By Dr. Jennifer Marsden, Guest Writer

[Editor's Note: Last October, we ran a guest post on 5 Things the White Coat Investor Gets Wrong, and guest author Erik Hofmeister wrote the following: “Has anyone tried to buy years of service from their organization that offers a pension or worked for two government entities that each offered a pension? How does your math work out if your pension doesn’t kick in until 60 but you plan to retire at 45? Has anyone had a small pension and then covered the balance with your investment portfolio?” Dr. Jennifer Marsden responded with this guest post.]

I served in the US Army for 7.5 years, before it even offered the Thrift Savings Plan (401(k) equivalent). Later in my career, I worked at a Veterans Administration (VA) hospital. When I started at the VA, I looked into buying back my military time and did so in a $5,000 lump sum perhaps halfway through my three years there. It can be done on a payment plan. Keep in mind that, depending on your situation, there might be some interest charges added to the buyback rate so consider getting this done early on if you might use it someday. I actually had to amend my DD214 (the paperwork issued when you separate from the military) to add in the 45 days x 4 tours active duty summers in med school. Service members, please keep those pre/post continuous service, active reserve assignments in mind and ensure it is on your DD214 when you separate to save months of paperwork should you ever want to do a “buyback” to get a pension.

 

Working as a Civilian for the Army

Later, I worked as a civilian for the army, essentially a US government Civil Service worker. I was already at the minimum retirement age, so all I needed was the service time to qualify for a pension. I figured if I had not yet done the time by the time I was 65 and presumably not working for the General Schedule (GS) system from then on, I would request my military deposit plus all my Federal Employee Retirement System (FERS) contributions (total under $10,000 from my first three years work) be applied.

I had first thought I needed 10 years total GS time, but I read the opm.gov info with a lawyerly mind and convinced myself and the retirement staff that it was five years GS service and 10 or more years total government service. I had first considered working part of the next year for the benefit of maxing out the TSP and IRA, but I was so miserable counting down my remaining time that I chose a date a few weeks after my certain five years. I also did a lot of math calculating whether another day or four would net me one more month (they don’t count weeks/days beyond that) toward my pension amount. Since I wasn’t clear on how it was counted, I couldn’t get it perfect. But I felt good I had less than a half-month excess uncounted rather than being 1-2 days short of an extra month.

 

Delaying the GS pension

While we are FI, I was concerned that if I delayed receiving a GS pension until I was 62 (almost four more years), something bad might happen. I envisioned hearing four years too late that I was 17 days short of qualifying for the pension (hey, please hire me to empty trash bins for 3 weeks; no longer qualified to be a medic . . .) or that after all I did, I would need 10 years in GS and having 5+7 didn’t qualify.

Therefore, I did some goofy spreadsheet math. I decided that taking the penalty for early receipt of the pension—a 5/12% reduction for each month prior to “full” retirement age at 62—but receiving the reduced pension for four years prior to 62 sort of made up for the permanent reduction in total benefit at certain interest rates and life spans. Peace of mind that the government was less likely to change its mind and claw back the pension once it had started was the main benefit, though. If I was more concerned about our future income or our longevity, however, I’d work longer, and I would have more carefully considered delaying until full pension age— just as we definitely plan to delay Social Security (which we don’t truly expect to need) until 70 as our final backstop if we somehow live to be 150.

 

FMLA and Illness Time

Another factor in GS work to consider, especially for those with poor health, is that one can actually miss up to six months per calendar year of work for illness or other reasons but still have those six months count toward one’s pension and time in service. Note that the pension could be reduced since one’s highest three consecutive years of pay might include that six months per year(s) of no pay. It's nice to know that if you actually had to use all your FMLA and maybe some military deployment time (if not already counted with buying military years!) that you are still marking time to vest in your pension.

I am so convinced of the high value of COLA-adjusted pensions (and my actuary brother urged me in this as well) that I also bought an extra half-year of service from the British NHS after I worked there a few years when we were stationed overseas. It cost me a similar amount—£2,500—and I expect 16 years later to start getting back about that much annually until my death. Then, a portion will go to my widower (too much trouble, if even permitted, for him to sign away that benefit). My biggest concern about that, as with the FERS/GS pension buy-in but worse because it's transatlantic, was if my heirs would bother getting that deposit plus my contributions back from the NHS if I never claimed it. The second biggest concern was what would happen if, by the time I am pension age, the NHS has decided I no longer qualify based on an income that's too high, because it decides to change the for non-UK citizens, or because I don't live in the UK?

pension and military buyback

 

Pension Math and Early Retirement

How does the math work out if your pension doesn’t kick in until 60 but you plan to retire at 45?

US readers face a similar dilemma with Social Security and Required Minimum Distributions (RMDs) between ages 62 and 70. For most of us, Social Security will be our only pension, so if we want to delay that (and avoid going back to work), we'll need to live solely on our investments at least for a while. We just need to calculate that magic number so we can figure out the age when we can quit adding to those investments and start spending them down. But we have been spending a lot recently, and I finally got serious about keeping up with getting my “bond-cash” (CDs and bond mutual funds for us) ratio where our Investing Personal Statement plan wants it.

The math works out pretty easily for short time periods, such as five years or less. Just multiply your annual spending by the number of years until the pension kicks in. The math is more complicated for longer time periods (you have to account for inflation as well as growth of the portfolio), but the longer the period the closer it gets to the 4% rule. Certainly by the time you get to a 20+ year time period between retirement and receipt of the pension you're in the 4%-5% withdrawal rate neighborhood.

 

Small Pensions and Retirement Math

Similarly, many people have a small pension and make up the difference with their investment portfolio. The key here is to simply subtract the pension amount from the amount you need to spend and withdraw from the portfolio enough to make up the difference between what the pension provides and what you spend.

I recently calculated we can afford to spend $5,000-$10,000 more monthly than we get from our pensions (the lower number is from lower rates or if my partner dies and his Army pension to me drops to a Survivor Benefit Plan payment). So, I am reworking our CD ladders to try to have $5,000-$10,000 mature each month, rolling it over if not needed. It hurt this self-confessed miser a little to actually sell some of our mutual funds, instead of just stopping the reinvestment of gains and dividends, which was my first move a few years ago to rebalance passively. Those capital gains, combined with additional tax due from Roth conversions we are now doing, will raise our taxes. We're carefully calculating it so we don't get pushed into the next higher tax bracket. However, we think it will be worth it given the higher taxable income we expect as we start taking Social Security and RMDs at about the same time.

Pensions are a valuable source of retirement spending for many. It is important to understand their value and how they mix with traditional retirement assets to provide financially for a comfortable retirement.

What do you think? Will you have a pension? Have you ever “bought back” years to increase the size of your pension? How will your pension affect your retirement spending? Comment below!

[Editor's Note: Dr. Jennifer Marsden was a US Army commander and a VA doctor, and she FIRE'd at the age of 50. She returned to medicine as a well-paid hobby until the age of 58. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]