There are some occasions when it makes sense to keep your money where it is, whether that's equity in your house, your Thrift Savings Plan account, the bank, mutual funds or under the mattress. Other times, it's clear you should pay the deposit. It all depends on the effect on your retirement.
Many people want a human resources specialist at their agency to tell them whether they should make a deposit. But the answer to the question depends on many factors your HR office might not be aware of. Here are some questions to ask yourself:
- Am I a good investor?
- How much risk am I willing to take in my investments?
- Will I have enough income in my recurring retirement benefit checks to pay my monthly expenses?
- Is it more important for me to have a larger monthly retirement check or to have a lump sum of money available for future use?
- Is it realistic to believe that my money will perform better where it is?
- Is this a no-brainer decision or a six-of-one, half-a-dozen-of-the-other situation?
- How is my health?
- What is my life expectancy based on my family history?
- Is there someone else who is dependent on me for income?
Once you've taken those factors into consideration, there are some other basic facts that can help you determine whether you should pay. Let's look at some scenarios.
Almost Certainly Should Pay
If you have a period of service for which you can pay a deposit so it can be included toward your eligibility for retirement, then you might be able to retire sooner than you thought. Another way to look at this is that if you don't pay the deposit, you will have to work longer (unless you are not old enough to retire, in which case you still would have to wait until you meet both the age and service requirements).
The following types of service will not count toward eligibility or computation of retirement benefits unless a deposit is paid (in other words, this is an all-or-nothing decision:
- Civil Service Retirement System: Post-1956 military service for employees hired on or after Oct. 1, 1982.
- Federal Employees Retirement System: Service not covered by retirement contributions or covered by refunded CSRS contributions that is now creditable under FERS.
- FERS: Service covered by refunded FERS contributions.
- FERS: Post-1956 military service (unless you are receiving military retirement pay and decide not to combine your military and civilian retirement benefits).
If paying a deposit makes the service creditable in the computation of your retirement, then the value of the service covered by the deposit will be computed at the following rates:
- CSRS: 2 percent times high-three average salary times years and months of service -- if you have more than 10 years of service. If you have less than that, it's 1.5 percent times the high-three times five years, plus 1.75 percent times the high-three times five years.)
- FERS (for employees who retire younger than 62 or, if over 62, employees with less than 20 years of service): 1 percent times high-three average salary times years and months of service.
- FERS (for those over 62 with at least 20 years of service): 1.1 percent times high-three average salary times years and months service.
For example, suppose Brandon, who is covered under FERS, worked for one year under a temporary appointment and did not have retirement coverage. He would owe 1.3 percent of his base pay during the temporary appointment. This is computed as 1.3 percent times $24,000 (his base pay at that time), or $312. He also owes interest that increases the amount he owes to $800. If he pays the deposit for this service, it will add one year of service toward being eligible for his retirement. It also will add one year to the computation of his retirement.
So, if Brandon's high-three average salary is $65,000, then this year will be worth:
So for $800, he gets an increase in his retirement of $650 a year for the rest of his life. That's a no-brainer.
Probably Should Pay
Some types of service count toward retirement eligibility, but not in the computation of retirement benefits. (Remember, the amount you owe is based on service performed earlier in your career at lower salaries, and the computation of your retirement is based on your highest salaries near your retirement.)
Under CSRS, these include:
- Service performed on or after March 1, 1991, and covered by refunded CSRS contributions.
- Service not subject to retirement deductions and performed on or after Oct. 1, 1982.
You still can be eligible to retire without paying the deposit for such service, but you'll have to pay it if you want the service to be factored into your retirement benefits.
It Won't Make Much Difference
Some service will count toward eligibility and computation of your retirement whether or not you pay for it. If you don't pay a deposit for such service, your retirement will be reduced by a relatively small amount. So the decision on whether to pay depends on your financial acumen and how much money you need in your monthly retirement check.
Under CSRS, this includes service not subject to retirement deductions performed before Oct. 1, 1982. For such service, your retirement benefit will be reduced by 10 percent of the unpaid deposit.
If you have service that was covered by CSRS contributions that were refunded because you had a break in service and you applied for the refund before March 1, 1991, then an actuarial reduction will be applied to the retirement.
This one is sneaky: Some service is credited toward retirement eligibility whether or not you pay for it. This service also counts in the computation of your retirement benefit, but if you qualify for Social Security when you retire from CSRS or when you turn 62 (whichever is later), then the service is no longer credited in the computation of your retirement unless the deposit was made prior to retirement.
This applies to post-1956 military service for CSRS employees hired before Oct. 1, 1982.
No Credit at All
Finally, it's worth noting that under FERS, some service is not creditable at all: that which is not covered by retirement deductions and was performed on or after Jan. 1, 1989. Unless Congress changes the law, such service counts only toward leave accrual and Social Security benefit computations. 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.