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The question of whether to buy back military time is something that affects a lot of people. This episode features Christian Sakamoto, a great advisor from our office who has valuable insight to share on this topic. Today, he and Micah discuss the key areas that you need to be aware of to decide whether buying back your time makes sense for you.
Listen in to hear some of the common misconceptions out there and what you need to know to navigate this decision. Christian and Micah also share the pros and cons, as well as insight from their experience, so you can have a better understanding and base to help you make the best choice for you.
I’ve never seen the math where it doesn’t make sense to buy that military time back. It not only increases your benefits, it increases your survivor’s benefits as well. – Micah Shilanski Click To Tweet
Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan
You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.
Micah Shilanski: Welcome back to another great episode of the Plan Your Federal Retirement Podcast. I’m your cohost, Micah Shilanski. With me is a guest, not the amazing Tammy Flanagan, but we have a great advisor from our office, Christian Sakamoto. Christian, thanks for joining us today.
Christian Sakamoto: Micah, my pleasure. Really excited to be chatting today.
Micah Shilanski: Yeah, we get to talk about some amazing things. Okay, yes, you can call us geeks. That’s fine, because we like to talk about this fun stuff. There’s some really neat parts about your federal benefits. Christian, this is a question that we get time and time again. Now it doesn’t affect all of our members, but it’s amazing how many people it really does affect, which is the question should I buy back my military time or not?
Christian Sakamoto: Yeah. Yeah, we’re seeing that a lot. I don’t know why, but, hey, it’s helpful, and we’d love to go through that and go through the details around that question. Let’s unpack it. Let’s just see, does it make sense or not?
Micah Shilanski: Let’s do it. Now the important part about this is these are your benefits as a federal employee. This is something that applies to you. Now if you don’t have military time and you don’t think it applies to you, then great. Just bookmark this episode. But send this out to a federal employee who’s had a question about it, because this is an area of misinformation we see all of the time, or maybe just not understanding how things work.
Maybe it’s water cooler information, I’m not sure, but we see a lot of inaccurate stuff, and we want to smooth that out, because understanding your federal benefits and applying those benefits to your personal situation, that’s the difference in a successful retirement and a not so successful retirement. We don’t want unexpected surprises from the IRS or OPM. Those just aren’t fun.
So, Christian, let’s go through this first and let’s talk about military time as a whole. So I guess one of the first questions we get all the time is from a non-federal employee that says, “Okay, well, if I’m not a federal employee, but I work at a different government, maybe it’s a local government, state, municipality, et cetera, that’s going to be there, can I buy back my military time?”
Christian Sakamoto: Yeah. That is a good question. Generally speaking, without knowing your specific agency that you work for, the answer’s going to be no. More often than not, you’re not able to apply your military time for a non-federal position.
Micah Shilanski: That’s right. We’re talking federal benefits versus state or local benefits that are going to be there. But ask the question. We are not experts on every fixed benefit system there is. We specialize with federal employees. So if you have military time and you think it might work, there’s something you’ve heard about buying back at your local agency, then absolutely it’s something to do.
Now let’s talk about the federal side of the equation. So what the federal government allows us to do if we have military time, uniform service time is really what we’re talking about, then the federal government allows you to buy that time back and it counts towards your pension.
Now we’re going to talk in a little bit about what that actually means in dollars and cents, because does it make sense? Does it not make sense? But, Christian, what are the cons, before we get into the pros? Because there’s a lot of pros. But let’s talk about the cons. What are the downsides of buying back your military time?
Christian Sakamoto: I’d say the biggest downside would be that upfront cost, the actual aspect of giving money for a benefit that you are not necessarily going to receive a return right then and there. So that’s probably the biggest con.
I would also say the other would be not knowing if you’re going to stay in federal service. So you’ve got time in the military. Maybe you’re in federal service right now, but maybe you’re thinking about leaving or going to a civilian job, or some sort of job outside of federal service. You might think, “Well, if I buy back this military time, am I wasting my money because I’m not going to actually get that benefit when I’m out of federal service?”
Micah Shilanski: Great points. If I could add to the con list too, one of the things would be if you’re receiving a military pension, so let’s say you retired from military service, you’re getting a pension, and you buy that time back, that means you’re forgoing the military pension. It goes away.
