Tag: Retirement

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Military Pay

Why Should you Care About the Survivor Benefit Plan Open Season in 2023?

Why Should you Care About the Survivor Benefit Plan Open Season 2023

Why Should you Care About the Survivor Benefit Plan Open Season in 2023?

When a retiree dies, his/her retired pay (and VA disability compensation) also expire. The Survivor Benefit Plan is a continuation of part of retired pay for a surviving spouse and or children. It can also support special needs dependents too.

The 2023 National Defense Authorization Act (NDAA) authorized a rare “open season” for eligible active and reserve retirees to get into or out of the Survivor Benefit Plan (SPB).  This is a big deal as there have been very few other open seasons in history (about one per decade and at the whims of Congress) and retirees end their service knowing that opting out of SBP is generally a one-way door.

Because opting back in is the rarer opportunity, this article focuses on getting back into SPB versus opting back out past the normal 3rd year opportunity.

A Quick SBP Primer

The DFAS website (and countless other blogs) has all the weedy details about SBP, but here’s what you really care about.  We’ll focus on the most common case—a married service member that chooses the Spouse full coverage SBP option. SBP costs 6.5% of retired pay per month. It comes out pre-tax. If the military member dies, the surviving spouse gets 55% of the military member’s retired pay.

The Pros of SBP include:

  • Inflation-adjusted income for the surviving spouse until remarriage (before age 55) or death.
  • The amount received is generally enough for a mortgage but is unlikely to cover 100% of expenses.
  • The surviving spouse does not have to determine how to invest an insurance payout to create lifetime income.

The Cons of SBP include:

  • If feels expensive initially-especially for military members that aren’t sure what their financial situation will look like on the other side of military retirement.
  • It looks expensive compared to sizeable amounts of Term Life Insurance.
  • 55% of say, 50% of basic pay isn’t enough to live on.
  • The benefit is taxable as ordinary income. Insurance payouts are tax-free and returns from invested insurance dollars could be at more favorable capital gains tax rates.
  • It goes away with remarriage before age 55 (but comes back if the new spouse dies or divorces).
  • Except for unpredictable and rare open seasons, it cannot be cancelled after the 3rd year of premiums. The premiums last for 30 years or until death.

There is an excellent, inexpensive, and short book available by a retired naval officer that has even more detail. In my experiences there are a few key reasons why retirees decline or opt into SBP.

Reasons that retirees take SPB:

  • Health conditions prevent attempting to replace it with Term Life Insurance and any other form of insurance is expensive and inadequate to the task.
  • Spouse indicates that s/he feels more secure knowing that there will always be some basic level of inflation-adjusted income.
  • Spouse will be unable to earn an income sufficient to provide for the family’s needs.
  • The family has not built a nest egg at military retirement such that, the nest egg combined with a Term Life Insurance payout could replace the income from SBP.

Reasons retirees decline SBP:

  • The premium is several hundred dollars per month and feels expensive compared to any other insurance the member has encountered.
  • Both spouses will be military retirees, thus one pension will continue if one spouse lives.
  • Both spouses work such that the surviving spouse expects to provide for his/her own needs (plus any children).
  • The family has purchased sufficient Term Life Insurance and believes that:
  • If the retiree dies, the spouse can invest and manage the payout to replace lifetime income needs.
  • The family has a nest egg growing such that the family will be self-insured before the life insurance term expires (which the surviving spouse can invest and manage to replace lifetime income needs).

Keep in mind that what you just read is a low pass over an extremely important topic and it’s vital to your family’s well-being to invest the time and effort required to make a fully informed decision about SBP.

Opting Back Into SBP

While the DOD has yet to announce the devilish details of how the SBP Open Season will work, the NDAA gives us enough information to start exploring the concept.  Let’s examine the case of an O-6 that retired at 23 years in 2020, receives $6,500 per month in retired pay, and chooses to opt back into SBP during the calendar year 2023 Open Season.

The NDAA states that members will need to meet the following criteria to opt back in:

  • Repay missed premiums since retirement (becoming eligible for SBP)
  • Pay interest on the missed premiums
  • Pay any other fees/penalties instituted by DOD

One not-so-small detail in the NDAA is that the calculations on these payments are supposed to be from the date one elects to opt back into the SBP.  If SBP Open Season isn’t already up and ready to as of the NDAA signing (it doesn’t appear to be as I’m typing), then retirees may have to pay for extra months simply because there is no way to opt back in yet.

