By Carol Church
With the new changes to the military retirement system and the introduction of the blended retirement system, service members will have many decisions to make. One choice that has been part of the system for some time, however, remains crucial for some: whether to take the so-called “High 36” plan or the CSB-REDUX plan. These options are available to service members who are retiring after at least 15 years of service and who entered service after August of 1986.
It’s important to note that the option to take the CSB will no longer be available after December 31, 2017. This option will be sunsetted after that time and no longer available to anyone. However, for current members who have 15 years of service this year, the CSB will still be an option until that date.
At its core, the choice between High 36 and CSB-REDUX is a choice between taking a lump-sum payment ($30,000) after 15 years in exchange for a lower pension for years to come or refusing this lump sum in favor of a higher pension in the future.
The exact terms are a bit more complex, but work like this:
Retirees receive a monthly payment that equates to at least 40% of the average of their monthly base pay over the three highest years of salary (2% x 20 years). They also get 2.5-3.5% increases added to that percentage for every year they work over 20 years. For example, if Jane Q. Servicemember earned an average of $6,000/per month during her 3 highest-paid years in the military, she would receive at least $2,400 per month in retirement at 20 years. This amount will increase if she puts in more than 20 years.
Of course, those who opt for CSB also get that $30k lump sum at 15 years, but more on this later.
Retirees receive a monthly payment that equates to at least 50% of the average of their monthly base pay over the three highest years of salary (2.5% x 20 years). They also get 2.5% increases in that percentage for every year they work over 20 years. For example, if John Q. Servicemember earned an average of $6,000/per month during his 3 highest-paid years in the military, he would receive at least $3,000 per month in retirement at 20 years. This amount will increase if he puts in more than 20 years.
COLA Adjustments: A Key Difference
Importantly, there is also a difference in cost of living adjustments for these two plans. So-called COLA adjustments are calculated based on the Consumer Price Index and are intended to compensate for inflation over time. (However, service members will never experience a decrease in their pension due to changes in the CPI.) For members who take the CSB-REDUX, the COLA adjustment rate will be decreased by a percentage point (except for one year at age 62, when it readjusts to be in line with CSI temporarily). For instance, if the COLA adjustment is 1.5% for those under High 36, it will be .5% for those under CSB-REDUX. In other words, those taking the CSB-REDUX are less protected from increases in the cost of living than those taking the High 36.
Why Take The CSB Plan?
Some might argue that the CSB plan is attractive. After all, it gives members the opportunity to get that 30k up front, allowing service members to do things like pay off loans, purchase homes or vehicles, or even start a business. You start off “ahead” of those who choose High 36, and remain “ahead” for some years.
However, it’s important to note that the 30K bonus has remained the same (no adjustments for inflation) since it was introduced, over 10 years ago. This means it has lost ground in terms of value. What’s more, depending on if and how that 30K is spent, it may not bring any future return to the member at all.
What if the service member instead chooses to invest the 30K, perhaps in the military’s TSP plan (to the extent possible)? This is certainly the prudent choice. However, as various articles and calculators show, even a high-earning investment (which is by no means a sure thing) may not “make up for” the money lost due to the reduced pension rate and COLA rate. After starting “ahead,” the CSB retiree will eventually end up “behind” the High 36 retiree in many cases (but not all) Of course, how long you live in retirement is also a factor here.
Why Choose the High 36?
Although those choosing High 36 miss out on the attractive 30K lump sum at 15 years, many financial experts believe this is the more prudent choice. For one thing, it can be difficult to resist the temptation to spend at least some of the lump sum. For another, these retirees will enjoy a higher pension rate and continued accurate COLA adjustments.
However, the situation is not completely cut and dried. The service member’s number of years of service and final rank and pay make a difference here. As the years pass, the REDUX pension rates gets closer and close to the 36 pension rate.
To see some possible scenarios and how they might play out financially, visit the “Typical Situations” page, which gives examples of how the CSB and High 36 plan will pay out differently for members at different pay grades and years of service. Remember, however, that these scenarios assume an 8% return (which could be high) and that the money is invested, partly in the TSP.
And for more on deciding which plan is best, visit http://militarypay.defense.gov/Pay/Retirement/Considerations.aspx. As the military itself advises, this choice affects the rest of a retired service member’s life, so it pays to think carefully.