Now it doesn’t go away until you retire. So there’s a little bit of income that you’re still going to get. But then that military pension goes away. So these are some big benefits that are going to be there.
So if you’re receiving a military pension already, I’m going to raise a giant red, if not at least a yellow flag up that says, “Hey, let’s hit the pause button on this buyback and really make sure it makes sense.” Now if you’re not receiving a military pension, not eligible to receive a military pension, boy, I have almost never run across that. I really hate saying never, never, but I can’t think of any time that I’ve run across a position where it does not make sense to buy back your military time. I can come up with a hypothetical reason, but I haven’t seen it in real life.
I think, Christian, my hypothetical, so feel free to poke some holes in this, is what if you had 10 years of military service you want to buy back, but you were only in federal service for two years, and then you were going to stop working. Not retire, but stop working. So maybe you’re going to have three years as a federal employee and you wanted to buy your 10 years back. All right. Well, let’s talk about some rules that are associated with that.
So, Christian, first, let’s talk about normal first rules. What are the normal first rules for wanting to retire and be eligible for an immediate unreduced pension?
Christian Sakamoto: Yeah. So those are the three, which would be retiring at your minimum retirement age, your MRA, with at least 30 years of service, that’s number one. Number two would be retiring at 60 years young with 20 years of credible service. Then number three, retiring at 62 years young with five years of credible service.
Now that’s to retire with an immediate unreduced pension. There’s other options out there available. Maybe it’s a deferred or a postponed retirement. So we can chat about those rules. But the minimum in order to be vested in the first retirement system is to have five years of creditable service.
Micah Shilanski: You got it. That’s the catch right there. Five years of creditable service you’ve got to have in there. Now rarely do I meet somebody … By rarely I mean it’s never. So I have never met … And I’m sure it exists. Over two million federal employees that are out there, I’m sure this case is there and I just haven’t personally run across it, that only has a couple years of federal service, has 10 years of military time, and doesn’t want to stay to five years.
Most of the time when I’m talking to those people, I say, “Look, here’s what’s going to happen.” For those of you that have 30 years of civilian service, you know exactly what I’m about to say. “Look, you don’t think you’re going to be here in two years later, and all of a sudden 28 years go by and you have a 30-year career. It happens about that fast.”
And so, more than likely I’m in the camp of if you’re eligible to buy that military time back, boy, I’m a big fan of really looking at it and saying, “Let’s look at these numbers, let’s look at the cost, and let’s see if we should buy it back.”
So, Christian, let’s chat about that. I think one of the cons, rightfully so, is the cost to buy it back. Now the benefits probably outweigh that con, but let’s talk about that con first. What is the cost to buy back that military time?
Christian Sakamoto: The cost would be 3% of whatever your base pay was per year. And so, that doesn’t include your base housing allowance. It doesn’t include combat pay. So it’s just going to be your base pay. No locality. So 3% per year.
Micah Shilanski: As our military vets know, you were not paid a lot of money. Your base pay was not that big, especially even today when I’m looking at it. So you’re talking 3%, yes, but of a fairly small number more than likely that’s going to be there. So, yup, you’ve got to do that 3%. So that’s the downside.
We’re going to go through a sample case with you in just a second and go through it. But you’ve got that 3% plus interest. The government says, “Okay, if you owed us money, whether you knew it or not, and you didn’t pay back in a certain period of time, you have to pay interest on that.” But the government gives us a nice little grace period, don’t they, Christian?
Christian Sakamoto: Yeah, they do. So you have essentially a two-year window. It’s up to three years. So basically what the wording would be after the second year, that’s when interest starts getting calculated. That interest rate is variable.
So in 2021, it was slightly under 1.5%. It changes every year. So, yes, that’s the downside is interest does accrue. In addition to that 3%, if we didn’t buy that time within that two-year window.
Micah Shilanski: Yup. That’s a great thing. So as soon as you’re becoming in federal service, I’m a big fan … Especially if you’re a supervisor and you’ve got new people coming underneath you, get them this information so they can make this decision.