Sample calculations (holding inflation at 0%) on the costs of opting back into SBP might look like:

  • Months in non-covered status: 36
  • Total premiums not paid: $15,210 (36 months * $6,500 * 6.5%)
  • Interest on premiums: $685 (hypothetical 3% interest compounded monthly from first “missed premium”)
  • Fees: $500 (hypothetical administrative fee)
  • Total upfront payment to opt back into SBP: $16,395
  • Remaining premiums paid over next 27 years if retiree does not die during the normal 30-year payment period: $136,890
  • Total cost of SBP over 30 years: $153,285
  • Total retired pay received over 30 years: $2,340,000

Wow! That’s a lot of Money…

You live in a different financial world if those numbers are budget dust to you. For most readers, separating with six figures of pay for a benefit that may never be used is hard to swallow.  Remember though, opting back into SBP is about taking care of a spouse that doesn’t share your interest in the details of investing such as costs, taxes, asset allocation, timing, account types, custodians, etc.

Still, if you’ve reconciled that you might be willing to make the monthly premium payment going forward (6.5% of your retired pay) but are having a hard time stomaching the upfront cost, it might be good to revisit alternatives.

Perhaps you initially purchased $1.5 million of 20-year term coverage, but now feel as though inflation has eroded the buying power of those dollars. Have you looked at getting more term coverage, perhaps for a longer period?  $16,395 would buy nearly 15 years of an extra $1M term policy at $100 per month.  What additional amount of time and payout to your nest egg would have you and your spouse comfortable trading guaranteed secure income for a one-time windfall?

That $16,395 payment would have bought my first new car and most of the price of the cars I’ve bought since.  It’s a bit more than I plan to spend on vacations and travel most years.  What line items from your family’s budget could skinny-down for a year or two to pay for the upfront missed premiums?

Since ultimately, we’re talking about purchasing a feeling of security for a widow(er), what is that worth? Clearly this is a complex question to answer, and each family needs to do both mathematical analysis and wade carefully through what might be an emotional mine field to get to the right answer.

Cleared to Rejoin

SBP is an important part of your retirement benefits. While it may seem expensive, it’s really about buying security for your spouse/family during part of their life they never expected to have to live: without you.  Even if you have what feels like sufficient life insurance, will your spouse be up to the task of turning a life insurance payout into income for life?

If you consider buying back into SBP, it will be important to compare the costs versus alternatives such as even more life insurance. Since you can’t enroll just yet, here are action steps you take today:

  • Review your life insurance and the assumptions behind it
  • Project your nest egg’s growth under varying conditions
  • Plan where the SBP upfront re-enrollment costs might come from
  • Project your new budget with the SBP premium factored in
  • Revisit the DFAS SBP Open Season site (or set up a Google News Alert) weekly
  • Talk to your spouse about the pros and cons of your current choice and the alternatives

Fight’s On!

Categories
Military Pay Military Retirement Taxes

Is My Military Retired Pay Tax Free if I have a VA Disability Rating? – NO!

Military Retirement Tax Free

Is My Military Retired Pay Tax Free if I have a VA Disability Rating? – NO!

 

Every year I have a handful of clients ask me if their military retired pay (a.k.a. pension) is tax free because they have a disability rating from the Department of Veterans Affairs (VA). When I ask why they believe their military pension is not subject to taxation they forward me “the email.” It is semi-official looking and seems to be from someone who ought to know what they are talking about. The email cites an IRS publication and sometimes (depending on which version you get) a court case.

 

It’s all twaddle. Your military retired pay is taxable income.

 

Like everything involving tax rules there are exceptions to the general rule. That is doubtless where the confusion originates. “The email” makes it seem like many more veterans qualify for the exception than do. The simple test to apply is this – do you have a written determination from the VA or your branch of the service specifying that your disability is combat-related. If that answer is ‘no” then you are paying taxes on your military retired pay. (If the answer is “yes”, you might still have to pay taxes on it, but you have no hope of being tax free without that official determination.)

