If you’re a veteran, then you have likely heard the phrase “buying back your military time” on more than one occasion. But what exactly does that mean, and why is it important? In this article, we’ll discuss the answers to those questions, plus some key factors to consider when deciding whether you should buy back your time.
What Is A Military Deposit Or Buy Back?
The FERS pension requires that federal employees pay into the retirement system to be eligible for the pension benefit. However, while in the military, you didn’t pay into the FERS system. Therefore, to add your military service years to your civilian service years, you must buy back that time, also known as making a military service deposit.
What’s The Benefit?
So, what’s the benefit of buying back your military time? Well, the benefit is twofold. For one, it directly increases your FERS pension. Remember that your pension is calculated by multiplying your High 3 by your years of service and a pension multiplier. Hence, the years of military service you make a deposit for will be added to the years of service in your pension computation, thereby increasing your pension.
The second benefit of buying back your military time is that it can make you eligible to retire earlier since retirement eligibility rules are based on your age and years of service.
Let’s look at an example:
Bob is 58 years old and has 6 years of civilian service and 4 years of military service. If he makes a military deposit, he can retire under the MRA + 10 provision. Whereas, if he doesn’t, he is not eligible to retire until age 62.
Note: You must have a minimum of 5 years of civilian service to be eligible to retire.
How Much Does It Cost?
Now let’s talk about the cost. Although this isn’t a free lunch; it is often an excellent investment. The exact costs of buying back your military service will depend on when you served, your basic military pay, and whether any interest has accrued. That being said, for most, the cost will be their military basic pay multiplied by a 3% multiplier plus any interest accrued.
You can use the calculator on the DFAS website to get an estimate of what your military deposit will be.
What’s This About Interest?
There is a grace period of 2 years from the day you started your civilian job to buy back your time without interest accruing. But since interest doesn’t actually begin to accrue until a year after the grace period, you technically have a 3-year grace period. After this grace period, interest will accrue annually on the deposit necessary to buy back your military time. Thus, the costs of buying back your time will increase the longer you wait after the grace period.
Note: Military deposits must be made before you retire.
Should You Buy Back Your Time?
When deciding whether to buy back your time, it simply comes down to if the cost of the deposit is worth the benefit you’ll receive. So, you’ll have to compare your pension increase against the deposit you’ll have to make.
Let’s look at an example:
This time Bob has 20 years of service, and a high-3 of $100,000, so his pension calculation is as follows:
If he made a deposit for 8 years of military service, his new pension calculation would be:
That is an extra $8k per year, but the real difference can be seen when looking at the change over an entire retirement. Assuming Bob is retired for 30 years, buying back his military time will add over $167,000* to his retirement.
*In today’s dollars, using a 2.5% discount rate.
Now let’s compare the pension increase to the amount that Bob will have to deposit. We’ll assume that the interest rate was 6% for the past 17 years to keep our numbers simple. Also, keep in mind that interest has only accrued for the last 17 of the 20 years of Bob’s civilian career because the first 3 were in the grace period.
So, in this example, it would cost Bob $11,633 to buy back his military time, which would increase his pension by $8k per year for the rest of his life. He would earn his deposit back within 1.5 years of retirement**. We see in this example that even with a large interest payment, buying back your time can still be an excellent investment.
**Breakeven: $11,633 / $8k = 1. 45 Years
Does It Always Make Sense to Buy Back Your Military Time?
Often it doesn’t make financial sense to buy back your time if your retired military. The reason is that you’ll need to waive your military pension once you start to receive your civilian pension.
However, if you’re already waiving a portion of your military pension due to VA disability compensation, then it might make sense for you to buy back your time.
Note: Reserve or national guard members under Title 32 can collect both their FERS and military pension.
Buying back your military time has some significant advantages like increasing your pension and potentially allowing you to retire earlier. But the decision can involve a few moving parts, so make sure to utilize the resources available to you, like the DFAS military deposit calculator and your human resource personnel. Although buying back your time is often a great investment as most things in financial planning, you’ll have to run the numbers for your situation to determine whether it makes sense for you. And if you do decide to make a military deposit, KEEP DOCUMENTATION. The last thing you want is to have to buy back your time twice because of some error. As always, if you don’t feel confident in creating your financial plan, consult with a qualified financial planner.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.