But I’m a huge fan of telling new federal employees, “Hey, if you’ve got military time, let’s buy it back,” because a couple of reasons that I like about that. One, we know what the rules are today. Great news, today you get to buy it back. Do we know what the rules are going to be tomorrow? I don’t.
Now do I think they’re going to take this away? I don’t. But, alas, the current administration, just like the previous one, they don’t return my phone calls. So I’ve got some great ideas, but they just won’t call me back. So I have no idea what they’re going to do, but we know what their current law is. So let’s plan with the law we know today. So I think that makes a ton of sense to look at that, make the deposit.
The way you’re going to make this deposit, by the way, is you’re going to go through your local HR in order to help calculate that. But they’re going to kick it off to OPM. So one of the few times that your stuff actually goes to OPM before you retire, OPM is going to do a calculation on how much that buyback is going to cost. They’re going to come back to you with that information.
Then you have one or two choices … Well, I guess three. A, you could do nothing with it, B, you could pay it off on a lump sum, and, C, you could make monthly payments to get that thing paid off. Generally, it’s going to make a ton of sense to do option B or option C, pay it off in lump sum, pay it off over a couple of years.
Now one of the things that sometimes I hear, saying, “Micah,” well, Christian, I guess to kick it back to you, “the interest rate’s pretty low. You said like one point whatever percent. My TSB is doing dramatically better than that over the long run. I’ve got an idea. How about instead of buying back that military time, I just invest the money and I put all that money in investments? It’s going to grow at more than 1% a year. Then when I go to retire, I’m going to be able to take that money out and I’m going to buy back my military time.” Is that a good idea?
Christian Sakamoto: Well, my initial reaction to that is, hey, great, that sounds good on paper, but will you remember to buy that military time back? “Is that actually going to happen?” would be my first reaction hearing that. But what’s another concern with that?
Micah Shilanski: Yeah. I think that’s a great one. Are you actually going to do it?
Christian Sakamoto: Yeah.
Micah Shilanski: What happens if you die? What position does that put your survivor in? Can you post-mortem buy back your military time? The answer is no. We really can’t do a lot of planning from the grave. It makes it very, very challenging. So these are survivor benefit questions that are there.
We also know what the interest rate is today. We don’t know what it’s going to be. We could go back to the ’70s, ’80s. It was a much higher interest rate at that period in time.
So I’m a big fan of taking advantage of the laws that we know today when they’re favorable. And guess what? It’s pretty favorable. So I’m a big fan of saying, “You know what? Let’s go buy that time back. Let’s lock these benefits in. It makes a ton of sense.”
Maybe if you’re only in the civilian service for two or three years and you’re like, “You know what? I really don’t want to stick in a 30-year career,” but you’ve got four years of military time, that four years of military time is doing nothing for you on the benefits. At least buy it back and stay five years.
Now all of a sudden you’ve got nine years that’s credible for retirement. That doesn’t go away because you’re vested, right, Christian? That’s what you said earlier.
Christian Sakamoto: That’s right.
Micah Shilanski: If you work under civilian service for five years, that means you’re vested to get a pension. Now we might have to wait till we’re 62 years young to get a pension, but you still get one. So might it make sense, maybe you’re in there three or four years, to say, “Let’s stick this out for five. Let me buy back that four years of military time. Now I’m going to have a 9% lifetime pension income. Maybe that’s worth it.” So these are things that you need to think about.
Christian Sakamoto: Absolutely. So we’d love to go through a scenario on that, too. Let’s say somebody had four years of military time. So let’s walk through an example. What would that cost be using 3% and interest and all of that?
Micah Shilanski: I love it. Now because we want to make our math very simple, we’re going to use nice round numbers, and we’re going to go on the high side. Let’s say you had four years of military time and, Christian, let’s say that your base pay in the military was $20,000 a year. Why 20? Because it makes our math super easy. So 20 times four, I’m coming up with about $80,000. Does that sound about right?
Christian Sakamoto: Sounds about right.
Micah Shilanski: Perfect. So if we take, okay, $80,000 was your total pay. We’re going to times that by 3%. 3% of $80,000 is $2,400. $2,400. That would be your deposit owed. Now if you do it outside of that three-year window, now you’re going to have interest. You’re going to have to start paying on that.
