Choosing between the High-Three and the Redux military retirement programs: Thrift Savings Plan participation a valuable option

Army Lawyer, Sept, 2000 by Vivian C. Shafer

Introduction

Service members who entered service after 1 August 1986 may select between two retirement plans(1) commonly called "High-Three" and "Redux."(2) The primary differences between the two retirement programs are a "career-status" bonus and pay differentials.(3) When comparing the two programs, members should determine which program yields the greatest future economic value. The key factor is a member's plans for the Redux career status bonus. Future economic values differ significantly depending on whether and how a member invests his bonus. Values also differ greatly for enlisted and officer members.(4) In addition, the availability of the Thrift Savings Plan (TSP)(5) affects future values. If Congress fully implements the TSP,(6) members who plan to retire under Redux could invest significant portions of their bonuses into their TSP accounts tax deferred..(7) This article discusses these factors and compares the future economic values of both retirement plans.

Which Program Produces Greater Future Economic Value: High-Three or Redux?

In general, this article argues that Redux retirees will reap the greatest future economic values. The discussion below amplifies this generality, and readers should consider carefully the author's underlying assumptions.(8) These assumptions may not be valid for individual service members. Moreover, service members are encouraged to use the Department of Defense (DOD) software, discussed below, when deciding which retirement plan works best for them.

Enlisted Service Members

If an enlisted service member invests a significant portion of his career status bonus, the Redux retirement plan will result in a greater future economic value than the High-Three plan. Suppose an enlisted Redux participant can afford to invest his entire career status bonus after he pays the appropriate income taxes. From the $30,000 bonus, suppose that he invests the maximum of $10,500 in the TSP.(9) He will achieve greater future economic value from the Redux retirement plan, regardless of when he withdraws his invested money. For instance, if the investment is withdrawn at age sixty-two, the Redux plan will yield $142,627 more than the High-Three plan. Upon withdrawal, if the Redux participant pays taxes(10) from his accumulated investments, he still will have greater assets than a comparable High-Three participant.(11)

If the enlisted Redux participant only invests $10,500, the maximum amount allowable in a TSP account,(12) he will still achieve greater value from his Redux retirement. This is true regardless of when he withdraws the money and regardless of tax implications.(13) Suppose the member does not wish to restrict the use of his funds by investing in a TSP account, but instead invests the entire $30,000 bonus, after taxes, in a taxable investment account.(14) The Redux retirement plan is still the best choice for the member, who will realize an additional $125,224 if he withdraws the invested money at age sixty-two. (15)

The Redux retirement plan begins to yield lower future values than the High-Three plan when the enlisted member invests $8000 or less in a TSP account. With an $8000 investment, the Redux member would have greater value for the first ten years of retirement. In the eleventh year, the value of his retirement program would be very similar to the accumulated pay difference between High-Three and Redux. From the twelfth year on, however, the High-Three plan has a greater future economic value.(16) The High-Three plan may be advantageous to enlisted members that would not invest significant portions of their career status bonus.

Commissioned Service Members

For officers, the choice between retirement programs is more complex. The member will obtain greater values with Redux, but higher investment amounts and greater time-periods are required. At the extreme, if a Redux participant invests his entire bonus after taxes,(17) he will achieve greater value from his Redux retirement regardless of when he withdraws the money and regardless of his tax liability.(18) Suppose he does not wish to restrict the use of any of his funds by investing in a TSP account and invests the entire bonus, after taxes, in a taxable investment account.(19) He will still achieve greater value in a Redux program, except for the fifteenth to nineteenth years of military retirement (ages fifty-eight to sixty-two). This is the period immediately before the adjustment in pay for Redux members.(20)

If the officer only invests $10,500 in a TSP account,(21) the Redux retirement will not yield greater value until the twenty-fifth year of retirement. At that point, the officer will be about sixty-eight years old. The pivotal point between the retirement programs occurs when an officer invests about $19,000.(22) With a $19,000 investment, the Redux program will produce greater economic values for all years of retirement except for the years preceding the Redux pay adjustment at age sixty-two.(23) Therefore, an officer planning for retirement must consider carefully when he will withdraw any funds invested for the future.