Retirement Choice 2014
CENTER FOR NAVAL ANALYSES ALEXANDRIA VA RESOURCE ANALYSIS DIV
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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 REDUXbonus 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 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, an E-7 who retires at age 38 with 20 years of service is paying an implicity interest rate of 15 percent and would see his or her retired pay reduced by 391,600 if he or she lived 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 517,833. For virtually all servicemembers, choosing REDUXbonus is a bad and costly decision.
- Personnel Management and Labor Relations
- Military Forces and Organizations