By the way, 1% interest on this is like $24. So it’s not really going to grow that much over this period in time. So let’s say it’s $2,500 that you have to make this deposit for. Okay, that’s the cost that’s going to be there. So that’s the cost, but, Christian, what are the benefits? What are they getting for buying that four years back?
Christian Sakamoto: Yeah, and making the numbers a little bit easy again, let’s assume that the high three is $100,000. So that’s what you’re getting paid today. Let’s multiply that $100,000 for an extra four years of creditable service, because that’s how much it adds to your pension. So that would be, $100,000 times four years, $4,000 a year of additional pension income that you would receive for basically paying $2,500 bucks once.
Micah Shilanski: That’s huge, right? Okay. So, look, carry the math. What’s my breakeven on this, what, seven months?
Christian Sakamoto: Right.
Micah Shilanski: This is a mental math. So I’m sure I’m off a little bit. So give me some grace on that. But, yeah, this is like a seven-month. If you live seven months after retirement, it’s bonus money that’s going to be there. So if you’re not going to live seven months after retire … Pro tip, don’t retire. That’s a joke, of course. So we want to have that nice longevity. But this is going to make a ton of sense to buy back.
I have never seen the math work out. I know I said this earlier, I’m sure there’s some weird case that it doesn’t make sense. But I’ve never seen the math … Make sense, where it does not make sense to buy that time back, because it not only increases your benefits but it increases your survivor benefits as well.
So this isn’t just money you’re going to get. It’s money your spouse is going to get, God forbid, but when you pass away. So it’s a huge benefit.
One downside … Well, I shouldn’t say downside, but one area of understanding we need to have is how this works in your retirement. Christian, you’re 100% spot on that this adds to your federal pension calculation. This adds an extra four years. What this does not do is increase your time to calculate your first supplement.
Now let’s keep in mind your first federal benefits were based on three things, your pension, social security, and TSP. Well, let’s just say that your minimum retirement, ages between 55 and 57, let’s say it was 57 years young. Well, if you put in a full career, the federal government’s designed your pension to be paid on all the three of those things. Well, you can turn your pension on right away if you’ve had a full career, which is over 30 years, including bought back military time, which is outstanding. But social security, you can’t turn social security on until 62.
So they have this bridge, they have this supplement that they put in place, the first supplement, that allows us to get a portion of your social security out early. The way that calculation works is it’s only your civilian service time. Even if you bought back military time, it does not count. It is only your civilian service time that’s going to count.
So that’s the only … I wouldn’t say a downside, because you’re still getting a much better pension. But that’s something to be aware of inside of there.
Christian Sakamoto: Yeah, just the rules.
Micah Shilanski: But it works out really well.
Christian Sakamoto: Yeah.
Micah Shilanski: Yeah. All right, Christian, another question that comes up, what about double-dipping? So I had said earlier that if you buy back your military time, you can’t get your pension. But just like any other good … Or you can’t get your military pension anymore once that starts.
So if you buy back your military time, let’s say you had a 20-year career, you’re getting a military pension, which most of the time it does not make sense to buy back your military time if you’re getting a pension. I’ve only seen one case where it did. Most of the time it really does not. But I’d run the mouth on it just to make sure.
So you buy back that time. You’re going to give up your pension. We said you couldn’t double-dip, but there’s actually an exemption to that, right?
Christian Sakamoto: There is, right. And so, that would be … Just like with anything, there’s always exceptions. But that would be with guard time.
Micah Shilanski: That’s right.
Christian Sakamoto: So anytime you’re in the guard, yeah, you might be able to double-dip with this time.
Micah Shilanski: So the way that works is if you have a reserve time, guard time that’s there, you can buy back your active duty time. Now if most of your time was reserved, let’s say you put in a full 20-year career, depending on how many points you have in that system, let’s say you had four or five years of active duty time, that’s going to be deployments, that’s at two weeks a year, et cetera, all of that time adds up. You can absolutely make it a deposit for that time, which is great.
