Military Buyback: Should I Pay the Money?

By on February 8, 2011 in Current Events, Retirement with 79 Comments

A Federal employee with prior military service has the option of making a deposit into the retirement fund, in order to receive credit for this service in his annuity. This is known as a “buyback.” The process is deceptively straightforward: just multiply the employee’s military earnings by 0.03*, and then add interest beginning with two years after his entry-on-duty date as a civilian. However, there is a complication.

The interest is compounded annually in accordance with the varying  interest rate announced by the Treasury Department each year. What really makes it complicated is that, by law, the interest charged to the employee every twelve months is a composite of the two adjacent years. For example: if the employee’s anniversary date is, say, May 22, then for each 12-month interest period you would add (218/360) * previous year interest rate to (142/360) * the current year rate (public law requires use of a 360-day year). Do this for all the years until the year he makes the deposit. It is helpful if you have a computer program for this part!

What are the cost/ benefit factors? Is it worthwhile for the employee to make the deposit?


Let’s take a look at two examples.

First, the employee served a 3-year enlistment during which his earnings were $168,000.

His entry-on-duty date is August 18, 2002. In this case his cost will be (0.03 * 168000) + interest for six years, or $6,463.20. Payment of this deposit will add 3% of his final high-three to his annuity. If his final high three is, say, $81,000 then the $6,463.20 payment will increase his annuity by $2,430 per year, or $202.50 per month.

In less than three years, then, he will recover his $6,463.20 “investment.”

Here is a second example.

Seven years service, earnings $400,000, $55,846 high three, and entry-on-duty Oct 13, 1999. In this case, the employee owes $17,778 and if he pays, he will see his annuity increase $3,909.22 annually, or $325.76 per month. The one-time payment will be recouped in 4.5 years.

Retired Military Personnel

How about retired military? Can they make the deposit?

Yes, they can, and it is calculated the same way, but the numbers are larger. And the decision has an additional element: the military pension must be waived in order to have the larger civilian annuity. Let’s do another example.

Twenty years retirement. Total salary = $1.2 million. High three $108,442. Start date: March 20, 2003. In this case, the deposit would be $44,528. This payment would generate an annuity increase of $21,688.40 per year, or $1,807.36 monthly. In just over two years, he would get his money back. But he would also have to waive his military pension. It seems that when there is a pension to lose, it is less likely to be worth the “investment.” But this is just a generalization – you need to run the numbers.

The above examples are illustrative, intended to show how the process works.

(The author developed the software at

* For earnings in 1999 there is an additional 0.25%, rising to 0.4% in 2000, then back to 3%. Also, above deposit amounts are for on/before the anniversary date; after this date, one more year’s interest is charged.

© 2016 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.

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  1. Ishmael Lite says:

    Fortunately, when an older guy like me started fed. in 2000, our exec. dir. was ex-Navy & told me about this my first day. Military deposit; start allotment. The ~$3600 I paid off in ~3 yr.
    However, when I arrived, I knew nothing about this, but I’d’ve learned little from this article, which really is written for the disbursing & retirement crowd & NOT for the fed. employee w/ prior service.

  2. J.R.M says:

    Had to pay $750 for 13 months back. No brainer if you ask me.

  3. Retiring 28 Dec 2012 says:

    I served for four years back in the 1960’s and my buy in with interst was less than $800.  As a CSRS (offsett) that has earned me 8%  of my high 3 or more than $8,000 a year.   I consider that to be one of the best investments I have ever made. 

  4. Manage This! says:

    Good article and sound on for the pricing info – but you might have mentioned that the DoD retirement annuity is sacrificed IMMEDIATELY upon entering the buyback program.  Therefore, lost annuity payments while working would be a huge factor to consider in the long game of deciding to accept or not.

    • Doug says:

      Incorrect statement. Your military annuity does not stop until you recieve your civil service annuity. Your buyback dollars are simply held until you make the decision to incorporate the time into your civil service retirement or not. If not, the money is returned to you.

  5. SAJ says:

    Served in the USAF from 1964 to 1968-made about $10K-had to pay approx $700 to add 49 months to my civil service-I completed 30 under tthe CS retirement system and the $700 payment moved my retirement from 56.25% to 64.25% of my high three.  No brainer to make the payment.

  6. Marie says:

    Please reiterate that the military pension is waived once civilian retirement commences.  For me, my civilian retirement will increase an extra $500 per month, and I will recoup the buy back cost in 15 months.  Also, I checked the COLA increases for both pensions, and they are compatible.   

