything you can do now to increase your retirement payments will have a lasting and cumulative effect on your retirement security. On the flip side, anything you do now that potentially decreases your retirement income reduces your long-term security.

You can think of your retirement plan as secure bonds in your investment portfolio — the reason you invest in bonds is for a more stable income stream. If you want (or feel you need) more risk, then use your other investments to satisfy that need. Since your pension is considered ultra secure, you may be able to take more investment risk in the rest of your portfolio, including in your retirement accounts like your Thrift Savings Plan, IRA, 401(k)s, or taxable investments (that doesn’t mean you should take more risk, just that you can make a case for it more easily than you can with taking a reduced pension so you can play the stock market).

When is REDUX a good idea? There may be limited circumstances when it makes sense to take REDUX, but in most cases, the math never works. If you are considering taking the REDUX retirement option, I highly recommend meeting with a financial planner who understands the ins and outs of this retirement plan. Sit down with the planner and run the numbers several times. Here is a High-3 and CSB/REDUX Comparison calculator provided by the DoD. Run your situation through different scenarios and see how it looks.

Why Does the Government Offer REDUX?

The reason REDUX is offered is simple: It saves the government millions of dollars every year in reduced pension payments, and since military pensions often last decades, the potential government savings each year can top hundreds of millions of dollars. If this wasn’t a good option for the government, they wouldn’t offer it in the first place.

But don’t take their word for it, or my w yourself. One resource to use is the REDUX calculator, which can help you better understand how much you can earn with each retirement system. Then you can use this information to determine how much your investments would need to earn to make it worth taking the REDUX option.

Military Retirement Calculators

I recommend visiting the DoD Retirement Calculators for additional information:

• High-3 Retirement System.
• CSB/REDUX Retirement System.
• High-3 and CSB/REDUX Comparison.

When you compare the REDUX Retirement System to the High 3 retirement plan, you can see how the difference between the two plans can add up quickly. Unfortunately, the $30,000 bonus is sometimes enough money to entice many military members to mortgage their future pension.

Your situation may differ, so I encourage you to examine your situation, play with the calculators, and speak with a professional advisor for more information.

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