Federal job, "military time buyback" for pension

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sippyCUP
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Federal job, "military time buyback" for pension

Post by sippyCUP » Sat May 06, 2017 10:09 am

This is a fairly basic question so apologize if this sounds silly. I just want to make sure I'm not overlooking something very important!

I am a fairly recent (2 year) federal employee who did about 8 years in the military. I am eligibile for the FERS pension when I retire, and if I "buy-back" my military time (cost for me is about $6000), they will apply my ~8 year of military time to my pension, which will increase the pension monthly payment by say about 9%, which for me will be well over $10k in 2017 dollars.

If I don't do this within 3 years, the government will tack on interest to my $6,000 "buy-back" payment, on an annual basis. My initial plan was to pay it all back at the 2 year, 10 month point, or thereabouts, in order to avoid the interest payments.

However, I looked up the interest a few days ago... turns out it's like 1.875% for 2017, last year was 2%, etc. Considering that I'm expecting a time-averaged return of roughly 5% after inflation for my overall investment portfolio, it seems like the optimal thing to do is to just monitor the annual federal interest rates on my $6,000 payment, and pay it off once those interest rates trend over 5% - for instance, in the 80's they were more on the order of 8-15%. As long as the interest rates remain <~5%, the money is doing better in my investment portfolio.

Seems like basic math, and I know that if Congress decides to change some rules then I could get screwed if I'm not already settled up, but other than this does my reasoning sound correct? Granted the returns of (5-2) % on $6,000 aren't going to be extraordinary, but every little bit counts.

Thanks,
Eric

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dm200
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Re: Federal job, "military time buyback" for pension

Post by dm200 » Sat May 06, 2017 10:27 am

I believe the federal employee retirement plan is an excellent benefit. I would definitely do the "buyback" and do my best to do so within the three year window.

lakpr
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Re: Federal job, "military time buyback" for pension

Post by lakpr » Sat May 06, 2017 11:15 am

We did something very similar for my wife in NJ. She's a teacher, who quit her job to take care of kids when they were born, and re-entered the teaching profession after a gap of 4.5 years. We were forced to cash out the accumulated pension benefit after 3 years of absence from the profession ... and she was allowed to buy that back after she re-entered the teaching profession for about $3800.

It was/is absolutely worth it. My wife has a colleague who is still working at the age of 71 years, trying to finish 35 years of service for getting the full pension, for his wife's sake rather than his own sake ....

We made this decision in spite of all the budget troubles the state of NJ is having in paying its retiree obligations. Just one year of retiree medical benefits alone would be worth this $3800 and much more ...

All my rambling above just intended to convey: take that offer, take it now, do not drag it out, take even a credit card cash advance if it comes to that to lock the benefit up and repay the credit card separately. We did.

qwertyjazz
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Re: Federal job, "military time buyback" for pension

Post by qwertyjazz » Sat May 06, 2017 12:50 pm

Interesting idea - arguing it is a cheap loan (leverage) as you plan to do it in the future
Questions to think about: would you take a home loan with the same conditions to invest?
Do you trust the rules will not change?
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stan1
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Re: Federal job, "military time buyback" for pension

Post by stan1 » Sat May 06, 2017 1:05 pm

I would just get it out of the way before the 3 years are up. In 10, 25 and 50 years you'll be glad you got it taken care of. I don't think seeking to arbitrage this is worth the risk or brain cycles that you could put to something more enjoyable.

delamer
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Re: Federal job, "military time buyback" for pension

Post by delamer » Sat May 06, 2017 1:12 pm

Retired fed here. I would pay the $6,000 now and be done with it. I understand your point about accruing more income on the investment then you'll owe in interest. But there have been have changes to the federal pension plans -- both small and large -- over the years and I would not take the risk that the option will be taken away.

If the amount was $60,000, the calculation might be different.

Does the buy-in actually change your service computation date, or just your pension calculation?

Swansea
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Re: Federal job, "military time buyback" for pension

Post by Swansea » Sat May 06, 2017 2:07 pm

The case for paying it sooner rather than later is bolstered by the fact that it is much easier to deny a benefit that has yet to be awarded, than it is to take away a benefit (military service credit) already earned and paid for.
There is a trend by local and state governments to alter number of years needed for a pension and/or raising the age for eligibility. While this is not directly analogous to your situation, it is a possibility for budget cutters can look at.

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theduke
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Re: Federal job, "military time buyback" for pension

Post by theduke » Sat May 06, 2017 2:14 pm

I did just that back in the 80s for my eight years of military service. I am now retired and enjoying my pension. I have had no regrets.

