Military Service Buybacks: Is the Cost Worth the Extra Years Added to Your Federal Retirement?

Key Takeaways

1. Military service buybacks can significantly increase your federal retirement benefits by counting your military years toward your civilian pension.

2. The decision to buy back your military service requires careful evaluation of costs, timelines, and long-term financial benefits.

What Are Military Service Buybacks?

Military service buybacks allow federal employees to credit their years of active-duty military service toward their federal civilian retirement under the Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS). This opportunity can increase your years of service, ultimately enhancing your pension and retirement benefits.

Essentially, by paying a lump sum or installments based on your military earnings, you can “buy back” your military time and include it in your federal service computation date (SCD). This revised SCD often results in more favorable retirement benefits.

How Does the Process Work?

To buy back military service, you need to follow a series of steps:

1. Obtain Your Military Earnings

Request a certified earnings statement from your branch of service. This document will be the foundation for calculating your buyback cost.

2. Calculate the Deposit

Your buyback cost is typically a percentage of your basic military pay earned during your active duty. For FERS employees, this percentage is 3% of your earnings, while for CSRS employees, it is 7%. Interest may accrue if you delay payment beyond a specified period, typically two years from your federal employment start date.

3. Submit the Application

Fill out the required forms, such as SF-2803 for CSRS or SF-3108 for FERS. Submit them along with your earnings statement to your agency’s human resources or payroll office.

4. Make the Payment

Payments can often be made in a lump sum or installments. Ensure you complete payment before your retirement to maximize your benefits.

The Costs Involved

While the benefits of buying back military service are appealing, the process comes with a cost. The primary expense is the deposit based on your military earnings. However, interest is another crucial factor. If you don’t pay within the two-year grace period, interest accrues annually, increasing your total payment. The interest rate varies yearly, which can significantly affect your cost if delayed.

For example, let’s say you’re a FERS employee with five years of military service. If your basic pay during those years was $200,000, your initial deposit would be $6,000. However, if you wait 10 years to begin payment, accrued interest could increase the total cost substantially. Timely action is essential to avoid unnecessary expenses.

The Benefits: Why It Might Be Worth It

1. Boost Your Pension

The most significant advantage of buying back military service is increasing your pension. Federal retirement annuities are calculated using the formula:

(High-3 Salary) x (Years of Service) x (Multiplier)

By adding military years to your total service, you increase the “Years of Service” factor, resulting in a larger annuity. For FERS employees, the multiplier is typically 1% or 1.1% for those retiring at age 62 or later with at least 20 years of service. CSRS employees benefit from a higher multiplier of up to 2%.

2. Qualify for Early Retirement

Adding military service years can help you meet the minimum retirement age (MRA) or reach the 20 or 30 years of service required for early retirement. This flexibility can be particularly advantageous for employees nearing retirement but falling short of eligibility.

3. Combine Military and Civilian Benefits

Buying back military service allows you to enjoy both federal retirement benefits and veterans’ benefits, such as VA disability compensation, without reducing either.

When It Might Not Be Worth It

While the benefits are substantial, military buybacks aren’t always the best choice. Consider these scenarios:

• Already Receiving Military Retirement Pay: If you’re already receiving military retirement pay, buying back your service may require you to forfeit that pension. However, there are exceptions, such as for reservists or those receiving VA disability pay.

• High Costs with Interest: If accrued interest has significantly increased your buyback cost, it might outweigh the financial benefits of an enhanced federal pension.

• Limited Remaining Service: If you’re close to retirement, the cost of buying back your service might not translate into meaningful pension increases due to limited additional service years.

Strategies to Evaluate Your Decision

1. Run the Numbers

Use online calculators or consult your HR office to estimate the cost of buying back your military service versus the potential increase in your pension. Comparing scenarios with and without the buyback helps clarify the financial impact.

2. Consider Timelines

Evaluate how close you are to retirement. If you have many years left to work, the benefits of a buyback may outweigh the costs. Conversely, if you’re nearing retirement, the return on investment might be minimal.

3. Factor in Interest

Interest accrues if you delay payment. Paying within the two-year grace period minimizes costs and maximizes benefits. If interest has already accrued, consider whether the increased cost is still worthwhile.

4. Seek Professional Guidance

A financial advisor familiar with federal retirement systems can provide personalized advice. They can help you weigh costs, benefits, and alternatives tailored to your situation.

What Happens If You Don’t Buy Back?

If you choose not to buy back your military service, those years won’t count toward your federal retirement annuity. This could result in:

• Lower pension payments

• Delayed retirement eligibility

• Missing out on the enhanced financial security that comes with a larger annuity

For some, preserving their military retirement pay or avoiding high buyback costs justifies this decision. Ultimately, it’s about balancing personal and financial priorities.

Key Timelines and Deadlines

• Two-Year Interest-Free Period: You have two years from the start of your federal civilian employment to pay your buyback cost without accruing interest.

• Retirement Deadline: Complete your buyback payments before your retirement date to ensure the service years are credited.

• Agency Deadlines: Individual agencies may have specific timelines for processing applications, so act promptly to avoid delays.

Alternatives to Buying Back Military Service

If buying back isn’t feasible or beneficial, consider these options:

• Preserve Your Military Pension: For those receiving military retirement pay, retaining this income stream may be more advantageous.

• Maximize Thrift Savings Plan (TSP) Contributions: Increase your retirement savings through the TSP to compensate for the smaller annuity.

• Explore Other Benefits: Take full advantage of veterans’ benefits, such as healthcare, education, and housing programs, to enhance your overall financial security.

Making Your Decision

The choice to buy back military service is deeply personal, involving financial, career, and retirement goals. Start by understanding the costs and benefits, then assess how the decision aligns with your long-term plans. Remember, timely action can save money and increase your retirement security.

Planning for Your Future

Whether you decide to buy back your military service or not, the key is to take control of your retirement planning. Evaluate all aspects of your federal benefits, consult professionals when needed, and make informed choices that support your goals.