From Military to Civilian

Last week, we began looking at retirement options for people who have not spent their full careers in the civil service. A large portion of people in that category started a second career in the civilian federal service after completing a career in the military.

In this situation, employees typically receive both their military retirement pay and a government salary. Usually, they don'thave 30 years of civilian service prior to age 60. They generally won't be eligible for an unreduced retirement under the Federal Employees Retirement System based on their civilian service until they turn 60 -- or sometimes 62, depending on their age when hired.

Like everyone else, these folks have the option of a reduced or postponed MRA+10 retirement once they have reached the FERS minimum retirement age (55-57, depending on their year of birth) and have more than 10 years of creditable service, but fewer than 30. They also can retire at 60 or 61 with more than 10 and fewer than 20 years of service.

Another Option

It's also possible for military retirees to combine their civilian and military careers so that all their service then can be used to compute their civilian retirement benefit. Doing so requires the retiree to make a military service credit deposit. (The FERS deposit is 3 percent of military base pay plus interest that accrues beginning with the second anniversary of the employee's civilian appointment for the entire period of military service.) Then the retiree must waive his or her military retirement benefit upon retirement from civilian service.

Because the Civil Service Retirement System benefit computation is more generous than the FERS computation, this was a more common practice under CSRS. But there are some situations when it makes sense for a FERS employee to at least consider combining careers.

Take the following example: Suppose Cliff served in the Army for 26 years and is receiving a military retirement benefit of $28,000 per year. He came into federal service at 48 and will have 10 years of federal civilian service at 58. If he were to combine his civilian service with his military service, he would have 36 years of service at 58 and be eligible for an unreduced FERS retirement benefit and a FERS supplement. The supplement provides a bridge between 58 and 62 to cover the period between his FERS retirement and when he would qualify for Social Security. The supplement would be based only on his civilian service, however. It would be worth about $325 a month, or a little less than $4,000 a year. His FERS basic benefit would be computed as follows:

36 x 1% x high-three average salary

So, if Cliff's high-three average salary were $75,000, then his FERS benefit would be $27,000. Combined with the $4,000 supplement, this would provide $31,000 per year in benefits. That's only $3,000 more than he already was receiving from his military retirement alone.

Cliff probably would choose to keep his benefits separate. That way, he could continue receiving the $28,000 military retirement and be eligible at 62 for a separate FERS retirement equal to 10 percent of $75,000 (10 years of service x 1% x high-three average), or $7,500 a year. He could choose to receive the benefit immediately, but he would have to take a reduction of 5 percent for every year he's younger than 62. If he retired at 58, that would mean a 20 percent reduction, leaving him with a FERS retirement of $6,000 per year.

When Combining Makes Sense

So when would it make sense for Cliff to combine his military and civilian service into one benefit?

• If his civilian salary was much higher. For example, if Cliff's salary were $150,000, he would be entitled to a FERS retirement of $54,000, plus an approximately $4,000 supplement, for a total of $58,000. If he kept his benefits separate, then he would have $28,000 in military retirement and a $12,000 FERS benefit, for a total income of only $40,000 a year. He would have to pay a service credit deposit to get the combined benefit, but it might be worth it.
• If he was receiving some of his retirement pay from the Veterans Affairs Department due to a combat-related or service-connected disability. In this case, the VA benefits would continue and the military service could be combined with the civilian service. He still would have to waive any military retirement benefits.
• If his retirement was from a military reserve component. Then Cliff would receive his reserve retirement benefit at 60 and could use his active-duty service toward his FERS retirement without forfeiting any military benefits. He would have to pay a service credit deposit for his active-duty service.

For reference, here's the chapter of the CSRS and FERS Handbook that discusses creditable military service. Keep in mind, the handbook was last updated in 1998, so seek additional guidance from your agency's human resources office if necessary.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.