Military Buyback 101
Could a military buyback towards your federal creditable service make sense for you?
Lots of Federal Employees have had prior military service. When we talk about buying back military time in my federal retirement classes - most federal employees want to know, “Does it make sense for me?”
If you have active honorable military service that isn’t already being ‘used’ towards a military retirement - there is a very good chance that you can ‘buy’ that time back and have it count towards your federal retirement.
If you do a military buyback - it will increase the number of years in service that are used for your annuity/pension calculation. The more years you have - the larger your federal pension.
How Much Will It Cost?
How much you will have to pay to buy back your military time depends on these factors...
- When was your service?
- How much were you paid during your military service?
- How much interest has accrued on that time?
- Are you a FERS or a CSRS?
The first step in a military buyback is to find out how much you were paid each year of your military service.
If you have your military pay records - that is the best. However, if you no longer have a copy of your pay records, you can submit a copy of your DD-214 and send a request to your particular branch of the military’s pay center.
Take the amount of military base pay you received during your service, and multiply that amount by a percentage: CSRS use 7%, but FERS use 3%.
Once you have that number, you now need to add interest.
The interest rate is different for each year - and of course, the longer you wait to do a military buyback, the more interest you will have to pay on top of your initial percentage of base pay. It is not uncommon for interest to be 2 or 3 times the amount of your initial percentage of base pay.
BUT - do not despair. Even with tons of interest - you will still almost always get a greater benefit in your pension than what you have to pay to buy back your time with interest.
Military Buyback: Let’s Look at an Example...
Bob served 3 years as an enlisted member of the military: 1973, 1974 and 1975.
Later in 1988, Bob began his federal career under FERS. He now has 22 years of service.
Bob wants to know if he should buy back his military time.
First, we need to total up Bob's military base pay:
Bob's Pay in 1973: $4,100
Bob's Pay in 1974: $4,600
Bob's Pay in 1975: $5,300
Total Military Base Pay = $14,000 for all three years
FERS 3% x $14,000 Military Pay = $420 Deposit
Now for the interest:
For an easy example, we'll say Bob was hired under FERS on Jan 1, 1988.
Bob’s ‘grace period’ on military buyback was from Jan 1, 1988 - Jan 1, 1990. The first date interest will be added to his deposit is a year following the grace period: Jan 1, 1991. Interest will continue to accrue until Bob pays the entire deposit due.
For Bob’s example, if he were to pay back his deposit now, it would be approximately $1,300 including the interest.
Can You Buy Back Time With No Interest?
There is an interest free ‘grace period’ of two years. If your military service was before your federal career, the grace period generally starts the day you were hired under FERS or CSRS.
The interest is accrued once a year - so technically, if you paid the deposit for your military time right before the third anniversary of your federal hire date - you can probably get by without paying any interest on your time.
However most of the federal employees I’ve talked with were not even aware of this grace period - or just didn’t understand how big a benefit it is to buy back their prior military service. And by then, the grace period had long since been over.
“How Much Will It Affect My Pension?”
Your Federal Pension is determined by your High-3 Salary, your Years in Service and your CSRS or FERS Pension Multiplier.
If you buy back your military time - it will increase your Years in Service. And the more Years in Service you have, the larger your pension will be.
Let’s Go Back to Our Example...
Bob is now 57 years old and has 22 years of federal service.
Right now, Bob is planning on working another three years. By then, he'll be age 60 and he will have 25 years of service. He will be eligible to go out on an immediate and unreduced pension (since he will be age 60 with 20+ years of service).
For easy numbers, let’s say Bob’s High-3 Salary was $100,000.
By age 60, if he doesn’t buy back his military time, Bob will have 25 years of service.
We take $100,000 x 1% x 25 years in service = $25,000 Annual FERS Pension
However, with a military buyback, Bob could add an extra three years of service to his calculation:
$100,000 x 1% x 28 years in service = $28,000 Annual FERS Pension
By buying back his military time and adding three years to his creditable service, Bob will receive an extra $3,000 a year in his FERS pension, for the rest of his life.
And if he chooses to leave a survivor annuity to his wife - her survivor annuity will be based on Bob’s higher amount.
So in our example, even though his military time cost him $1,300 - Bob’s pension was increased by $3,000 a year, for every year, for the rest of his life.
"Does it Make Sense for Me?"
Of course, every one’s personal situation is different. And how much your military service increases your pension depends on other factors, like your High-3 Salary.
When considering if a military buyback makes sense for you - you should also think about retirement eligibility.
Another benefit to buying back military time is that in addition to the higher retirement pension, you may be eligible to retire sooner.
So if you’re right on the ‘cusp’ of being eligible to retire - buying back your military time might make you eligible to retire sooner than you had thought.
I can tell you that in my years of working with federal employees, I have not yet once seen a situation where it did not make sense for a person to buy back their ‘unused’ military time.
Even so, it is still important to understand your retirement benefits and run the calculations for your own personal situation.