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PERSONAL FINANCE / KATHY M. KRISTOF

Helping Uncle Sam Shrink Ranks of Military

July 19, 1992|KATHY M. KRISTOF

You remember the peace dividend, that windfall that was supposed to follow the end of the Cold War? There was no end to speculation about what all those unspent dollars could do.

Well, one person's dividend is sometimes another's pink slip. That's precisely the situation in the armed forces, where enemies of the United States are now so scarce that the military is shrinking.

The Department of Defense is thus offering those on active duty what amounts to an employee buyout. And like so many companies that have offered similar programs in recent years, the department is offering incentives including cash and a good hard shove.

Those who opt to leave the military when they're offered the program will get to choose between two generous severance packages--the voluntary separation incentive or the special separation benefit.

Those who don't take the VSI or the SSB may get fired--or as the Defense Department puts it, may be subject to "involuntary termination."

With a goal of reducing the armed forces by roughly 360,000 by 1997, this may well be the nation's biggest employee buyout program. But, by and large, the recipients of the military's plan are much younger--sometimes in their 20s and 30s--than in most such plans.

As a result, their choices have very long-term repercussions. And the choices are tough.

Those who don't take the buyout but do make it to military retirement age--often around 40--are afforded some of the best post-retirement benefits in the nation. Taking a buyout means foregoing these benefits.

Military personnel also need to choose between the two plans--a lump sum or an annual annuity. The annuity works out to substantially more cash for those who have been in the service for a significant period of time, but it also comes with more restrictions.

Those who get the annuity must serve in the military reserves for as long as they continue to receive separation payments. That could be 20 years.

Those who get the lump sum are only required to serve in the reserves for three years.

Finally, those in the service have to determine whether their military skills can translate into civilian jobs during a slow economy and a time of severe defense industry cutbacks.

Many officers who would normally have no trouble getting a consulting or executive-level job may now find the job market glutted with similarly qualified service members, as well as experienced defense executives who were laid off.

Given the weighty choices, the simplest of these decisions is which buyout offer to take. According to Defense Department literature, the annuity option, or VSI, will always be worth substantially more than the lump sum, or SSB payment.

Nevertheless, some may opt for the lump sum if they want to start a business, buy a home or make some other large investment that requires upfront cash. If they're concerned about how long they might be out of work after leaving the military, the lump sum option might also be considered. And, of course, anyone anxious to cut their reserve service short should probably take the lump sum.

However, in nearly all other cases, the VSI is a better deal. An 11-year veteran who would get $62,495 as a lump sum would receive $10,416 a year for 22 years. Assuming a 7% rate of return, that stream of payments has a net current value of $123,276. Payments are generally taxable on receipt.

Far more difficult to determine is whether taking a buyout makes sense at all. The question pretty much hinges on how close you are to regular military retirement and how much you like being in the service. As a rule of thumb, the further you are from regular retirement, the more a buyout makes sense because the risk of being cut loose involuntarily increases. Additionally, those who believe that they may be skipped over for promotions should seriously consider the separation offer. In the military, you either keep getting promoted or you get forced out. If being forced out is a real possibility, it makes more sense to get out while the getting is good.

Faced with decisions such as these, it might make sense to consult financial and career counselors before making a final decision. Such a counselor should be able to help you formulate a workable budget and assess your job prospects on the outside. Some may also suggest education or additional training that could make you more employable in private industry.

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