 

Until recently I had to provide a long explanation to recipients of “the email,” some of whom ardently believe their retired pay was not taxable because they had a VA disability rating. I would have to explain that the court case did not apply, that IRS publications are not legally authoritative, and that the passages cited are being taken out of context. The explanation got much shorter recently, as one veteran took her case to the US Tax Court. The judge ruled against her, and his explanation sheds some light on the tax status of military retired pay.

 

You can read the full Tax Court Memo here.

 

T.C. Memo 2022-42; Tracy R. Valentine v. Commissioner filed April 28, 2022

 

Valentine is an Army veteran who was honorably discharged in 2002 after 22 years of active duty service. She had a disability rating of 60% that was increased to 90% effective May 1, 2016. For the first 4 months of 2016 she received VA disability payments of $1100 per month. For the remaining 8 months of 2016 she received $1700 per month in VA disability payments. The IRS does not dispute that these payments from the VA are tax free (excluded from income).

 

Valentine also received $23,801 from her Army-based retirement plan in 2016. She received a form 1099R from DFAS, reporting the entire amount as taxable. When Valentine filed her 2016 tax return she reported the taxable income from her military pension as $3,158, excluding the remaining $20,643 as not taxable income. The IRS disputed her claim that part of her military pension should be excluded from income and issued a Notice of Deficiency (NOD). Valentine exercised her right to challenge the NOD and petitioned the Tax Court for relief.

 

At Tax Court Valentine testified that IRC Section 104(a) and 104(b) entitle her to use the VA disability rating to exclude both the VA disability payments and a portion of her military pension from taxable income. Valentine represented herself at Tax Court and did not cite specific sub-paragraphs of the IRC to support her claim.

 

In his ruling Judge Gustafson provided some analysis of the tax code. There are two separate provisions in the tax code that could render a veteran’s military retired pay excludible from income. Under section 104(b)(2)(C) a veteran may exclude a portion of the distributions from income if they qualify as “amounts…received by reason of a combat-related injury”. Valentine did not provide any testimony or evidence at trial to indicate her disability rating was combat-related. Therefore section 104(b)(2)(C) does not apply.

 

The other provision is contained in section 104(b)(2)(D). A veteran may exclude a portion of the distributions from income equal to an amount they “would be entitled to receive as disability compensation”. There is legislative history supporting the court’s interpretation of this to mean that it does not apply if one is already receiving disability compensation from the VA. As Valentine was already receiving disability compensation from the VA, section 104(b)(2)(D) does not apply.

 

The Bottom Line

 

Bottom line: The US Tax Court ruled all the retirement distributions Valentine received are “properly includible in her gross income”. Military retired pay cannot be excluded from income solely because one has a VA disability rating. Valentine was also subject to penalties and interest on the tax owed for not reporting the income on her 2016 tax return.

 

I have had clients contact DFAS, explain they have a VA disability rating, and request the tax withholding on their military retired pay stop. When DFAS stops the withholding the veterans assume DFAS agrees that the pay is not taxable. That is not true. It simply means that DFAS will stop tax withholding on your military retired pay if you request it. When the 1099R is issued it will state that all the retired pay is taxable. Since the IRS also receives a copy of your 1099R, they will expect you to declare it on your individual income tax return and pay taxes on it. If you don’t, they will issue you a Notice of Deficiency and charge you penalties and interest for failing to report it.

 

I am a veteran with a VA disability rating. I want my military retired pay to be tax free. I am also a tax professional. If my military retired pay was tax free I’d know about it. If our military retired pay was tax-free I would be writing about it. My colleagues would be writing about it. The VA, VFW, DAV, and the American Legion would all be writing about it. The IRS would have pages of FAQs about it. You wouldn’t find out about it through an old forwarded email that tells a story too good to be true.

 

If you still have questions, the Military Financial Advisor’s Association has both tax professionals and financial planners with tax planning expertise that can help with your unique situation.

 

 

 

 

Categories
Financial Planning Military Pay

10 Financial Opportunities and Challenges Dual Military Couples Experience

Dual Military Couples

When both members of a couple serve in the military, they share a greater understanding of the mission and life demands that come with putting service before self.  They also share the unique financial planning opportunities and challenges created by their double duty lives.

 

While dual military couples enjoy the financial advantage of two incomes and twofold benefits; they also to juggle the challenges that come with two military careers – two missions, two commanders, two demanding work schedules.   Add a couple of kids to the mix and you’ve got a recipe for financial challenges created by tag-team deployments, maintaining multiple households, and paying for sky-high childcare expenses.

