If you have an active military pension, then how much is FERS retirement worth?

[marc422]

So according to OPM,

Most military retirees are barred from receiving credit toward a civilian annuity unless they waive their military retired pay.

But we all know plenty of retirees who work GS jobs. I've always understood that the pension is reduced for retirees who take federal jobs, but not gone completely. If there is an annuity for those who could qualify for a second retirement, how is it calculated?

I understand the basic FERS system is (High 3) x (1%) x (# of federal service years). How is this altered if one is receiving a pension?

 

[elizamurr]

@marc422 So, I'm not sure we're all on the same page here. What OPM is referring to is buying back your military time in order to receive creditable time towards a civilian pension. Normally, this would only make sense for some who is not receiving a military pension ... They buy back their military time to make it count towards their civil service pension.

If you are receiving a military pension, you can still earn a civilian pension, but you can't use any military time that is already being used in your military pension calculation. An example of this might be Service Academy time; you can buy it back and have it credit towards a civil pension only because it is not used towards your military pension. Or, you buy back no time and just earn a pension through civil service in addition to your military pension. They just don't let you count the same years for both pensions.

In very rare cases, it can make sense to forgo your military pension, buy back 20+ years, and end up with one large civil pension. This is uncommon, but can happen.

 

[wesupportpastorrob]

@elizamurr This is pretty much the correct answer. Generally speaking, someone who retired military wouldn't buy back their time. Usually folks who don't do a full 20, and switch to civil service will buy their time back. There is a formula on how much and its gotta go through several agencies to complete.

 

[marc422]

@elizamurr I'm curious to hear the cases where a FERS is more valuable than a military pension. By my math, assuming you'll live to 85, work 28 years, retire as an O5 at 53, and COLA increases at 2.4%, an active pension is worth $6,380,100. Each workday is worth $624.

Applying the same to an 20 year E6 gives you a pension worth $3,000,000, but each workday is worth $420 because they can start collecting at a younger age.

Meanwhile, a federal employee who retires with a high 3 of $150,000, and 35 years of service would make $4,077,000 until age 85, making each workday worth $319. I'd love to see the people who thread that needle where the fed pension makes more sense.

 

[elizamurr]

@marc422 So, I don't personally know of anyone who it has made sense for, but I did hear about an O5 who retired, went through a very messy divorce, his ex-wife's lawyer wasn't very good and the decree made it very clear that she was only eligible for payment from his military pension. This guy gave up his military pension to buy back all the time and now has a civil service pension that his ex can't touch. Was it the best money move? For him, it might have been!

 

[dreamscapestars]

@elizamurr Also, people who are medically retired would have different math.

 

[davidolonge]

@marc422 Pension to pension military probably is highly favorable because they can draw it at a much younger age.

However, a federal employee probably has a higher salary during their working years too, which allows them to invest much more heavily if they live the same quality of life as the military member. I know for me as a 6-yr E-5, I separated and nearly doubled my salary which is letting me invest something like 5x the amount I could afford to while enlisted. The extra alone (extra as in the amount I can invest only from the extra salary I'm making) will give me a similar self-funded retirement equal to what a 20-year enlisted retirement would. Add a pension from a federal employee on top of that and I effectively have an amount equal to both military and civilian pensions, which is absolutely more than just an enlisted pension.

That said, if you're an officer then that difference is going to be quite small if it even exists.

 

[sokor]

@marc422 It’s typically people who retired from the military at low grades, and are employed as high level civilians. Like they retired as an E6 but then got a job as an SES. In that case, the discrepancy makes it worthwhile for them to take the lower cut of the much higher pay.

 

[marc422]

@sokor Full respect to any E6 who ends up retiring an SES.

 

[sokor]

@marc422 For sure. It happens though, and not just to enlisted. Assistant Secretary of the Navy Guerts was a terminal O5 while on Active Duty.

Some people just are better suited for civilian employment vs. the military.

 

[tumbleweedangel2]

@marc422 Your off on your numbers on what it’s worth it’s not worth $6,380,100. I’m pretty much what you described and I get Va too and I can buy my annuity for 2.5 million.

 

[marc422]

@tumbleweedangel2 Thanks for the feedback. My formula is:

(Base Pay) x (Years) x (.025) and I adjust for COLA by multiplying by (1.024^Number of years after retirement). In this case, I assume an active duty O5 with 28 years retires at the age of 51 in 2035, then lives for another 34 years. So I take today's base pay (10,384) x (28) x (.025), which is 7,268 per month.

Assuming an average COLA adjustment of 2.4%, I take that number and multiply by 1.024 each successive year. The first year of retirement in 2035 would be $9,893/month in 2035 and $22,159/month in 2069. At twelve months per year, the total paid over all those years is $6,398,784.

If I'm being overly optimistic with COLA, I also have rows that account for COLA increases of 2% or 1.5%. With that same methodology, 1.5% would be $4,753,656 and 2% would be $5,641,152.

Obviously this doesn't include taxes, survivors' benefits or whatever, but if there's something wrong with my methodology, I'd love to be corrected.

 

[tumbleweedangel2]

@marc422 you are assuming an O5 does 28...oh I was thinking more like 20... anyway a good rule of thumb is take the annual amount (forgetting the COLA issue as that complicates it) and / .04 so if you are thinking $7,268 / .04 = $2.3 million approximately. that's about what an immediate annuity would cost which is essentially the value of it...it's not anywhere close to $5.6 million..it's the cost of an immediate annuity at that monthly income.

 

[marc422]

@tumbleweedangel2 For the 28 years, I went from active to guard, so I use 28 as a planning factor for how long it’ll take me to get to 20 active years.

If you’re advocating a conservative estimate, then that’s fair. Otherwise, over the last 30 years, COLA increases have averaged 2.37%. Over the last 45, it was 3.58%.

 

[catherine_of_the_faith]

@marc422 Think of it in terms of a safe withdrawal rate, not the $ value it will pay out over its lifetime.

Your value of $7,268/month is $87,000/year. Using a very conservative 3% withdrawal rate, that $87,000 represents a $2.9 million investment portfolio

 

[marc422]

@catherine_of_the_faith For most things you’re right. But if you’re planning for paying off a mortgage or something with a fixed rate, that 2% or so makes a huge difference over time.

 

[gspfever08]

@marc422 I have no idea of the specifics but I know somebody who did 20 yrs in the army then 20yrs gs and he ended up buying his military time. So now he gets one pension and he said it paid for itself in 2 years. So look into the buying time option.

 

[marc422]

@gspfever08 I've heard of that too, but I'm wondering what's the formula.

 

[blizzardwild]

@marc422 To buy back military time, it's basically 3% of the base pay you receive during your military service. You have 3 years to buy it back before you have to pay interest on the remainder of what you owe. It's a variable interest rate, not sure what it is now but as of 2021 I think I read that it was under 1.5%.

Example: you serve 4 years and the total basic pay equals $100,000, or an average of $25,000 a year. 3% of 100k equals $3,000. Once you start government service, you have a 3 year grace period to pay that to buy those 4 years back.

If you serve 20 years and earn an average of $50,000 a year, that total base pay comes out to $1,000,000 and you'll have to pay $30,000 in to buy back the 20 years of service.

 

[marc422]

@blizzardwild This is really good info.