Buy Back COLA as Locality Pay for Federal Retirement

There are special rules to buy back COLA to count as Locality Pay for your Federal Retirement.

Federal Employees in Alaska, Hawaii and the U.S. Territories have a unique opportunity to increase their High-3 Salary for their federal pension calculations.

If you are thinking about retiring in the next few years... you may want to revisit your federal retirement plans.

Rules to Buy Back COLA as Locality for Retirement

First, to be clear, there is no change here in the eligibility rules for federal retirement. You must be eligible for retirement in order to take advantage of this provision.

There is a provision in section 7 of the Non-Foreign Area Retirement Equity Assurance Act of 2009 that allows you to buy back COLA and have it count towards your Federal Retirement as if it were Locality Pay... but only if you file an election and retire before 12/31/2012.

When you buy back COLA to count as Locality Pay, you're paying the amount you would have contributed to your federal retirement system if you had received that money as Locality pay.

So most FERS would pay 0.8% of the difference between the Locality they received, and the full Locality Rate for their region. Most CSRS would pay 7% of the difference. Special Provisions will pay a higher percentage.

I've helped many of my clients buy back COLA for their retirement. The amount of money it costs is very small, generally less than $1,000 (and most frequently, it's less than $200 for FERS).

It increases your federal pension every month for the rest of your life. And if you leave a survivor annuity - that is higher too. In most cases, the higher pension means that you'll 'break even' in less than 1 year of retirement.

Keep in mind, you can only buy back COLA if you are retiring on or before 12/31/2012.

If you're retiring 1/1/2013 or after, you can't buy back COLA. You'll only be able to count the Locality you actually received.

If you were planning to retire in early 2013... take a hard look at how this provision works. Run the numbers, and evaluate your options. See if you could retire in late 2012 instead, but only if it makes sense for your personal situation.

Another rule, you can only buy back COLA when you are ready to retire. You need to do it as a part of your retirement paperwork.

Limits to Buying Back COLA as Locality Pay

There are limits to how much COLA you can buy back as Locality Pay for your Federal Retirement pension.

Limits to How Much You Can Buy Back

  • You can only buy back up to the full Locality Pay rate for that year.

    The way the transition from COLA to Locality Pay was set up, everyone affected received 1/3 of the RUS Locality Rate in 2010.

    So in 2010, you received 4.72% Locality Pay... which was 1/3 of the RUS rate of 14.16%. You can buy back the difference between what you received (4.72%), and the full Locality Pay rate (14.16% in this case) for that year.

    For 2011 you can buy back the difference between what you receive, which is 2/3 of the locality pay rate for your region, and the full locality rate for your region.

    But in 2012, you receive your full locality rate anyways, so there is nothing to buy back.

    No matter how much COLA you received, you can only buy back up to the full Locality rate for that year.


Limits for High Income Earners

  • Special limits around $155,000

    There's another funky rule that your combined base pay + locality pay can not exceed the rate of basic pay payable for level IV of the Executive Schedule (approx $155,000). A few exceptions are listed in section 5304(g) of title 5 of the US Code.

    This affects how much COLA you can buy back. It's a fairly complicated and quirky exception.


Limits to Which Years You Can Buy Back

  • You can only buy back COLA for time you actually worked in 2010 and 2011. In 2012, you'll be getting the full Locality rate for your region, so there is nothing to buy back.

    So if you retire in 2011, and your High-3 would include time from 2009, 2010 and 2011... you can only buy back COLA for the time you worked in 2010 and 2011.

    There is nothing you can do about your pay in 2009... it is what it is.

    The transition started on the first pay period in 2010 - so that is the first time that you are allowed to buy back COLA as Locality Pay.


Let's look at an example about buying back COLA as Locality Pay for federal retirement...

Example of Buying Back COLA as Locality Pay For FERS

Say you're planning on retiring on 12/31/2012, and your High-3 Salary will be counted off the last three years of your career.

For easy numbers, we'll say your base pay (before Locality) is $100,000. And it's $100,000 for 2010, 2011, and 2012. Even though you probably would have had some increase in pay, step or grade... we're trying to keep the example as simple as possible.

In 2010, you received $4,720 in Locality Pay. If Locality pay was not being phased in, you would have received the full RUS Locality Rate of 14.16%, which would have been $14,160. You can choose to buy back the difference ($9,440). For a FERS, 0.8% of $9,440 is about $76.

In 2011, (using the Alaska Locality Pay Rate) you received $16,460 in Locality Pay (2/3 of 24.69%). If you had received the full rate of Locality at 24.69%, you would have received $24,690. You can buy back the difference of $8,230 for 0.8%... which is approximately $66.

In 2012, you received the full Alaska Locality rate. Since you receive the full Locality rate this year, there is nothing to buy back.

If you retire on 12/31/2012, and do not file an election to buy back COLA as Locality, your High-3 for retirement would be $115,290.

But if you do file the election, and pay approx $142 (plus some interest) to buy it back... your High 3 salary will be $121,180.

buy back cola, cola locality pay, fers retirement


So how much would this increase your federal pension?

Let's say you had 30 years of service, and were retiring under FERS at your Minimum Retirement Age of 56...

Before the buy back, your FERS pension would have been...

30 years of service x 1% x $115,290 = $34,587/12 = $2,882 a month

If you did file the proper election and buy it back, your FERS retirement pension would be...

30 years of service x 1% x $121,180 = $36,354/12 = $3,029 a month

A difference of $147... every month... for the rest of your life.

In the example, you paid $142 (plus a fairly small amount of interest)... and your FERS retirement pension will be increased by $147 every month... you broke even just after a month.

Same Example, for CSRS

Now we'll take the same example, but show the effects for a CSRS federal employee.

The differences here will be the cost to buy back COLA as Locality, the impact on your federal pension, and how long it will take you to break even.

To buy back the COLA in the example, a regular CSRS will pay 7% plus interest. Special Provisions CSRS would pay a higher percentage.

So the cost for a Civil Service Retirement System federal employee to buy back the COLA here would be $1,237 (plus interest).

If you retire on 12/31/2012, and do not file an election to buy back COLA as Locality, your High-3 for retirement would be $115,290.

But if you do file the election, and pay approx $1,237 (plus some interest) to buy it back... your High 3 salary will instead be $121,180.

cola locality pay example, locality buy back, civil service retirement system


So how much would this increase your CSRS pension?

Let's say you had 30 years of service, and were retiring under CSRS on 12/31/2012 at age 56...

Before the buy back, your pension would have been...

$115,290 x 5 Years of Service x 1.50% = $8,646.75 .... plus
$115,290 x Next 5 Years x 1.75% = $10,087.88.... plus
$115,290 x Last 20 Years x 2.00% = $46,116.00

$8,646.75 + $10,087.88 + $46,116 = $64,850.63 / 12 = $5,404 a month

But if you file the proper election and buy back COLA, your pension would be...

$121,180 x 5 Years of Service x 1.50% = $9,088.50 .... plus
$121,180 x Next 5 Years x 1.75% = $10,603.25.... plus
$121,180 x Last 20 Years x 2.00% = $48,472.00

$9,088.50 + $10,603.25 + $48,472.00 = $68,163.75 / 12 = $5,680 a month

A difference of $276... every month... for the rest of your life.

So in the example, you paid $1,237 (plus a fairly small amount of interest)... and your CSRS retirement pension will be increased by $276 every month... you'll break even around 5 months.

Retiring Soon?

Everyone's personal situation is unique. But it almost always make sense to buy back your COLA as Locality for retirement.

Be sure to take a look at this *before* you file your federal retirement paperwork.

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