Active-Duty Military: Retirement Income and Finances

The lifestyle of the military family can prove both challenging and rewarding, especially in terms of family finance. Saving, investing and budgeting on a military income – while coping with frequent moves, career changes for the spouse and new schools for the kids – requires special skills and planning. That’s why we’ve created the GI Money online portal and family of educational products.

Active-Duty Military: Retirement Income and Finances

retirement couple beach

In return for 15, 20 or more years of patriotic service and sacrifice, active-duty service members enjoy a retirement income plan that’s among the very best in any occupation.

Retired pay, the military’s version of a pension plan, has three powerful features. It is:

  • Guaranteed for life.
  • Adjusted annually for inflation.
  • Available immediately upon retirement, regardless of your age.

Three Retirement Plans

The military retired pay system has evolved over time. Depending on when you began your service, you’ll be covered by one of three plans:

  • Final Pay
  • High-36 (often called High-3, because 36 months equals three years)
  • CSB/REDUX (Career Status Bonus and REDUX retirement system)
Which plan applies to you?
Date You Entered Service Retirement Plan
Before Sept. 8, 1980 Final Pay
Between Sept. 8, 1980, and July 31, 1986 High-36
On or after Aug. 1, 1986 Your choice of High-36 or CSB/REDUX


How Retired Pay Is Calculated
Retirement Plan Retired Pay Formula
Final Pay 2.5% x years of service = % of final monthly basic pay you’ll receive
High-36 2.5% x years of service = % of average highest 36 months of basic pay you’ll receive
CSB/REDUX For first 20 years of service: 2% x years of service = % of average highest 36 months of basic pay you’ll receiveFor each year after 20 and up to 30: 3.5% x years of service = % of average highest 36 months of basic pay you’ll receive

The 15-Year Choice

When today’s military members reach their 15th year of service, they are asked to choose between the High-36 and CSB/REDUX plans. Those who select the CSB/REDUX plan receive a $30,000 bonus immediately but are required to serve at least another five years to complete a 20-year commitment.

“While the bonus may be tempting, CSB/REDUX isn’t the best choice for most people,” says JJ Montanaro, a CERTIFIED FINANCIAL PLANNER™ professional with USAA. “The early ‘bonus’ is really more like a loan, which you’ll pay back (and then some) over your lifetime.”

Upon receiving the $30,000 at your 15th year, your 20-year retirement is reduced from 50% to 40%. Additionally, the CSB/REDUX plan provides smaller inflation adjustments each year. Over the years, you’ll be giving up far more than $30,000.

How much more? The chart below shows the decrease in lifetime benefits for three retirees of different ranks, ages and years of service. The analysis assumes investing 100% of the $30,000 available after taxes.

CSB/REDUX: Bonus Today, Much Less Money Tomorrow a,1

Status at Retirement Lifetime Reduction in Retirement Benefits
Grade Age Years of Service Through Age 79 Through Age 85
E-6 38 20 $317,071 $419,279
W-3 38 20 $426,460 $563,930
O-5 44 22 $428,627 $617,424


VA Disability Pay and Retired Pay

Until 2004, retired service members were unable to simultaneously collect their military retired pay and any Veterans Affairs disability compensation. Essentially, their military retired pay was reduced by the amount of their VA disability income. As of Jan. 1, 2014, this policy has been totally phased out for those with a 50% or higher disability rating through what the government calls Concurrent Retirement and Disability Payments.

But, Montanaro notes, retirees with combat-related disabilities don’t necessarily need to meet the 50% rating threshold to receive both VA and retirement benefits at the same time. If they meet the right qualifications, they can apply for payments through the Combat-Related Special Compensation program, which allows them to replace some or all of their retired pay that was withheld because they receive VA disability income.

Protecting Your Retirement with the Survivor Benefit Plan

“When you consider the value of a lifetime of inflation-adjusted income, retired pay may be your largest financial asset,” Montanaro says. “Fortunately, you can help prevent your loved ones from losing this income when you die, through an optional government program called the Survivor Benefit Plan. While participation isn’t free, the price could be well worth it considering the protection your family receives.”

