Author Topic: Mil buyback and FERS cashout?  (Read 2479 times)

zephyr911

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Mil buyback and FERS cashout?
« on: August 28, 2015, 09:21:55 AM »
Hey all, this is a two-part USG civilian question (in case you failed to infer that from the subject line).

I'm a GS employee with almost four years in, and at this point it's pretty likely that I'll do least get five. It is highly unlikely that I'll go past 6-7.

1) I crunched numbers during my first two years and decided the mil buyback was a bad deal for me. I spent about six years as a USAF officer; I calculated my buyback at something like $16K, and worked out the annualized return (from now till retirement age) based on the pension increase at 2-3%. I kept the money for real estate. Has anyone done that analysis with wildly different results? Anyone think I need a sanity check?

2) Based on similar calculations, I'm thinking that even if I qualify for the deferred retirement, I should probably just cash out my employee-contributed FERS balance and add it to my stock portfolio or other investments. I don't see the pension being a game-changer, between the small amount and the very late effective date, and I think I can beat the return. What are your thoughts?
« Last Edit: August 28, 2015, 11:47:10 AM by zephyr911 »

zephyr911

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Re: Mil buyback and FERS cashout?
« Reply #1 on: August 28, 2015, 11:47:19 AM »
BAMP

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Re: Mil buyback and FERS cashout?
« Reply #2 on: August 28, 2015, 12:51:40 PM »
Summoning Nords.

Re #2, what percent of your salary are you contributing towards the FERS annuity? I thought the rate was 0.8% for people who joined that long ago. If so, then you would not be getting back very much if you cashed it out (like a few grand). Versus a few grand a year for the rest of your life after 57 or more after 62.

Re #1, if you could buy 6 years of credit for $16k, that seems like a cheap annuity, depending on your high 3. For easy math, let's say you make $100k as your high 3, and you quit with 6 + 5 years of service. Then at 62 you'd get $11k with COLA the rest of your life. $11k in 25 years is probably still worth $7k in 2015 dollars. Add that to SS and maybe you don't need anything on top of that for your living expenses. That's a pretty nice guaranteed cash flow that you can't outlive. Maybe you could turn your $16k into $60-70k in 2015 dollars 25 years from now. The extra $4k in your annuity is more than a 4% WR on that $60-70k. And you get the benefit of it being guaranteed, with a COLA, and you can't outlive it, and the market could suck between now and then, so who knows. Your math may be different.

zephyr911

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Re: Mil buyback and FERS cashout?
« Reply #3 on: August 28, 2015, 03:00:52 PM »
Re #2, what percent of your salary are you contributing towards the FERS annuity? I thought the rate was 0.8% for people who joined that long ago. If so, then you would not be getting back very much if you cashed it out (like a few grand). Versus a few grand a year for the rest of your life after 57 or more after 62.
Yeah, the cash balance after almost 4 years is only 2k+. FWIW, part of why I'm doing this is I originally expected to leave this job sooner and some of my assumptions are no longer valid. You're right that the FERS cash value is better left alone if I'm going to serve past 5 years.
Quote
Re #1, if you could buy 6 years of credit for $16k, that seems like a cheap annuity, depending on your high 3. For easy math, let's say you make $100k as your high 3, and you quit with 6 + 5 years of service. Then at 62 you'd get $11k with COLA the rest of your life. $11k in 25 years is probably still worth $7k in 2015 dollars. Add that to SS and maybe you don't need anything on top of that for your living expenses. That's a pretty nice guaranteed cash flow that you can't outlive. Maybe you could turn your $16k into $60-70k in 2015 dollars 25 years from now. The extra $4k in your annuity is more than a 4% WR on that $60-70k. And you get the benefit of it being guaranteed, with a COLA, and you can't outlive it, and the market could suck between now and then, so who knows. Your math may be different.
I'm making a little less than $80K now and my hi-3 won't change much. The extra 6 years would add $400/mo to my retirement, at a cost of around $18K (I'm past the grace period and interest applies). This is 6 times the FERS cash balance that buys me roughly the same annuity, so it's a much less obvious choice.
Where I live, this $18K could buy me an 80% financed rental that returns cash flows immediately for those same 25 years, while paying itself off. At the end I have a $90K asset (today's dollars, assume appreciation = inflation) netting more than the annuity. (I understand there are downsides to this but the total return wins out for my situation).

