Retirement Choice 2016
Abstract
At their 15th year of service, military personnel who are eligible and intend to serve for 20 years must choose either: (1) High-3 retirement plan or (2) A reduced retirement (REDUX) and a $30,000 bonus paid at the 15th year of service. This paper is designed to help servicemembers make that decision. We describe the REDUX/bonus option as an early, partial cash-out of the servicemembers retirement pension that the member pays back in the form of reduced retirement checks over his or her entire lifetime. We calculate how much the servicemember will pay back (the reduction in pension benefits) and we calculate the implied APR or interest rate for this loan. For example, and E-7 who retires at age 38 with 20 years of service is paying an implicit interest rate of 15.2 percent and would see his or her retired pay reduced by $400,649 if he or she lives to 79 years. Even if the servicemember received the bonus tax free, the repayment amount is over 13 times the amount of the loan ($30,000). If this servicemember lives to 85, the repayment amount would be $529,799. For virtually all servicemembers, choosing REDUX/bonus is a bad (and costly) decision.
Document Details
- Document Type
- Technical Report
- Publication Date
- Mar 01, 2016
- Accession Number
- AD1007566
Entities
People
- Aline Quester
- Anita Hattiangadi
- Lewis G. Lee
- Robert Shuford
Organizations
- Center for Naval Analyses