May 13, 2014 |

5 Money Management Mistakes


It can be dizzying. And there’s lots of hard-to-ignore noise on the periphery.

No, I’m not talking about trying to work at home with the kids buzzing around. Instead, I’m talking about managing your investments. Peruse the paper, surf the Internet or turn on your TV and you’ll be bombarded with “can’t-miss opportunities” and gut-wrenching financial news that inevitably work their way into decisions you make on your investment portfolio.

Truth be told, I’m surrounded by money managers and money news, and sometimes I wonder, “What’s the right move?” And that’s with 20 years of experience in the business of personal finance! There’s no doubt about it: Managing your investments can be perilous – ripe with opportunities to make a bad move.

With the accuracy of hindsight on my side, here are five common mistakes I’ve seen people make while trying to tackle this task.

Timing instead of “time in.” Buy low, sell high. Sounds easy enough, right? But the reality is far different. At the beginning of 2013, a budget crisis, pending government shutdown and a long-running bull market could easily have led investors to jump out of stocks. A correction was surely imminent. Oops, U.S. stocks surged more than 30%. The lesson? Don’t try to time the market. Among the challenges you’ll face is the need to make two decisions – when to get out and when to get back in. Can you get them both right? If so, can you do it more than once? Probably not. Don’t try to time the market, let your long-term money work for, yes, the long-term.

Picking off the top of the list. Avoiding this market mishap is a battle with human nature. It’s way too easy to look at last year’s winners and choose to jump on the bandwagon by shifting your money to whatever did best. Don’t do it! Remember, the rule is: Buy low, sell high. Maybe last year’s winner will go even higher. Or maybe it won’t. Typically, you’ll arrive at the party just in time for a big disappointment. Plus, chasing last year’s return isn’t really an investment strategy.

Hankering for a home run. In 2013, if you owned Rite Aid stock, you would have seen a healthy 272% return. If you had bet on the gold-mining stock Newmont Mining, you would have lost nearly half your investment. The point? For most people, broad-based mutual fund or exchange-traded fund investments make more sense than swinging for the fences … and the risk of striking out.

Believing more is better. Everything in moderation. It’s a saying that works well in many aspects of life, and investing is no exception. Some gold, commodities or real estate might be a nice addition to your portfolio. However, like cayenne pepper in your favorite recipe, more is not necessarily better! A diversified portfolio should contain a mix of different investments but not wild bets on the latest trend.

Following the headlines. Today’s 24-hour news cycle makes it difficult to focus on your long-term goals. But overhauling or overturning your plan for the next quarter-century based on the latest and loudest talking head’s thoughts (which won’t match next week’s rant) is not a solid portfolio management model. Follow the news, but don’t let it run you in circles.

Are you guilty of these missteps? Hopefully not! But if you feel any of these mistakes creeping into your life, bust out your long-term plan and your noise-canceling headphones. Like it or not, the investment world will always be a loud one. The key is to block out the extraneous noise and tune in to the goals you’re trying to achieve.


May 9, 2014 |

The Drink, Coffee & Sandwich Bargain

sexy sandwich girl

Having your favorite barista make your coffee or a sandwich artist prepare your lunch sure is convenient. But you ultimately pay a big price for these little pleasures. Cutting down on to-go orders – whether it’s coffee, sandwiches or even bottled water – can save you hundreds of dollars a year. Here are some pain-free ways to do it.

Coffee: Brewing your own coffee with a drip filter costs about 40 to 50 cents a serving, and with a K-Cup® machine about 50 to 75 cents a serving. Meanwhile, buying a cup of joe at the corner coffee shop will put you back at least $1.50, and a latte runs $3.50 or more. You don’t necessarily have to go cold turkey off of those venti mochaccinos, but if you reduce your consumption by half, you’re still looking at potentially saving hundreds of dollars.

