What Army Personel Should Know About the REDUX Military Retirement System

REDUX Rip-off: Selling your future short

There are currently two options for military retirees, High-Three and REDUX. The High-Three option takes your highest three years of pay, averages them, and pays you 50% of that average each year if you complete 20 years of service.

A few years ago, the government decided to try and lower costs. The government currently spends about $40 billion a year to pay military retirees. And this amount is rising by about $1.5 billion each year as more retired military personnel are living longer.

That’s why the government created the REDUX retirement system. The REDUX option gives retirees the option to take a $30,000 CSB at their 15 year mark in exchange for accepting only 40% of the average of their highest three years of basic pay.

Since most Army and military personnel retire in the grades of E-7 through E-9, that 10% costs the retiree at least $5,000 each year in cash. $30,000 may sound nice now, but you’ve got to consider the future.

Also, you won’t actually be getting all $30,000. Since the CSB is classified as a “bonus,” it will be taxed. That $30,000 would fall to $22,500 if you’re in the 25% tax bracket. And it will probably fall to around $20,000 once Medicare, Social Security, and state taxes are taken out.

That’s why I call this retirement plan the REDUX Rip-off. The government is trying to tempt you with a seemingly large one-time payment in exchange for $5,000 or more in annual payments. That breaks down to more than $400 a month. You can do a lot with an extra $400 a month.

This REDUX plan is just one of the most important problems with personal financial management, there’s almost always a conflict of interest. That’s why it’s important to find financial advice from truly independent sources and always ask yourself, “Why is this person so willing to help me?” They usually have a pretty strong financial motive.

That’s why finding a truly independent advisor is almost impossible to do. Everyone wants to make money off you. The more you trade with a stockbroker, the more commissions he receives and a financial planner only gets commissions when your finances are under his watch.

In my military career, I saw financial planners encourage military families to make the wrong moves. In one case, a financial planner encouraged a colleague of mine to cash out his wife’s 401K and put the money into a family financial plan including high-cost life insurance that he was recommending.

My colleague would have had to pay back taxes on the 401K contributions as well as 10% penalty for early withdrawal. The $7,000 his family had saved towards retirement would have been quickly turned into $5,000 to invest in their financial advisor’s life insurance plan. This was anything but a good deal.

Luckily, I showed him the other side of the matter the financial planner wasn’t explaining to him. Essentially, he would have to pay $2,000 to buy an expensive life insurance policy that he didn’t need as his remaining $5,000 slowly dwindled away into the financial advisor’s pocket through the life insurance premiums. And this kind of stuff goes on all the time.

In the end, remember to stay away from the REDUX retirement option. The $30,000 CSB may sound tempting at first, but in the long run, you will be the one that loses on the deal. And when searching for a personal financial advisor or financial advice in general, always ask yourself where their interests lie.

Andrew Mickey
Veteran, USAF
Editor in Chief, BreakAway Investor

BreakAway Investor, is based on the idea that a company, no mater how small or large, can earn a disproportionate share of its market if it has product it can use as leverage against its competitors. Breakaway Investor seeks to identify companies that are about to "break away" and become leaders in their industries or sectors, while providing double- and triple-digit gains to subscribers in a matter of months. Learn more…

Local man wins $194 million jackpot! We’ve all seen headlines like that. And it inevitably leads to asking yourself, “What would I do if I won?” We’ve all been there and frankly it’s kind of fun. Whether its quitting your job, taking a trip, telling off your boss, or whatever you choose, you would have almost unlimited freedom. However, if you did win the lottery you would quickly be faced with a tough decision: lump-sum cash payment or 20 years of annual payments.

Some say the lump some is the only way to go. Others powerfully state the 20 annual payments is the only sensible choice. I’ll let you know that the state lottery commission and major interstate lotteries like Powerball, simply don’t care.

They already have the cash on hand for the large cash payment. They raised it through lottery ticket sales. If the winner opts for the lump-sum payment they cut a check for the amount and the deal is complete.

If the winner opts’ for the annuity, the lottery commission takes the lump-sum and invests the amount in a series of government bonds. The bonds mature (that’s when the government pays back money it raised by selling the bond) in each year of the annuity and the cash makes up that year’s payments.

As a result of this system of purchasing guaranteed government bonds, lottery commissions couldn’t care less which payment option the winner chooses. It costs them the same amount either way.

The same isn’t true for the $30,000 Career Status Bonus (CSB) under the REDUX military retirement system. This bonus was designed to save the government money. And when you get your paycheck from the government, if they’re saving money, you’re losing it.