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Nords
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Re: Federal job, "military time buyback" for pension

Post by Nords » Sat May 06, 2017 2:32 pm

sippyCUP wrote:This is a fairly basic question so apologize if this sounds silly. I just want to make sure I'm not overlooking something very important!

Seems like basic math, and I know that if Congress decides to change some rules then I could get screwed if I'm not already settled up, but other than this does my reasoning sound correct? Granted the returns of (5-2) % on $6,000 aren't going to be extraordinary, but every little bit counts.
Eric, this breaks down into two sets of questions:
1. How much money would you earn on the interest arbitrage? Is it worth the time? What if you plan to leave (or get RIF'd) and you haven't finished the transaction? You may lose the opportunity forever.

2. How much do you want to complicate your life with monitoring and political risk? Is there more benefit to just doing it now, simplifying your life, and not worrying about more decisions later?

Make sure you're covering all the analysis. Here's an excellent summary by a submarine vet who bought his military service credit deposit but then left for industry after vesting his five years:
http://gubmints.com/2013/03/26/gubmints-comprehensive-military-service-credit-deposit-guide/
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hale2
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Re: Federal job, "military time buyback" for pension

Post by hale2 » Sat May 06, 2017 3:38 pm

theduke wrote:I did just that back in the 80s for my eight years of military service. I am now retired and enjoying my pension. I have had no regrets.
+1. I bought back my 12 years of military time. It was tough to do in the first 3 years since my pay was so low, but I didn't want to pay the interest. I retired 6 months ago. I calculated the amount I would have if I had instead invested it. It will take me 15 months (9 now) to break even. My payback was on the higher end since I was an officer and was receiving flight pay. So you may "break even" even sooner. I think it's a no brainer.

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TimeRunner
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Re: Federal job, "military time buyback" for pension

Post by TimeRunner » Sat May 06, 2017 8:53 pm

Retired Fed here. Buying back is a no brainer. Since you can afford it now, just do it and move on. Delaying just introduces risk that for some future reason you won't buy it back.
One cannot enlighten the unconscious.

Dontridetheindexdown
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Just pay the 6K and don't look back

Post by Dontridetheindexdown » Sat May 06, 2017 9:45 pm

Been there done that, just pay the 6K and don't look back.

It is the best investment you will ever make, and it is not worth trying to time it - just pay it using payroll deductions.

Then work toward maxing out your traditional TSP to reduce taxable income, and also fund a ROTH outside the TSP.

TSP is the best tax-deferred plan ever, but it becomes unwieldy to have both traditional and ROTH in the TSP.

LAR
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Re: Federal job, "military time buyback" for pension

Post by LAR » Sat May 06, 2017 10:08 pm

In addition, if you pay it and you work at least 18 months for government and in combination with your military deposit equals more than 10 years and you die in service your spouse will get a monthly annuity. https://www.opm.gov/retirement-services ... /survivors

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sippyCUP
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Re: Federal job, "military time buyback" for pension

Post by sippyCUP » Sun May 07, 2017 3:54 pm

Hey all, I really appreciate all your replies! I think I am going to go with the "sooner rather than later" approach and forgo the arbitrage per your suggestions. I would really beat myself up if I missed some procedural change and/or new legislation that ate my lunch :oops: .

Thank you again,
Eric

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EATaxGuy
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Re: Just pay the 6K and don't look back

Post by EATaxGuy » Mon May 08, 2017 7:50 am

Dontridetheindexdown wrote:TSP is the best tax-deferred plan ever.
I don't know about "ever", but it is the best one for accumulation currently available.
I have some clients who find the distribution rules too constraining. They are rolling out to an IRA after retirement in order to have unfettered access to their funds. They will pay higher fees, but they believe it is worth it.

My understanding is the distribution rules for TSP are on the table to be revised.
You may have been handed a cactus, but sitting on it is up to you.

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Cobra Commander
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Re: Federal job, "military time buyback" for pension

Post by Cobra Commander » Mon May 08, 2017 9:05 am

delamer wrote:Retired fed here. I would pay the $6,000 now and be done with it. I understand your point about accruing more income on the investment then you'll owe in interest. But there have been have changes to the federal pension plans -- both small and large -- over the years and I would not take the risk that the option will be taken away.

If the amount was $60,000, the calculation might be different.

Does the buy-in actually change your service computation date, or just your pension calculation?

The buy-in will change OP's SCD-RIF and SCD-L but not the SCD-Civilian. In other words, OP won't be able to use this time to back into the original FERS plan.