Sandwiches: When it comes to lunch, there are two words to remember: brown bag. Pack your own food for the office, and you can save as much as $5 to $10 per meal each workday. Planning is key for preparing lunches. Buy sandwich meats, fixings and bread at the beginning of the week. Don’t forget snacks and a drink, either. Set aside an extra five minutes in the morning to put your lunch together. If you’re really ambitious, do it the night before.

Drinks: Consider that in 2012 the average cost of bottled water was $1.13 a gallon, according to the International Bottled Water Association, while tap water costs about two-tenths of a penny per gallon. How many gallons of bottled water do you drink? Stop pouring so much cash down the drain and buy a reusable water bottle to carry with you.

Dinner: Sometimes the demands of the day make whipping up an elaborate dinner at home seem like an impossible dream. There are faster, cheaper alternatives to eating at a restaurant or ordering takeout. The easiest is to head to your local supermarket. Most grocery stores today boast an impressively stocked salad bar, prepared foods in their deli section, take-and-bake pizzas and fully cooked rotisserie meats – all for less than restaurant prices.


April 25, 2014 |

Discussing a Million Dollar Plan

money cash woman savings

While some millionaires were born, and others have quick-picked their way to riches, many more have started with less and worked their way to seven-figure status.

Effective money-saving habits can help boost your wealth little by little, year after year. But more importantly, a habit of steady saving along with financial planning can help you on your way to your future.

“For many millionaires in the making, it’s all going to start with reviewing and assessing your plan on a regular basis,” says JJ Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA. “Believe it or not, sometimes slow and steady does actually win the race.”

The Advantage of a Helping Hand

Once you’ve made the decision to build your nest egg, productive conversations with a financial advisor can help you toward your financial goal. Building your financial footing can happen over time, and a financial advisor can help you to maneuver around and through life’s unforeseen challenges.

Your advisor should get to know you, your family and your financial goals and be a sounding board for your wealth-building ideas. Together, you can discuss the types of choices you’ll need to make to compile a portfolio that is designed to grow steadily. He or she should ask you for some information that some might feel is personal. Topics will certainly include income, debts, employer’s retirement choices and any investments. Your financial advisor should get an idea of your current financial picture and your ideas for how you envision growing your family’s wealth in the years to come.

Think of your financial advisor as a coach, helping you work toward your financial objectives. He or she can serve in several different ways as you strive to accrue wealth. Some of these roles may include:

  • A voice of reason: You may need help identifying your specific financial goals. An advisor can lend an ear, as well as help decipher some of the fine print that explains complicated topics like 401(k) or IRA rules.
  • Motivator: A financial advisor can help make sure you stay the course for your savings goals. If you ever lose sight of your long-term goals, and think about abandoning your saving habits, your advisor can remind you that your wealth-building ideals are not in vain, and that your sacrifices now are designed to pay off in your later years.
  • Prioritizer: With all the different ways that you can spend your hard-earned paycheck, a financial advisor can help you determine necessary spending from nonessential spending, helping trim the fat in your budget. He or she should understand the need to use some income for recreation, and can help you budget that need into your spending, while helping you keep in mind that your long-term financial goals can be attainable with discipline and an effective set of priorities.

Your advisor can help you discover components to address your financial needs. With your continued contribution to your accounts and the advice from your financial advisor, a well-thought-out plan is important.

“One of the hardest aspects of wealth building is having the patience to let your plan unfold and know that overnight success isn’t what you’re shooting for,” explains Montanaro. “Having a relationship with someone who can keep you grounded in this reality can be critical to keeping you on track during those times when things don’t go as you expected.”

In order to pick the right advisor for you, know that a reputable professional will have no qualms about answering your questions about his or her credentials and compensation.

“People are often hesitant to ask the important details about their advisor because they fear it will come across as offensive,” says Montanaro. “I say, ‘Ask away!’ If you’re going to entrust someone to guide you on such an important journey, it’s not asking too much for you to get an understanding of what makes them qualified to help you.”

There are different ways to become a millionaire, but discipline, patience and some financial planning are tactics that can help achieve that goal. Talking realistically about your financial ambition and plotting your path are steps in the right direction toward earned wealth.


March 7, 2014 |
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