Nords

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Re: Mil buyback and FERS cashout?
« Reply #4 on: August 29, 2015, 03:11:38 PM »
I'm a GS employee with almost four years in, and at this point it's pretty likely that I'll do least get five. It is highly unlikely that I'll go past 6-7.

1) I crunched numbers during my first two years and decided the mil buyback was a bad deal for me. I spent about six years as a USAF officer; I calculated my buyback at something like $16K, and worked out the annualized return (from now till retirement age) based on the pension increase at 2-3%. I kept the money for real estate. Has anyone done that analysis with wildly different results? Anyone think I need a sanity check?

2) Based on similar calculations, I'm thinking that even if I qualify for the deferred retirement, I should probably just cash out my employee-contributed FERS balance and add it to my stock portfolio or other investments. I don't see the pension being a game-changer, between the small amount and the very late effective date, and I think I can beat the return. What are your thoughts?

Re #2, what percent of your salary are you contributing towards the FERS annuity? I thought the rate was 0.8% for people who joined that long ago. If so, then you would not be getting back very much if you cashed it out (like a few grand). Versus a few grand a year for the rest of your life after 57 or more after 62.
Yeah, the cash balance after almost 4 years is only 2k+. FWIW, part of why I'm doing this is I originally expected to leave this job sooner and some of my assumptions are no longer valid. You're right that the FERS cash value is better left alone if I'm going to serve past 5 years.
Quote
Re #1, if you could buy 6 years of credit for $16k, that seems like a cheap annuity, depending on your high 3. For easy math, let's say you make $100k as your high 3, and you quit with 6 + 5 years of service. Then at 62 you'd get $11k with COLA the rest of your life. $11k in 25 years is probably still worth $7k in 2015 dollars. Add that to SS and maybe you don't need anything on top of that for your living expenses. That's a pretty nice guaranteed cash flow that you can't outlive. Maybe you could turn your $16k into $60-70k in 2015 dollars 25 years from now. The extra $4k in your annuity is more than a 4% WR on that $60-70k. And you get the benefit of it being guaranteed, with a COLA, and you can't outlive it, and the market could suck between now and then, so who knows. Your math may be different.
I'm making a little less than $80K now and my hi-3 won't change much. The extra 6 years would add $400/mo to my retirement, at a cost of around $18K (I'm past the grace period and interest applies). This is 6 times the FERS cash balance that buys me roughly the same annuity, so it's a much less obvious choice.
Where I live, this $18K could buy me an 80% financed rental that returns cash flows immediately for those same 25 years, while paying itself off. At the end I have a $90K asset (today's dollars, assume appreciation = inflation) netting more than the annuity. (I understand there are downsides to this but the total return wins out for my situation).

Most of the military service credit discussions that I can help with are about the "how" because the veteran has already decided that the "why" is worth the effort.  If you want to dig into the details of the growth calculations (admittedly reduced by the interest after the grace period) then I'd contact Eddie Wills at Gubmints.com.  He's done many of these (including one for his own civil-service career) and he can help with the projections.  The last e-mail address I have for him is EJWills at Yahoo.

As for the logic of "I can make more in real estate" or "I can make more in the stock market", well of course you can.  You're taking much more risk in those asset classes than you are with a federal civil-service pension.  If your priority is risk-adjusted return then stay away from a government pension.  If, however, in the next few months you decide to bring diversification and annuitized income into your asset-allocation decisions, then you may want to reconsider the civil-service pension.  At your age and earnings I doubt it'll make much difference either way.

I'm unclear on your interpretation of the phrase "cash out".  If you mean "transfer my TSP account to my IRA" then that sounds good.  If you mean "cash it in, pay taxes and penalties, and then go for higher stock-market returns", that's short-sighted.  It's far better to avoid the taxes & penalties now, especially when you can invest your IRA in an aggressive asset allocation without having to face taxes or penalties. 

If the attitude is "But I need that money in a taxable account right now so that I can invest in this incredible opportunity", the all-purpose answers are "No you don't", and "There are other ways to close the deal".  Especially if you're already eligible to tap into 80% financing or can do it via a self-directed IRA.