 

Across the Department of Defense, seven percent of service members are in a dual military couple; or looked at another way, one in five military women are in a dual military couple.

 

If you’re a member of a dual military couple or a couple considering jumping into military service together, this article will help you understand the unique financial planning opportunities you may experience and the financial and career challenges you may face.

 

Let’s look at the top ten financial opportunities and challenges dual military couples experience.

 

#1: Two Incomes

 

No matter the rank, two incomes make life a little easier – easier to live within your means and easier to avoid debt. Two incomes allow dual military couples to save more aggressively for both short and long term goals, provided they’re able to establish a standard of living more closely aligned with one income, than two.

 

The key for dual military couples is to take advantage of this opportunity from the beginning of their careers.  Demographic data tells us that the number of dual military couples drops off dramatically as rank increases.  Among enlisted ranks, the number of dual military couples peaks at E-6; for officers, the peak is O-3. (DOD Demographic Report.)

 

This data suggests that dual military couples are wise to maximize their savings and investing opportunities in the first ten years of their careers in part to benefit from the power of compounding; but also, recognizing this two income opportunity may be fleeting.

 

#2 Two Housing Allowances

 

In many situations both members of a dual military couple receive a basic allowance for housing (BAH).  Let’s walk through a couple of scenarios –

 

First, if a dual military couple is assigned to the same location and live off base, both members of the couple receive BAH.  If they’re able to carefully manage their housing costs, this is a golden opportunity to ramp up their savings rate by applying their second housing allowance toward their Thrift Savings Plan (TSP) account or other savings accounts.

 

If this same couple lives on post in privatized housing, they both receive BAH, but their rent is based on one BAH at the with dependent rate.   This too can be a great opportunity to maximize their savings rate by applying the additional housing allowance toward savings.  By contrast, if this same dual military couple is assigned government provided housing, neither receives BAH.

 

If a dual military couple has a dependent child, one of the two members receives BAH at the dependent rate.  In the not so rare case that the couple is not assigned together and each of them has a dependent child living with them, then both members could receive BAH at the dependent rate.

 

Let’s walk through an example of this last scenario.   A dual military couple with two kids is stationed overseas when the husband receives a one-year stateside school assignment.   He relocates stateside with one of the couple’s children, while the wife extends her assignment overseas and keeps their other child with her.  Both receive a housing allowance at the with dependent rate.

 

This example of multiple households leads to our first challenge –

 

#3 Living Together or Not?

 

The services try to keep dual mil couples together when possible, the Air Force refers to these assignments as a “join spouse” assignment, while the Army calls it a “joint domicile” assignment.

 

Like everything in military life, the needs of the service always comes first. It isn’t always possible to perfectly align two military careers every step of the way, especially as both careers progress into leadership positions.

 

When it all works out, one roof with two BAHs, it’s an amazing opportunity to save, save, save.

 

When it doesn’t work out, when the couple needs to maintain two households because they aren’t stationed together, that’s when they’re really glad they decided to live within the value of one BAH at their previous assignment.

 

Technically a “joint domicile” assignment could assign the spouses to two separate installations within 50 miles from each other.  In this scenario, a dual military couple might decide to live somewhere in the middle and each commute to their duty station.  This scenario is common with dual military couples who are not in the same service.

 

#4 VA Loan Entitlements

 

With all this moving to and from installations, sometimes together, sometimes not; it’s important to understand that each member of a dual military couple earns their own VA Loan entitlement.

 

When they buy a home, they can either use one of the entitlements and save the other for a future home purchase, or they can split the entitlement, leaving each of them with a partial VA entitlement.

 

An important consideration is if one of the spouses is a member of the Reserve Component and has already established a VA disability rating; their VA loan entitlement allows them to avoid paying the VA funding fee, which could substantially reduce their upfront costs for purchasing their primary residence.

 

So far, we’ve looked at several financial opportunities that dual military couples experience which allow them to maximize their savings; but it’s important to consider a few of the common financial challenges.

 

#5 Military Childcare

 

Obviously, quality childcare is critical to all working parents, military or not.  Across corporate America, only 20% of employers provide any assistance or subsidy for their working parents’ childcare needs.  Fortunately, the DOD has invested substantially in installation Child Development Centers (CDCs) and Family Childcare programs.

