Money Pilot Financial Advisor Podcast
Money Pilot Financial Advisor Podcast
Episode 69 Military Buyback
If you served on active duty in the military and then become a federal civilian employee, that military time may count as time in service for calculating your FERS or CSRS pension. Periods of active duty while in the any of the military reserves, including your annual active duty training, count. However, National Guard active duty only counts if it was Title 10, section 233(d), or under a call by the president. Service must be honorable. And a deposit has to be received before you retire (that’s the buyback).
You need to qualify for a FERS or CSRS pension, which generally means serving at least 5 years as a federal civilian. Then the military time you deposit, nicknamed buyback, is added to the years you actually work as a civilian when calculating your FERS or CSRS pension benefit.
The pension formula for a FERS employee is the average of your High 3 salaries times your creditable service times our multiplier. If you have 24 years of federal civilian service, a high-3 pay of $110,000, and will retire before age 62, your pension would be $110,000 x 24 years x 1%. That’s $26,400 a year. If your buy back 6 years of military time, that 30 years which is $33,000. That’s $6,600 more a year in your FERS pension. Live 30 years in retirement and that’s almost $200,000 more with the buyback. And buying back military time may give you enough creditable years you to retire earlier.
A buyback for a FERS employees is about 3% of your total military BASE pay for the years you are depositing. If you wait more than 3 years to buyback, you will also have to pay interest Even with the interest it is usually worthwhile to buy back the time.
The multiplier for CSRS employees is about 7%. But the rules for CSRS employees are more complicated. If you are a CSRS employee that will not be eligible for Social Security, no deposit, or buyback, is required and you will get full credit for military service after 1956.
If you’re a CSRS employee that will be eligible for Social Security, the military time you buy back will count towards eligibility for retirement and computation of your pension. If you don’t buyback any time, your military time will count towards eligibility for retirement. And if you retire before your eligible for Social Security at 62, your military time will count toward your pension computation just up until you reach 62.
If you have a regular military pension and buy back those years you will have to give up your military pension. This very rarely makes financial sense. But if you’re entitled to a reserve pension that starts at age 60 you can keep that, whether you buyback or not. This often does come out as a great deal.
You don’t need to do all the math your HR office will do the calculations for you. You will need a copy of your DD 214 the Report of Transfer or Discharge. If you can’t find it, you can request a copy it from the National Personnel Records Center by filling out a Standard Form 180.
Then complete a form RI 20-97 Estimated Earnings During Military Service and mail with a copy of your DD214 to your appropriate military finance center. They send back your statement of estimated earnings.
Take your estimate of earnings and your DD214 to HR and fill out an SF 2803 Application to Make Deposit or Redeposit. HR will then compute the amount of your military deposit using the Military Deposit Worksheet, let you know the amount, and options for making payments.
Once HR gives you the buyback cost, compare that to how much more your pension payments would be with the buyback. The process can be a pain, but it is usually well worth it. You can payoff all at once or in payments over time. And remember, your application to deposit, buyback, military time has to be approved and paid BEFORE you retire.
Welcome to the Money Pilot Financial Advisor podcast, where you team up with Money Pilot founder, former Army helicopter pilot and your host Katie Cannon to put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and land your financial life. Hello, and welcome back to the podcast. Today we're going to talk about military buyback. What is military buyback? Well, if you've served on active duty in the military, and then become a federal civilian employee, that military time may count his time and service for calculating Your FERS or CSRS pension. Today, we'll cover which military time can count how much it will increase your federal employee pension, what it costs to buy back that military time, the impact of a buy back on your military pension, when to buy back, and some how to to help you answer the question. Is it worth it for me? First off, what military time counts. Your service has to have been on active duty, periods of active duty while in any of the military reserves including your annual active duty training count. However, National Guard active duty only counts if it was titled 10, section 233 D or a call by a president. Regular yearly training and call ups by the states do not count. It has to be federal, your service must have been honorable and performed before you separate from civil service. And a deposit has to be received before you retire. Next, how much will a military buyback increase your federal pension? First you need to qualify for FERS or CSRS pension, which generally means you have to actually serve at least five years as a federal civilian, then the military time you deposit nicknamed buyback is added to the years you actually work as a civilian, for calculating your FERS or CSRS pension benefit. So let's look at a FERS example. The pension formula is the average of your High 3 salaries times your creditable service times your multiplier. If you have 24 years of federal civilian service, a High 3 pay of $110,000 and will retire before age 60, your pension would be $110,000 times 24 years times 1%. That comes out to $26,400 a year. The military time that you buy back is added to your creditable service. So what happens if you buy back six years of military time? That's the same $110,000 High 3 times 30 years instead of 24 times 1%, which comes out to be $33,000. That's $6,600 every year more in your FERS pension. If you live 30 years from retirement, that's almost$200,000 more with the buyback. Buying back military time may also help you retire earlier than you otherwise could. Regular FERS