The 15-Year Cookie
Watch your retirement planning and potential earnings carefully
by Thomas K. McKnight
Retiring? If you took the $30,000 Career Status Bonus your retirement check will be reduced. (Photo by LCpl Michael S. Cifuentes.)
|
As you hone your Marine skills, pouring through the Marine Corps Professional Reading Program, practicing on the range for requalification, or synchronizing your training and your learning to your mission, it could be really important to spend a moment considering a flirtatious offer from your retirement program. Here it is. If you have 15 years time in service, just step up to the benefits office, fill out the papers, and walk away with $30,000 cash money before taxes, no strings attached. That’s a nice little cookie1 for you in your mid-30s when bills could have stacked up a little bit or you fancy your investing skills as superior to the herd on Wall Street. However, before you reach for your cookie, maybe you should give some thought to what it will cost.
Retirement Program Basics
There are many moving parts in the conditions and features. I’ll hit the basics and give you some sites on where to learn more. Among the many benefits waiting for your retirement is a monthly cash payout that is either the so-called “High 3” or the more limited “Redux.” These payouts are sensitive to your time served as well as to the payout alternative that we are addressing here. On the High 3 plan, if you are a 20-year retiree, you will receive 50 percent of your average base pay over your 3 highest earning years. You also receive a cost of living adjustment (COLA) that matches inflation. Now for the reason why you might end up on the Redux plan. If at the end of your 15th year you “eat” your cookie; i.e., accept the Career Status Bonus, you immediately fall to only 40 percent pay. (Actually if you stay in for 30 years, this pay arrives at the same 75 percent as the High 3 alternative.) Significantly, there is also a different COLA for those opting for the Redux plan. Your COLA is 1 percentage point below the COLA for the High 3 option. No, that is not 1 percent of, but 1 percent below. If High 3 retirees have a 3 percent COLA, the Redux retiree will be awarded only 2 percent. (There is a one-time catchup on COLA at age 62 and then it returns to 1 percentage point below inflation.)
There are several well-written articles on the subject that you should find on the Internet and read. None of them illuminate the worst case, although they do offer varying degrees of depth and erudition that make them much worth recommending. We’ll get to the worst case, but it would help for you to read these:
- http://www.army.com/articles/item/2393.
- http://findarticles.com/p/articles/mi_m6052/is_2000_Sept/ai_71828859.
- http://findarticles.com/p/articles/mi_pnav/is_200112/ai_1754126164.
- http://www.militarymoney.com/money/1084549756.
If you retire at 20 years and live to the national average of 78 years, the typical penalty for accepting the Career Status Bonus is about $172,800 for enlisted (the difference in monthly payments times 432 months, or $400 times 432) and $302,400 for officers ($700 difference per month times 432 months). In other words, for accepting your bonus, you receive $30,000 cash in return for a $172,800/$302,400 payback. (Don’t forget to include the tax calculation.) There are a variety of assumptions that could be influential, but for the purposes of brevity, let’s stick to the basics to make our point. For example, if you take your cookie while serving in Iraq or other war zone, you pay no taxes and keep the entire $30,000.
If you receive $30,000 cash and pay it back across 36 years,2 then your cost of money will be about 4.87 percent (6.4 percent if you are an officer). Not bad. Several of the articles cited above will confirm this “not so bad after all” conclusion, particularly if you retire after 30 years when the difference between the two plans is almost nil. (The COLA is slightly different.) So, where’s the problem? There are several.
Retirement
First, it’s your retirement! If you live to be older than 78 (the national average) and you retired at 20 years after having taken your cookie, you could easily have $4,800 to $8,400 fewer dollars coming in each year. The older you get, the more you will feel the sting of those missing dollars. You will take this cash at roughly age 35 when you are in your prime earning years, and if you retire at 20 years, you will be “paying” it back with reduced benefits when you will not be able to fill in any missing cash with consulting work. You’ll only be able to cut costs for food and shelter. The annual impact is significant and potentially staggering.
The Gamble
Second, what makes you so sure you will be able to proceed from your 20th year to your 30th? There are plenty of reasons why you and the Corps might part ways, and the closer you are to 20 years when that happens, the higher the adverse economic impact. Remember, you will be taking your cookie at year 15, a time long before you will have the ability to see for certain if you will be able to retire at the end of 30 years (the same pay rate as High 3 option). This means that you’re gambling, and the ante is anywhere from $4,800 to $8,400 per year for the rest of your life. If you get lucky, and take your cookie and put it somewhere where it can grow, you’ll probably break even or even come out ahead. Maybe not.
The True Value
Third, now for the really ugly truth, the worst case I’ve been mentioning. If you take your $30,000 cookie or bonus today, retire at your 20th year (assume you signed up when you were 22), live until you are 78 years old, and you apply today’s prime rate (6 percent) as you calculate the value of the cash flow, you will pay back the compounded sum of $351,229 (enlisted) or $808,705 (officers) for your having taken your cookie or bonus. If you beat the average and live, say, until you are 92, your cost for accepting this bonus or cookie will be $916,797 (enlisted) or $2,052,9553 (officers).3 Read that again.
Conclusion
This bonus makes sense when you absolutely know for certain that you will be in the Service for more than 30 years. If you aren’t even close, such as when you are between your 15th and 20th years, it could prove to be a hideous $2 million error. In that case, get your hand out of the cookie jar!
Notes
1. I use the term “cookie” to refer to the Career Status Bonus, the more proper name as described on any website devoted to military retirement, such as http://www.defenselink.mil/militarypay/retirement/ad/04_redux.html.
2. The Social Security Administration indicates at www.wwa.gov/OACT/STATS/table4c6.html that half of us will be alive when we are 78.
3. Using a mortgage calculator, plug in 600 for N, the number of months you will live past your 42d birthday if you reach 92. Plug in 6 percent for the interest. For the present value plug in a negative $30,000. (It’s negative because it is coming to you not going away from you.) For payment plug in $700. Then ask for the full value. Adjust accordingly for the previous numbers. This is the compounded interest scheme in reverse, just like a mortgage, where your payments would earn interest on themselves at the prime rate. This is the true value of this flow of dollars.
>Mr. McKnight is a former Marine and is President, Career Military Mortgage Trust, LLC.