 

The DOD’s childcare program is the largest employer sponsored childcare program in the US, providing care to over 200,000 military children at a cost of about $1B per year.

 

CDCs provide nationally accredited childcare to our military families at an affordable price, but dual military couples still face several childcare related challenges.

 

Availability.  There are more than 400,000 military kids under the age of 5, yet only half that many CDC slots across the DOD.  Unfortunately, waitlists are the norm at many installations.  Single military parents and dual military families have priority at their installation CDC, but even that advantage is not always enough to guarantee a slot when they need it.

 

Duty Hours.  The typical duty day rarely fits neatly within the CDC’s hours of operation, leaving parents with extended duty days or shift work scrambling for alternatives.  Training exercises and temporary duty assignments stretch dual military parents even further beyond the CDC’s hours.

 

Cost.  To say that childcare is expensive is an understatement, even on two incomes.  Nationwide, parents spend on average more than ten percent of their income on childcare; in high cost of living locations like Washington DC, couples can spend over $2000 a month on a single child’s care.

 

For dual military couples who can’t fit their duty day within the CDC’s workday, they often turn to nannies to provide in home care including early morning and late evening care, or overnight care when necessary.  On average, nanny’s charge $700-800 a week or over $30,000 a year.

 

Subsidized Fees.  In order to keep CDCs affordable, the military subsidizes the program and charges parents on a sliding scale based on their total family income.  These fees can range from just under $300 to almost $800 per month per child; both well below the national average.

 

Fee Assistance.  Additionally, the services now offer financial support to families who cannot find care for their children on the installation, either because of a lack of availability or the distance between the duty station and the CDC.  The Fee Assistance Program is meant to partially cover the difference in cost between what the servicemember would be expected to pay at the CDC and what they are required to pay at an off base childcare facility.

 

# 6 Tag Team Deployments

 

Let’s look at another financial challenge for dual military couples – potential Tag Team Deployments.  When spouses are in separate units, that can mean separate deployment schedules.

 

In some cases, dual military couples with kids intentionally alternate their deployments so that one parent is always home with the kids.  While this is an amazing sacrifice, it can be a strain on their relationship and their wallet.

 

This constant churn of one parent always being deployed can increase childcare expenses, travel costs, and spending on household help to balance the demands on the family.  Fortunately, when the demands of duty keep these couples apart, they may be eligible for the Family Separation Allowance (FSA).

 

The one positive of these dual deployments is that it provides ample opportunity to push up their tax-free Thrift Savings Plan Roth contributions while in a combat zone.  They may also contribute up to $10,000 to the Savings Deposit Program earning 10% interest during their deployment.

 

#7 Estate Planning

 

You can’t talk about dual military couples’ deployments without addressing the importance of proper estate planning.  Because both members could and often do deploy, their estate planning preparedness is even more critical to their overall financial plan.

 

If they have minor children, they have the added requirement to complete their services’ Family Care Plan, which requires among other things, naming short-term and long-term guardians for their children should they need to deploy on short notice.

 

Dual military families frequently list this as their biggest pain point.  Each time they PCS, they find themselves in a new community, a long way from family, asking brand new neighbors they barely know to take responsibility for their kids on a moment’s notice.

 

#8 Two GI Bills

 

One of the most amazing financial benefits dual military families earn is two GI Bill education benefits.  All that money they spent on childcare–they finally get a benefit that can work for them!  For dual military couples, this provides the ultimate education funding flexibility.

 

From a planning point of view, each member of the couple should transfer their benefit to other spouse as soon as they’re eligible, this starts their service commitment clock.  If they have children, they should both transfer at least one month of GI Bill benefit to each child.  This sets them up to take full advantage of this amazing education benefit when their kids are college bound.

 

#9 Two Careers

 

It can’t be overstated how difficult maintaining a marriage and raising a family can be when there are two military careers involved – two separate but important missions to achieve, two commanders to serve, and two deployment schedules to meet.   It’s a lot.

 

Dual military couples face a constant challenge to live together while meeting the needs of their services.  Every career milestone is fraught with possibilities and tradeoffs between the two careers.  Every assignment cycle brings another “should I stay or should I go” conversation.  Whose career will take priority? Will we be able to live together? Where will we find childcare?

