When you consider your military retirement options, choosing between High Three and Redux is a lot more than looking at the options and making the choice. Both High Three and Redux have long-term implications that should be weighed carefully before you choose. To get the most out of your military retirement pay, select High Three or Redux as part of a well-thought out plan that's balanced between current financial needs and what you'll need in your life after the military.
What is High Three? What is the main difference between High Three and Redux? The main features of these military retirement programs include the following:
This is a simplification of the two military retirement pay plans, but for our purposes, it's enough information to get to the main point. Choosing Redux over High Three is very tempting because of the $30,000 bonus. For many, the entire issue boils down to that bonus money and what to do with it.
Redux appeals to military people struggling with debt, high mortgage payments or other financial issues. There's a big problem with choosing Redux in these circumstances; one of the key features of Redux is that 40% retirement pay rate-- one of the trade-offs you make for accepting the $30,000.
WHY CAN THIS BE A BAD DEAL FOR A MILITARY FAMILY STRUGGLING TO MAKE ENDS MEET?
The biggest short term drawback; you will never see the full 30K. This money is classified as a bonus, which means it is taxed the same way your re-enlistment bonuses are taxed. The IRS will take a chunk, and if you live in a state where military members are still required to pay state taxes, your cut of that $30,000 will actually be closer to 20K.
Long term, you get less retirement pay under Redux. You agree to take ten percent less basic pay as calculated under High Three. How much money do you lose per year by accepting 40% instead of 50%? How much do you lose over a 20 year period? Combine this with the idea that you don't actually see the full $30,000 bonus in your bank account. Does Redux still seem like a viable option? For many, the answer is no.
Some people consider Redux because it's theoretically possible to make up the difference in retirement pay between High Three and Redux through sound investment strategies. Do a Google search on "High Three vs. Redux" and you'll find plenty of articles and advice explaining how you can invest your 30K bonus money and actually make more than you would under High Three.
Many of these articles were written before economic conditions took a turn for the worse; the real estate crash, stock market woes and other issues with America's troubled economy. The advice of yesterday may not be as financially sound today. How many people do you know who are complaining about the losses in their 401Ks? Under current conditions, would you feel safe investing half or more of that $30,000 bonus money in stocks, a 401K or other programs?
That's not to say you should never put your money in an investment fund, or that you should never consider taking Redux over High Three. Some people get into Redux and invest money in the government's Thrift Savings Plan. Others want to invest Redux bonus money regardless of what the market is doing today—they have their eyes on long term investing rather than short term profit taking. Military members who understand the stock market and know good investment principles may accept the pros and cons of Redux to invest a large amount of money in a diverse portfolio. If you can make informed choices about where to put that money to work, Redux might be an option to consider.
But most people simply don't have the time to learn a whole new set of investing skills. If you don't know how to minimize your risks and take chances only where appropriate, chances are taking Redux and investing the bonus isn't for you—at least under current market conditions.
In the long run, High Three is a safe choice. You won't get any bonus money, but over a 20 year retirement, the full 50% of your basic pay as calculated under High Three adds up to a great deal more than $30,000. Whichever you choose, Redux or High Three, think far beyond the needs of today and consider the quality of life you want during your military retirement years.