The most difficult decision for service members used to be whether to stay in the military until retirement. Soon, however, a more difficult choice could be the selection between retirement plans.
After 31 July 2001, men and women nearing 15 years of service will make one of the biggest financial decisions of their lives: whether to switch to the High-3 retirement plan, which pays 50% of basic pay after 20 years and provides full inflation protection, or stay with lower annuities and smaller costof-living adjustments under the Redux plan, sweetened by an immediate $30,000 cash bonus.
Given the natural allure of lump-sum amounts, the decision will not be easy. Military pay officials say, in general, officers would be better off under High-3. But it is a closer call for enlisted. If an E-7 retiring after 20 years could earn an average of 10% annually on the $30,000 bonus, assuming $10,000 is sheltered from taxes in a military thrift savings plan (TSP), then lifetime benefits could exceed High-3 by more than $370,000, by one service estimate.
The retirement decision awaits any careerist who first entered service after 31 July 1986. Redux members make up 77% of the current force.
The defense bill that was scheduled to be passed by Congress and signed by the President by 1 October holds surprises for members on two fronts. First, it offers a substantial boost in lifetime retirement benefits, more than requested by the Clinton administration. Those who move to High-3 will see an average rise in benefits from 12% to 15%. The actual difference per individual will be more or less than that, based on their rank, length of service, and age at retirement.
By one estimate, a lieutenant colonel (O5) who retires at 20 years is set to gain $221,500 more over a lifetime under High-3 compared with the original Redux plan, without the $30,000 bonus. A 20-year enlisted (E-7) stands to gain $104,000.
The second surprise from Congress is offering the Redux generation an alternative to High-3: a $30,000 bonus to stay under Redux. The choice will invigorate some and leave others pining for the service paternalism of a bygone era. Aren't military leaders supposed to make those choices for us?
In calculating the cost of the option, Congress assumed that 50% of enlisted personnel and 40% of the officers will elect to stay under Redux. Each one who does will save the government money. But should they stay under Redux?
By next summer, service officials hope to help members decide, providing counselors, brochures, web sites, and computer programs that calculate lifetime benefits under most any scenario or set of assumptions. Members will be encouraged to discuss options with family, friends, and financial advisors.
A higher proportion of enlisted will take Redux and the cash because $30,000 represents a larger chunk of their overall benefit. Also, enlisted members typically retire younger, which will give investments more time to grow. They also are paid less than officers and therefore need the cash more often to buy a home, fund a child's education, or pay off debts. Whatever individuals decide, they are likely to second-guess themselves later. But the more information they have and absorb beforehand, the fewer regrets they will have, pay officials contend.
That is why attendance at a Redux-vs-High-3 briefing likely will be made mandatory in a careerist's 15th year, which for the first Redux members will start in August 2000.
"We're going to make sure they understand what the options mean," said a senior Defense official. "Different people are going to want to move in different directions. We want them to know if they take the $30,000, and put [some of it] in thrift savings, how it will multiply. While it's going to be their choice, my sense is Congress didn't create the [bonus] just to pay off bills."
Still, the temptation will be hard to resist, said a service pay official. "Everybody has demands and, with families, it's going to be real hard not to take the first $5,000 and pay off those bills you can't seem to get rid of."
That attraction to a lump-sum bonus could be heightened by the stellar performance of the stock market over the last decade. The Redux generation, some officials worry, will be overconfident about being able to score double-digit returns each year on the $30,000.
Over 40 years, even a 1% disappointment in return on investment has a deep impact. Take the case of an E-7 who retires after 20 years under Redux, invests $10,000 of the bonus in a thrift savings plan, and pays taxes on $20,000 before also investing what remains in the stock market too.
With a 10% return, total retired pay for that E-7 by age 76 will exceed total High-3 annuities by $377,000. If the return were only 7%, said a service official, that same Redux E-7 at 76 would be more than $20,000 behind. Officials cite the magic and power of compounding for the huge difference. The next generation of retirees will learn all about it soon enough.