 

What frustrates many dual military couples is that they have little or no control over these life changing decisions.  This lack of flexibility leads many dual military couples to decide that one member will step off active duty and into the reserve component to gain more control of their lives.

 

From a financial planning point of view, it’s important to recognize that the competing demands of two careers and raising a family may put achieving two active duty retirements out of reach.

 

 By optimizing your savings opportunities in your early career, you can ensure you’re financially prepared to make decisions when career challenges arise later in your career.

 

#10 – Two Pensions

 

Finally, if a dual military couple survives all the deployments and meets all the competing mission demands, in the end, they earn the best financial opportunity of all, two military pensions.

 

For many dual military couples, if they’ve saved and invested properly all along, this can mean a “BIG R” retirement.

 

They may not need to take on a second career.   They may be able to hop in the RV and travel the county or more likely, chose work that is rewarding rather than focusing on earning power.

 

Looked at from investment portfolio point of view – two military pensions mean double the income floor provided by their inflation protected government pension; which could allow them to carry a higher equity to bond ratio in their portfolio than would be typical for their age or retirement timeline.

 

Also important is that they will have two Survivor Benefit Plan (SBP) decisions to make.  If both members of the couple had careers of equal length and rank, if they don’t have any dependents at home and have saved aggressively, growing a large investment portfolio on which to rely, their SBP decision could be simple.

 

On the other hand, if they have significant career differences, maybe one left as soon as they reached 20 years, while the other continued to get promoted and retired at 30 years; then their SBP decision is a little more complicated.

 

Another factor to consider is that because of the competing work/life demands, dual military couples frequently wait to have children until later in their careers.  This means their kids are younger when they retire from the military and have a longer time horizon until they become financially independent adults.  This can create a scenario where it is important for dual military couples to extend SBP coverage to their children.

 

Follow these links for more insight on the Survivor Benefit Plan and Reserve Component SBP.

 

A Financial Strategy for Dual Military Couples

 

If you’re a member of a dual military couple, what is important to understand is that you will experience opportunities and challenges along the way.  If you’re able to maximize your savings and minimize your debt when your dual military careers align, you’ll be prepared for the inevitable financial and career challenges when your careers don’t align.

 

As a dual military couple, you don’t need to get every financial decision correct, nor do you need to perfectly align your career aspirations at every turn.  If you’re able to maximize your savings opportunities, you’ll have the financial freedom to make decisions that best support your combined professional goals and your family’s priorities.

Every military family’s situation is unique and presents its own challenges and opportunities.  We recommend working with a financial planner who understands your military benefits from first-hand experience and specializes in serving military and veteran families.  The advisor members of MFAA understand your life, your challenges and your benefits because they’ve walked in your shoes.

The information provided in this blog is simply that, information.  It is not intended to serve as an individual recommendation and should not be relied on as investment or tax advice.

Categories
Military Retirement

Should you Buy Back your Military Time?

Should I Buy Back Military Time

Should you Buy Back your Military Time?

What is 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. We’ll look at which military time can count, how much it will increase your federal employee pension, what it costs to buyback that military time, the impact of a buyback on your military pension, when to buyback, and some how-to’s to help you answer the question “is it worth it for me?”

What military service time counts? Your service has to have been on active duty. 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. Regular monthly training and call ups by the states do not count. Your service must have been honorable and performed before you separate from civil service. And a deposit has to be received before you retire (that’s the buyback).

How much will a military buyback increase your federal employee pension? First you need to qualify for a FERS or CSRS pension, which generally means you have to actually serve at least 5 years as a federal civilian. Then the military time you deposit, nicknamed a buyback, is added to the years you actually work as a civilian for calculating your FERS or CSRS pension benefit.

A FERS Example

Here’s a FERS example. The pension formula for FERS employees 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 62, your pension would be $110,000 x 24 years x 1%. That’s $26,400 a year. The military time you buy back is added to your creditable service.

What happens if you were to buy back 6 years of military time? That’s the same $110,000, x 30 years (instead of 24). And because you now have 30 years of service (instead of 24) your multiplier is 1.1% giving you a FERS pension of $36,300. That’s $9,900 more every year in your FERS pension. Live 25 years in retirement and that’s almost $250,000 more FERS pension with the buyback.

