Military Buyback for Feds: Is It Worth It?
Federal employees can buy back military time at 3% of basic pay plus interest. The deposit adds years to your FERS annuity. Here is the break-even math.
You spent four years in the Navy, got out, finished your degree, and landed a GS-11 job at Norfolk Naval Shipyard. Now you are five years into your federal career, and someone in HR mentioned something called a “military service credit deposit.” You nodded, filed it under “deal with later,” and forgot about it.
That deposit could add four years to your FERS annuity calculation, potentially worth $6,000 to $12,000 per year in additional retirement income for the rest of your life. And if you do not make it within two years of your civilian hire date, the cost starts climbing with interest.
What Is the Military Buyback?
Under 5 U.S.C. Section 3332 and the Federal Employees’ Retirement System Act, federal civilian employees can receive credit for their active duty military service (post-1956) toward their FERS retirement annuity by making a deposit to OPM. The deposit equals 3% of your military basic pay for the period of service being credited.
The critical deadline: if you make the deposit within two years of your civilian hire date, no interest accrues. Wait beyond two years, and interest begins compounding on the unpaid balance at a variable rate set annually by the Treasury Department.
| Buyback Rule | Detail |
|---|---|
| Deposit rate | 3% of military basic pay during service period |
| Interest-free window | 2 years from civilian employment start date |
| Interest rate (2026) | Variable, set annually by Treasury (historically 1.875% to 4.875%) |
| Where to pay | Through your employing agency to OPM |
| Payment options | Lump sum or payroll deduction installments |
| Eligible service | Active duty post-1956 (honorable discharge required) |
How Much Does the Deposit Cost?
The deposit amount depends on when you served and your rank. Military basic pay tables are published by DFAS for every fiscal year. You need your exact dates of service and your rank at each point.
Here is a representative example for an E-5 who served four years (2014 to 2018):
| Year | Rank | Annual Basic Pay (approx) | 3% Deposit |
|---|---|---|---|
| 2014 | E-3 | $23,400 | $702 |
| 2015 | E-4 | $26,000 | $780 |
| 2016 | E-4 | $27,100 | $813 |
| 2017 | E-5 | $29,400 | $882 |
| Total | $3,177 |
If paid within the two-year window: $3,177. If paid at year 10 with 4% average interest compounding for 8 years, the cost rises to roughly $4,347.
What Do You Get for the Deposit?
The buyback adds your military service years to your FERS annuity calculation. Under FERS, the basic annuity formula is:
1.0% x years of creditable service x high-3 average salary
(Or 1.1% if you retire at age 62 or later with at least 20 years of service.)
Four years of military service added to, say, 26 years of civilian service gives you 30 years instead of 26. With a high-3 salary of $120,000:
| Scenario | Years | Multiplier | High-3 | Annual Annuity |
|---|---|---|---|---|
| Without buyback | 26 | 1.0% | $120,000 | $31,200 |
| With buyback (under age 62) | 30 | 1.0% | $120,000 | $36,000 |
| With buyback (age 62+, 20+ YOS) | 30 | 1.1% | $120,000 | $39,600 |
The difference: $4,800/year under the 1.0% formula or $8,400/year under the 1.1% formula. Every year for the rest of your life. With COLA adjustments.
What Is the Break-Even Period?
For the E-5 example paying $3,177 to gain $4,800/year in additional annuity:
Break-even: less than 8 months.
Even at the delayed-interest cost of $4,347, break-even is under 11 months.
In our view, there are very few financial transactions in government that produce this kind of return. A deposit of $3,000 to $5,000 that generates $4,800+ annually, adjusted for inflation, for every year of retirement is an extraordinary payoff.
Does the Buyback Affect the FERS Supplement?
Yes. The FERS Supplement estimates what your Social Security benefit would be at age 62, then prorates it by your FERS-creditable service divided by 40 years. Adding military years to your FERS service increases the numerator.
Without buyback (26 years): Supplement = estimated SS benefit x (26/40) = 65% of estimate With buyback (30 years): Supplement = estimated SS benefit x (30/40) = 75% of estimate
If your estimated Social Security benefit at 62 is $2,200/month, the difference is roughly $220/month in additional FERS Supplement income from retirement until age 62.
What Happens If You Wait Too Long?
Interest accrues starting two years after your civilian hire date. Once interest begins, it compounds annually on the full unpaid balance. A $3,177 deposit that sits unpaid for 15 years at an average 3.5% rate becomes roughly $5,311.
The annuity benefit does not change based on when you pay. You get the same four years of credit whether you pay in year one or year fifteen. The only difference is cost. Every year you wait, the deposit gets more expensive for the same benefit.
Can You Still Get Credit If You Are Receiving Military Retired Pay?
This is where it gets complicated. If you are a military retiree drawing retired pay AND a federal civilian employee, you generally cannot receive credit for military service under FERS unless you waive your military retired pay upon civilian retirement. There are exceptions for disability retirees and those with reserve retirement at age 60, but the general rule requires a choice.
This is a significant decision that depends on your military retired pay amount, your FERS annuity projection, and your total retirement income picture. The math varies dramatically depending on rank, years of service, and disability status.
Who Should Prioritize This?
The buyback makes the strongest financial case for:
- Anyone still within the two-year interest-free window. The deposit is cheapest now. It will never be cheaper.
- Employees planning to reach 30 years of combined service. The jump from 26 to 30 years at the 1.1% multiplier (age 62+) is worth $8,400/year on a $120,000 high-3.
- Hampton Roads federal workers at NAVSEA, NAVFAC, NASA Langley, and the VA Medical Center who transitioned from active duty. This is one of the most common career paths in the region, and in our view, one of the most commonly missed financial opportunities.
How Do You Start the Process?
- Request your military earnings record from DFAS or obtain your DD-214 and military pay records.
- Contact your agency’s HR/benefits office to request a military service credit deposit estimate.
- Review the estimate, confirm the interest-free deadline, and decide on lump sum or installment payment.
- Make the deposit through your employing agency. Keep confirmation records.
Related reading:
- FERS Supplement: The Retirement Bridge No One Explains
- FEGLI Option B After 60: The Cost Cliff
- What Is a Fiduciary Financial Advisor?
Ferrante Capital LLC is a registered investment adviser. Information presented is for educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. All investing involves risk, including the possible loss of principal.
FC and its principals may hold positions in securities or asset classes discussed in this article. This analysis is for educational purposes only and does not constitute a recommendation to buy, sell, or hold any security.
Forward-looking statements reflect Ferrante Capital’s current analysis and involve assumptions and estimates. Actual results may differ materially. Past performance is not indicative of future results.
Please consult a qualified financial professional before making investment decisions.