employees can retire at your Minimum Retirement Age with 30 years of service or at age 60 with 20 years of service, or age 62 with five years of service. Buying back military time could nudge you over one of these age hurdles. It might not make sense for you to retire as early as possible, but it's nice to have the option. So far this is sounding pretty awesome. Especially if you serve In the military with less than 20 years, and only have your TSP and aching body, and the thanks of a grateful nation to show for it. So what's the cost catch? The reason that depositing military time is nicknamed a buyback is because it's going to cost you. How much is it going to cost you? Let's take a look. For FERS employees out there, it will be about 3% of your total military base pay you're depositing for those years. So if you're depositing three military years, and during each of those years, you earned $30,000 in base pay in year 1, $30,000 in year two, then got promoted and earned$35,000, the last year, that's$95,000, total of military base pay. You multiply that by 3%, which is $2,850. And if you buy back that time, in your first three years of federal service, that's exactly what you would pay. Oh, what if I've been a federal employee for longer than that? Then it's still $2,850, but it's plus interest. So depending on how long you wait to buy back time, the interest could actually double or even triple the cost of the buyback. But don't lose heart. Even with the interest, it's usually worthwhile to buy back the time. Now the multiplier for CSRS employees is about 7%. But if you're a CSRS employee, your military base pay was likely much lower way back then. So your buyback cost may not be that much even with interest. The rules though for CSRS employees are more complicated. So if you're a CSRS employee that will not be eligible for Social Security, no deposit or buyback is actually required. And you will get full credit for military service that you performed after 1956. Now if you're a CSRS employee that will be eligible for Social Security. The military time you buy back will count towards eligibility for retirement and computation of your pension. If you don't buy back any time, your military time will count toward eligibility for retirement. And if you retire before you're eligible for Social Security at 62. Your military time will also count toward your pension computation, just up until you reach age 62. Okay, back to both are FERS and CSRS employees. Did you serve long enough to qualify for a military pension? You can buy back all those years and add it to your federal retirement. But you'd have to waive your regular military pension. That's just a delicate way of saying you can't double dip, you'd have to give up your military pension. This rarely makes financial sense. But what about a reserve pension that starts at age 60? Ah, you can keep that whether you buy back or not. So buying back active reserve time often does come out as a great deal. So be sure to run the numbers. And you may be thinking this is making my head explode. So many rules, so many numbers. Yeah, it's complicated. But you don't need to do all the math yourself. Here's how to get started to see what a buyback would cost. Step one, find your DD 214. That's the Record of Transfer or Discharge that shows your military record and was given to you when you left military service. If you can't find your DD 214 anymore. You can request a copy of it from the National Personnel Records Center by filling out a Standard Form 180. Step two, complete a form RI 20-97 Estimate Earnings During Military Service and mail that along with a copy of your DD 214 to your appropriate military Finance Center. The finance center should then send back your statement of estimated earnings. Step three. Gather up your statement of estimated earnings, your DD 214 and go to your current human resources office. And their fill out an SF 2803 Application to Make Deposit or Redeposit. Step four, HR will then compute the amount of your military deposit using the military deposit worksheet, and let you know the amount and options for making payments. Once you know the military deposit cost, you can compare your options and decide when and how to pay for it. You can pay it off all at once or in payments over time. Just remember, you'll owe interest on payments once you have three years of federal service. Whew. Let's do a recap. All right, active duty military service and Title 10 reserve active duty can be deposited to increase your federal civilian time and service and increase your civilian pension and or help you retire early. Depositing military time will cost you, nicknamed a buyback. It will cost FERS employees about 3% of the total basic pay you earned during the military period you're depositing. CSRS it's about 7%. If you don't pay for the buyback within the first three years of civilian service, you'll also owe interest. If you're receiving a regular active duty pension, you would have to forfeit that in almost all cases. You can't double dip. Find out the numbers, but this rarely is a good idea. However, if you're eligible for reserve retirement at age 60, you can receive both that and a civilian pension. That includes a buyback. And this likely will be in your favor. Your current human resource office is a great place to start. Track down your DD 214 and get an estimate of earnings and go there to fill out the deposit form. They will calculate the cost of your buyback for you. Once HR gives you the buyback cost. Compare that to how much more your pension payments would be with the buyback. The process can be a pain, but it's usually well worth it. And remember, application to deposit or by back of military time has to be approved and paid before you retire. I recommend you start at least a year out. Better yet. Do it all now. If you're still not sure if it's good for you, you can always wait to start paying for the deposit until you're closer to retirement. Just remember the longer you wait, the more interest you'll have to pay. I hope you found this somewhat confusing topic helpful and a bit clearer now. Head back to the shownotes to see the formulas and the form numbers I was talking about and where you can get them. And don't forget to check in with your human resources office. And we'll talk with you again next week.
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