Today, in a military family forum, there was a discussion about the Career Status Bonus (CSB)/Redux retirement plan available to currently serving military members. I was really surprised to see this topic come up, because it seems so glaring obvious to me that the CSB/Redux option is bad, bad, bad.
For those of you who don’t know, the CSB/Redux retirement plan is an option to the traditional retirement plan. Under CSB/Redux, service members receive a taxable $30,000 bonus at 15 years of service. In return, the way their retirement pay is calculated is changed in two ways. First, the retirement multiplier is calculated differently, and second, the Cost of Living Adjustments (COLA) are restricted. Service members who do not elect to change to the CSB/Redux retirement plan will remain under the High 36 retirement plan.
Military retirement pay is based on a retirement multiplier. In the default High 36 retirement plan, the multiplier is 2.5% for each year of service. Under the CSB/Redux plan, the multiplier is 2.0% for the first 20 years of service, and then 3.5% for the next ten years of service, and 2.5% for any years over 30.
Therefore, service members who remain in the High 36 plan and retire at 20 years of service will receive 50% of the average of their 36 highest months of active duty pay. Service members who elect the CSB/Redux plan and retire at 20 years of service will receive 40% of the average of their 36 highest months of active duty pay.
Now, because the CSB/Redux retirement multiplier jumps after 20 years of service, the difference shrinks with each additional year. At 30 years of service, retirees under either plan will receive 75% of the average of their 36 highest months of active duty pay. At this point, the remaining difference is the Cost of Living Adjustment.
Cost of Living Adjustment
Military retirement pay is subject to a Cost of Living Adjustment (COLA) each year. Military retirees under the High 36 retirement plan receive the full COLA each year. Military retirees who elected the CSB/Redux retirement plan receive a reduced COLA at the calculated rate minus a full percentage point. Therefore, if the COLA is 2.5%, CSB/Redux retirees will receive a 1.5% raise. This continues each year until the retiree turns 62, at which point their retirement pay is reset to the amount it would have been if they had been receiving the full COLA. In subsequent years, they will continue to receive the reduced COLA.
The Department of Defense has a good calculator that compares the value of the regular High 36 retirement vs. the CSB/Redux retirement. (Note: it’s not perfect – it doesn’t account for the fact that the CSB bonus is taxable) If you input some hypothetical situations, and look at the results, it is pretty obvious why the CSB/Redux option is a terrible idea.
The default entries assume that the service member is an E-6 at 15 years of service, and retires at 20 years of service as an E-8. In this scenario, the High 36 retiree starts out with an extra $500 a month in retirement pay. After 10 years, the High 36 retiree is earning an extra $1,000 each month. The retiree who remained in the High 36 retirement plan earns an extra $30,000 in retirement pay during just the first five years of retirement, and continues to earn a significant amount each subsequent year.
I understand the temptation – $30,000 is a lot of money, and most people can think of many good uses for it: paying off debt, buying a house, saving, even spending. However, the higher value of the High 36 retirement can add up to many times that amount over the course of a retirement. You will find some articles that suggest that a CSB invested wisely can be a better choice, but I disagree for the reasons my friend Doug discusses in his epic post on this subject.