    • ManageThis says:

      No, the military pension stops immediately upon acceptance of the buyback option.  Thus, you would loose all of the remaining annuity payments from your military retirement in favor of receiving a greater CS retirement “When You Retire”.
      For 99.99% of retirees, the resulting sacrifice of the annuity would be significantly more than the difference they would ever hope to get from their CS retirement.  For example, if your retirement annuity from Military were $36K/yr, and you filed within your first two years of CS, then worked for another 15 years in CS (assuming you entered Mil at 18 years old), then on 20 years of service retired, that would make you 48+, add 15 years to that – makes you 63.  That 13 remaining years of CS and lost retirement would cost you $36K x 13 = $468K.  Adjust the total of your service through the buyback, 15 years + 20 years = 35 Years (or 38.5%), then multiply the high three years average by this percentage, that will equal your highest annuity potential, next do the same calculation without the service included 15 years x 1% = 15%, then multiply that times your high three average.  The difference, that would then be the amount you need to compare to the loss of the $468K.  On face value, you would need to make at least $36K more per year from the buyback average just to earn what you would have gotten (and continued to get while working) anyway – if you had not bought back.  Using that as a starting point consider this 38.5% – 15% = 23.5%  23.5% x $153,000 = $35,955, in other words, you would have to be at least as GS-15 or higher just to make the grade on the difference in your salary that you gave up.  If you had a higher retirement annuity – it would increase the burden for you to make CS grade even faster to achieve the earnings goal to break even.  On a more advanced note, say you got lucky and scored a GS-15 or higher, now you also have to deal with the differential losses, specifically, how much you are sacrificing to the tax gods for that higher income while you are still working.  Your military annuity – is not tax exempt, but because it is not earned income – it has a different place in the tax structure – a much lower percentage and usually nothing in the extraneous taxes like SSA, Medicare and the increased amounts posting from your pay towards FEGLI, and FERs Retirement.

      The comparison values are just not in it to support a retiree giving up the annuity in favor of a greater CS retirement.    On the other hand, if you are not receiving any kind of annuity from the Military Service, by all means, trading your years in DoD for additional retirement years in CS is a solid investment, even if you do it after you start accruing interest obligations.

      Note: for the record, I’m using a pretty significant retirement annuity – most 20 vets only get about $28K unless they managed to shine really good and scored promotions all the way to E-9 before leaving.  Officers have it even harder to make it to the break even percentage.   The numbers are pretty easy to recognize once the outline is presented (above).

      • Marie says:

        “No, the military pension stops immediately upon acceptance of the buyback option.”  I’m happy to say that you are incorrect on this statement.  I bought back my time and received a confirmation letter from DFAS stating that I must inform them prior to my federal civilian retirement of said retirement date and that my military pension will cease the day my federal civilian pension begins.   

        • David says:

          Obviously. Sounds like a classic example of some of the select enlisted leaders that “know all, but research little.” These people will get you in lots of trouble. That’s why I always insist people do the research for themselves. There is nothing more detrimental than a person that passes along false information as true. Take the few extra minutes (or hours) and look up the things that affect your health and finances for yourself. You’ll be happy you skipped that new episode of CSI when the time comes.

      • Marie says:

        Here is an informative article:



  8. Redline513 says:

    I enjoyed my job so I had 48 years of service when I retired. As I got close to retirement, a retirement advisor said that I should pay a deposit for my military time even though I did not need to. The result was that when I was refunded my excess retirement contributions, I received credit for the four years I had in the Air Force. I received a refund of more than what I had to deposit. Thanks to the retirement advisor!

  9. Diana Devore says:

    I have made the deposit for my military time while I was working overseas, however now that I am eligible to retire no one can find the information where the deposit was made. I was working for the Air Force at the time. When I divorced my ex he threw away all my LESs from my time overseas. They showed where the monies was withheld from my civilian pay. How can I get this information now? It was during the timeframe of 1986 – 1989.

  10. pjohnson says:

    I’m really bothered by the fact that this article is treating everyone as if they were under the same set of rules and it’s just a matter of plugging in numbers. The rules about being hired before or after Oct 1, 1982 are really important and should be noted in the article. I mentioned it in my earlier reply to hoffy1954 and Former retirement specialist has a more extensive reply. I think the author of this article should make reference to it.
    Also, SS no longer counts quarters as a chunk of time, but by amount of money earned, so each $1120 earned counts as a quarter. For example, if you are retiring at 56, and only need 10 more quarters to qualify, that is not 40 months, that’s $11,200. So if you started working for the feds prior to Oct 1, 1082 and earn ONLY $1244 a year before you turn 62, and have not paid back your deposit, your annuity will be recalculated and permanently reduced at age 62 (once it’s determined that you qualify for SS.) It’s very rare that your SS earnings would compensate for this reduction.

    • Fedbens says:

      Pjohnson, the article was not meant to be encyclopedic, nor comprehensive. It was meant to be a primer on the basic features, etc, applicable and relevant to a great majority of employees.

      1982 was 28 years ago. I omitted the pre-Oct 1982 provision because in my judgement it was not necessary to the general nature of what I wrote. There were a few other omissions, also.

      The purpose of the article was to be an overview.