OP, another reason to do this ASAP is to get moved into Leave category 6 instead of category 4 (i.e. six hours of leave per pay period). While HR should be able to do this solely based on your DD-214, good luck with that.

In addition to reasons others have mentioned about the possibility of this benefit being taken away, I would do it as quickly as possible because it removes the possibility that HR will screw something out by you drawing out the payments. I don't know where they hire Fed HR people from but they are by and large some of the dumbest and laziest people I have ever met.

LAR
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Re: Federal job, "military time buyback" for pension

Post by LAR » Mon May 08, 2017 9:44 am

Once you pay it off you should receive a paid in full letter. Keep it with your permanent records and when you plan to retire include it with your application to retire.

delamer
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Re: Federal job, "military time buyback" for pension

Post by delamer » Mon May 08, 2017 10:38 am

Cobra Commander wrote:
delamer wrote:Retired fed here. I would pay the $6,000 now and be done with it. I understand your point about accruing more income on the investment then you'll owe in interest. But there have been have changes to the federal pension plans -- both small and large -- over the years and I would not take the risk that the option will be taken away.

If the amount was $60,000, the calculation might be different.

Does the buy-in actually change your service computation date, or just your pension calculation?

The buy-in will change OP's SCD-RIF and SCD-L but not the SCD-Civilian. In other words, OP won't be able to use this time to back into the original FERS plan.

OP, another reason to do this ASAP is to get moved into Leave category 6 instead of category 4 (i.e. six hours of leave per pay period). While HR should be able to do this solely based on your DD-214, good luck with that.

In addition to reasons others have mentioned about the possibility of this benefit being taken away, I would do it as quickly as possible because it removes the possibility that HR will screw something out by you drawing out the payments. I don't know where they hire Fed HR people from but they are by and large some of the dumbest and laziest people I have ever met.
Thanks; that is what I'd guessed regarding service but I wasn't sure.

The person who helped me get all my retirement paperwork completed was excellent, but overall my experience with HR staff in the federal government is consistent with yours :shock:

delamer
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Re: Just pay the 6K and don't look back

Post by delamer » Mon May 08, 2017 10:46 am

EATaxGuy wrote:
Dontridetheindexdown wrote:TSP is the best tax-deferred plan ever.
I don't know about "ever", but it is the best one for accumulation currently available.
I have some clients who find the distribution rules too constraining. They are rolling out to an IRA after retirement in order to have unfettered access to their funds. They will pay higher fees, but they believe it is worth it.

My understanding is the distribution rules for TSP are on the table to be revised.
My take is that people overreact to the TSP constraints. You can shut down the account and withdraw/rollover the balance at any time, so why do so before you need to? And if you are doing monthly withdrawals, you can change the amount annually so it just takes a little planning.

I can understand doing a rollover more for those who have no liquid assets outside of TSP but if you have a bit of flexibility, I say take advantage of those low fees.

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EATaxGuy
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Re: Just pay the 6K and don't look back

Post by EATaxGuy » Mon May 08, 2017 10:57 am

delamer wrote: My take is that people overreact to the TSP constraints.
Not everyone is a Boglehead. :)
You may have been handed a cactus, but sitting on it is up to you.

delamer
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Re: Just pay the 6K and don't look back

Post by delamer » Mon May 08, 2017 11:21 am

EATaxGuy wrote:
delamer wrote: My take is that people overreact to the TSP constraints.
Not everyone is a Boglehead. :)
Preaching to the choir! I just found out that a close friend of mine (who is getting ready to retire) doesn't understand what marginal tax rates are. She has a paid off house and a large pension, so she'll do OK. But she has zero interest in anything financial and even though she has saved money regularly, it has sat in CD's and savings accounts so her liquid assets are low relative to what they could have been with a little planning.

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TimeRunner
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Re: Federal job, "military time buyback" for pension

Post by TimeRunner » Mon May 08, 2017 11:51 am

Deleted
Last edited by TimeRunner on Tue Dec 11, 2018 5:35 pm, edited 1 time in total.
One cannot enlighten the unconscious.

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sippyCUP
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Re: Federal job, "military time buyback" for pension

Post by sippyCUP » Mon May 08, 2017 8:20 pm

Cobra Commander wrote:
delamer wrote: OP, another reason to do this ASAP is to get moved into Leave category 6 instead of category 4 (i.e. six hours of leave per pay period). While HR should be able to do this solely based on your DD-214, good luck with that.
I actually did just that, was able to break into 6-hour-land using a couple of DD-214's. I definitely anticipated some issues but they did it correctly... - Eric

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