Buying back military time may also help you to retire earlier. Regular FERS employees can retire without a reduction at your Minimum Retirement age with 30 years of service, at age 60 with 20 years of service, or age 62 with 5 years of service. Buying back military time could nudge you over one of those age hurdles. It might not make sense to retire as early, but it’s nice to have the option.

What is the cost? The reason depositing military time is nicknamed a buyback is because you must pay cash to have your military time credited to your federal service. Human Resources will calculate the exact amount for you. In general, for FERS employees it will cost about 3% of your total military base pay you are depositing. For example, if you deposit 3 military years and during each of those years you earned $30,000, $30,000, and $35,000. That’s $95,000 total of military base pay x 3% which is $2,850.

When can I buyback military time?

You can buyback any time after you start federal civilian service. But your buyback must be complete before you retire. You cannot retroactively buyback time after you retire as a fed. If you serve as a federal employee for longer than 3 years before buying your time back, you will also pay interest on that amount.

What about CSRS federal employees?

CSRS employees joined federal service before 1987. The multiplier for CSRS employees is about 7%. And 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. You will get full credit for military service performed 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 only count towards eligibility for retirement. Unless you retire before you’re eligible for Social Security at 62, then your military time will count toward your pension computation just up until you reach 62.

All federal employees, did you serve long enough to qualify for a military pension? You can buyback all those years and add it to your federal retirement. No matter when you buyback, you can continue to receive your military pension while in still serving as a federal employee. BUT you must waive your active duty military pension when you begin your civilian pension. You can’t double dip. This often does not make financial sense.

How is your VA Disability pay affected by a buyback?

It isn’t. You will still receive your VA disability pay, including Combat-Related Special Compensation (CRSC) after buying back military time. And unlike a military pension, your federal civilian pension will not be reduced by your disability pay, regardless of your VA disability rating. This may tip the scales in favor of a buyback.

What about a military reserve pension that starts at age 60? You can receive that, whether you buyback military time or not. So, buying back active reserve time often does come out as a great deal, so be sure to run the numbers.

How do I get the exact cost of a buyback for me, and maybe do a buyback?

 

Stop by your federal civilian human resources department and ask for help. Here’s what you can expect:

Step 1, find your DD 214 the Report 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 DD214, you can request a copy from the National Personnel Records Center by filling out a Standard Form 180.

Step 2, complete a form RI 20-97 Estimated Earnings During Military Service and mail it along with a copy of your DD214 to your appropriate military finance center.  The finance center should then send back your statement of estimated earnings.

Step 3, gather up your estimate of earnings, your DD214, go to your current Human Resources Office and fill out an SF 2803 Application to Make Deposit or Redeposit.

Step 4, 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 you know the military deposit cost, you can compare your options and decide if you want to do a buyback, when and how to pay for it. You can payoff it all at once or in payments over time. Note you’ll owe interest on payments once you’ve had 3 years of federal service.

If your numbers are very close, remember your military pension gets a full Cost of Living Allowance (COLA) every year. But a FERS pension gets “COLA lite” which can be up to 1% less in high inflation years.

Let’s recap. Active duty military service and Title 10 reserve active duty can be deposited to increase you federal civilian time in service. This can increase your civilian pension and/or help you retire earlier. Depositing military time will cost you, thus it’s nicknamed a buyback. If you don’t pay for the buyback within the first 3 years of civilian service, you’ll also owe interest.

Putting it All Together

If you left military service before retirement, a military buyback is very likely a great deal.

If you are eligible for a Reserve retirement at age 60, you CAN receive both that and a civilian pension that includes a buyback. This will also likely be in your favor.

If you are receiving a regular active duty military pension you would have to forfeit that in almost all cases if you do a buyback (you can’t double dip). If your military pay was significantly less than your federal civilian pay is now and/or your military retired pay is being reduced by your VA disability it may be worthwhile to do a buy back.

Run the numbers. And remember, your application to buyback military time must be approved and paid BEFORE you retire from civilian service.

The right answer is unique to each military family.   Working with a financial planner who understands your military benefits from firsthand experience can help you frame your decision within the context of your family’s financial plan.

 

The financial planners at the Military Financial Advisor Association can help you work through the various BuyBack scenarios so you can make the decision that best meets your family’s needs.