So now you know what the High 36 retirement system is, as well as the CSB/REDUX system. Knowing this, you can see the surface differences between the two. But what are the long term consequences of taking one or the other?

To examine that, we need to go to the math! I am pumped up! Oh, and if you want to do the math for yourself, here is my calculator. The instructions are on each page. Follow along if you would like and check my work if you think I am wrong. Or, input your information and see what it is for you!

Here is my scenario. It is 1 July, 2014. You are an Army Officer at your 14 and a ½ year mark, and you are attending your mandatory CSB/REDUX briefing. You are currently a non-prior service Major, and you will be retiring as a LTC (assuming on time promotions). Oh and by the way, you will be retiring on your 42nd birthday, which is January 1st (because I said so). For simplicity sake, we will assume a yearly average pay increase of 1.75% and a constant Consumer Price Index yearly increase of 2.5%.

So here is what your retired pay looks like:

It is obvious by just looking at the differences between the equations that the High 36 will make more starting year one. But one thing that is not factored into this is the $30k that you received at year 15 from taking the CSB/REDUX. However, after just three years being retired, the High 36 system has already caught up and eclipsed the CSB/REDUX, and that is assuming you received the $30k bonus in a combat tax exclusionary area! The Further from your retirement date you get, the worse it is for you. By the time you get to the point when your multiplier and Consumer Price Index (CPI) multipliers are recalculated, you are over $380k behind!

“But Captain,” you are surely saying in your head, “What if I just serve an additional three years to get my multiplier up to 50%?”

Well, first I would tell you that it would actually be 50.5%. You need to go back to math class, LT.

Second, let’s take a look what happens when we adjust the Years of Active Federal Service Beyond 20 and age at retirement (with pay adjusted as such):

As you can see, the High 36 breaks even by the fourth year, and by age 62, you are still behind over $260k. That gap is significant. So, now that we can plainly see this, in what situations is it advantageous to take the CSB/REDUX over the High 36?

The first thing that I have heard people say is that by wisely investing the bonus at your 15th year, you can end up with much more money in the end. So let us explore this. Lets say you put the $30k in a moderately risky mutual fund the day you get it, and let’s further assume that your mutual fund never loses money and gives a consistent rate of return (for arguments sake, I am using USAA’s Cornerstone moderate risk mutual fund USBSX, which has yielded a yearly return of about 6.5 over twenty years). Given the first retirement scenario outlined above, This is what is may look like:

As you can see, throughout the life of the fund, it does not perform at the same level as retiring under the High 36 system. You may want to note here that, any time you invest (even in a low to moderate risk investment), there is a chance of partial or even complete loss, where the retirement money is guaranteed. There is a chance that by investing the bonus, you can beat High 36, but the risk involved may be too much for you. Not to mention that, at some point, you may want to divest or use the interest as it accumulates instead of letting it compound, whereas the retirement money is liquid, so you do not have to worry about divesting.

Another use for the bonus people try is to pay off debt or pay down a mortgage. I will assume that, should you use the bonus in this way, that you would simply be paying things off quicker, and that your spending habits do not incur new debt over time. Meaning, if you use it to pay of credit card debt, you do not turn around and use the credit card again. So, given the first retirement scenario outlined above, a $150k balance remaining on the mortgage principle, a $1000 a month payment and an interest rate of 4.13%, this is what it looks like

As you can see, by the time the mortgage is paid off, you have saved over $63k in interest! That is not too shabby… well until you compare it to what you would be getting in monthly retirement payments. By doing this, you are losing out on $315k over the same time-frame! That is a nicer house than the one you just finished paying off early!

It gets worse when you use it to pay off credit card debt. Again, assume the first retirement scenario, $30k in credit card debt, minimum monthly payments of 4% of the balance, interest rate of 13.2% and not paying anything more than the minimum payment each month.

Ouch. Only a difference of about $9k. You would be losing out on hundreds of thousands of dollars.

“Ok, sir. I get it. Don’t take the CSB/REDUX. God! Stop beating me up about it!”

Wait, LT, there are some times when you may want to take it. Don’t be too hasty or judgmental!

For example, if you think that you will be in the Army for 30 years or more (a doubtful proposition, given your math skills and tendency to be judgmental), it may be worth it to invest the money if you can get a good return on it. You may actually come out ahead, given just the right market and right investments.

Or, if there is a true emergency in your life and you have no other choices (no support agencies, no family or friends to fall back on and no credit cards), it may be the only way to get back to normal.

Or maybe you have a once in a lifetime investment opportunity, and this is the only way for you to get enough liquid assets to invest. All of these reasons are not likely at best, but they do happen. Really, in the end, it is in your best interest to use the High-36 system. It is the safest long term bet.

Next week, we are going to start taking a look at the Reserve and National Guard retirement systems. If you thought that the Active Duty systems were complex, stay tuned for some truly insane red tape. I can only hope that my Excel skills can keep up.