So what does that mean? That means it increases your pension, which is outstanding, but only for the reserves. It does not take away from your reserve pension, your guard pension. You’re still going to get that pension income, which is coming in. Now my active duty guys are like, “WTF. How come they get it and we don’t?” We don’t make the rules. We’re just explaining how they work.
So this is a very good benefit that’s going to be there. There’s a lot of misconceptions and misnomers about it, so make sure you understand how that benefit’s going to work. But it’s a really great thing that you could look at.
Another rare thing that we also see, academy time. So let’s say you had your 20-year career, but you did four years at one of the academies, which is outstanding. As you know, your academy time does not count for your military pension. Well, if it doesn’t count for your military pension, guess what you get to do? You get to buy that time back for your civilian service. Absolutely.
So you have four years of academy time, doesn’t count in your 20-year military career. You’ve got 20 years in federal service, let’s say civilian service. You can buy back that four years at academy time.
Now good news, bad news. More than likely, that was over three years ago. So you’re going to pay interest on it. But you’ve got to pay 3% again of your base pay of those whopping, huge mega dollars you got while you’re at the academy, which is, what? $50 a month at best. I mean your academy pay was squat. So you do have to pay 3% of that base. We’re talking nothing really in a contribution size.
So that makes a ton of sense. Again, these are benefits you have to know and understand and apply before you retire. So really understanding this is just absolutely key.
Christian Sakamoto: Love it. Thanks for going through those scenarios.
Micah Shilanski: Perfect. Well, Christian, let’s go through to a couple action items, right?
Christian Sakamoto: Sure.
Micah Shilanski: So this podcast is all about taking action. This podcast is all about taking the next step. Knowledge is one thing, the application of knowledge is really what’s going to make the difference here.
So I’m going to say the first action item we need to do, if you have not bought back your military time, you need to put in a request to buy back your military time. That’s going to be the first action item.
Second action item I’m going to suggest to do is to run a calculation. I know I said first to request it. That is for a reason. Second one is to run a calculation to see what that benefit is going to be for you. Why did I say do it in that order? It’s going to take a long time to get the estimate back from OPM, from your HR departments, et cetera. I want to start that process as soon as we possibly can.
The second thing is look at the math and say, “Great. What’s my cost? What’s my benefit going to be?” Come up with a swag, come up with a round number that’s going to be there. A couple of quick ways that I can do it, social security statement, especially the old social security statements are great. They give me more information than the current new ones.
But maybe you don’t know what your base pay was in that period of time. Great. What I would do is I’d grab your social security statement. I’d go back to that time that you were in the military. I’d look really quickly at your pay and I times it by 3%. Is that the exact number? Nope. But is it going to get us really, really close? It absolutely is.
And so, that’s what I’m going to use as a swag. Great. This is going to be the cost while we’re waiting for six to eight months for OPM to respond to our request to find out the buyback. Then we can look to say, “Okay, does this make sense to do it or not?”
Again, if you were the exception where it does not make sense, I would love you to reach out, because I’d love to know why that doesn’t make sense. If you’re getting a pension, I get that. But if you’re not getting a pension, it doesn’t make sense to buy back. Man, I’d love to see that scenario.
So those are two really important action items. Third one, share this information. I know this sounds self-serving, but we get so much disinformation. We get so much incorrect information out there about your federal benefits that’s circulating in that federal community. We want to be a source of great information that federal employees can take action.
Make sure they’re getting this podcast. Make sure they’re getting this great information so they can make good, educated decisions about their federal benefits.
Christian Sakamoto: Love it.
Micah Shilanski: Well, Christian, thank you so much for joining us today and walking our podcast and our listeners through all of this great stuff. Until next time, happy planning.
Christian Sakamoto: Happy planning.
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reliable sources, and no representations are made by our firm as to other
parties, informational accuracy, or completeness. All information or ideas
provided should be discussed in detail with an advisor, accountant, or legal
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Content provided herein is for informational purposes only and should
not be used or construed as investment advice or recommendation
regarding the purchase or sale of any security. There is no guarantee that
any forward-looking statements or opinions provided will prove to be
correct. Securities investing involves risk, including the potential loss of
principle. There is no assurance that any investment plan or strategy will be
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