By George Ray

In a previous post (Get Credit for Non-Deduction Service ASAP), we covered an issue that could potentially cost you tens of thousands of dollars over the course of your retirement. The issue is getting credit for service that you performed for which a deduction was not taken from your pay and contributed to the Civil Service Retirement and Disability Fund. As you now know (if you read the earlier post), you can receive credit for this service (making it ‘creditable’) by paying a deposit for it.

When discussing non-deduction service during a benefits training program, I suggest that there are three logical questions that you’ll need to answer before you can decide if making a deposit makes sense. By the way, these questions should also be asked if you’re considering making a re-deposit (i.e., replacing contributions that you took out after leaving service previously) or making a deposit for military service (i.e., military service that wasn’t credited toward a military pension). This is primarily a ‘numbers issue’, so here are the three questions:

1. How much do I owe?

The first, and probably most logical question, when deciding to make a deposit will be ‘how much do I owe or how much will it cost me?’. Without knowing the answer to this question first, you won’t be able to answer the next question.

Your agency can assist you in getting the answer and has software that can accurately compute the amount of civilian deposits (and a military deposit too), but before requesting assistance, you’ll need to help your agency by putting together some additional information for the calculation. You’ll need to know:

When the service occurred (what is the start date and end date?)
How much were you paid during that time (do you have any payment records?)
Whether you were a FERS- or CSRS-covered employee during the service time

If you don’t have this information, ask your agency for help. Getting the information will provide them with what they need to determine the total amount of the deposit including the interest that must be paid. They will also be able to estimate the amount of your pension without making the deposit, and how your benefit will increase if the deposit is made. Your agency’s benefits specialist should be able to assist you. Once you have this information, the next question will likely be . . .

2. Can I afford to pay it?

This is a question that your agency can’t answer. You’ll need to answer this question yourself; however, that doesn’t mean that you must do it alone. You’ll certainly want to discuss the issue with your spouse and should get help from your financial adviser (who better to help with a numbers issue?).

The deposit can be made by paying it all at one time with a single check. Do you have the resources to write a check for this amount? Where will the payment come from? Will it come from savings? Will it deplete your emergency fund? (If you can’t write a check for the total amount, you can pay it back in installments.)

The amount you’ll need to pay back will be smaller if you begin earlier in your career because less interest will have accrued. Unfortunately, most employees have a greater available cash flow to be able to make the deposit or make payments towards it later in their careers when their pay checks are typically larger. Although the amount of the deposit may be smaller, making it while on a lower salary earlier in your career while also paying the mortgage and for all the things the kids need could be tougher on your budget.

Consider if it will affect your ability to make contributions to your Thrift Savings Plan (TSP). You’ll want to make sure that you can continue to contribute at least enough to receive the full amount of agency matching contributions. Also look at the effect that it may have on your other savings programs.

Will it negatively affect your lifestyle? Will your spouse accept ‘Sorry honey, we can’t afford dinner and a movie this weekend because I’m still making deposits to get credit for that darned non-deduction service.’? Most Feds have told me that their spouses wouldn't find that answer acceptable.

The last question to be answered is the most important and has the most impactful long-term consequences. It is . . .

3. How will it affect my retirement check?

Asking this question makes a lot of sense. If you’re going to pay a bunch of money to get credit for this service, you should be asking ‘is it worth it?’ That’s what we’re talking about here. How much larger will your retirement check be each month if you make the deposit? As I mentioned above, your agency should be able to provide you with the answer.

But, just as importantly, how long is the ‘payback period’? In other words, how long will it take you to get back the money that you paid in to increase your benefit (and gain service to retire earlier)? If the amount of time to ‘get paid back’ for your deposit is relatively short, then it’s likely worth it to make the deposit. If you’ll need to still be around at age 89 before you recover the amount you paid, you make want to consider your current age, health, family longevity, and other factors that could make getting it all back questionable.

A Few Tips Before We Finish

Here are a few tips that didn’t make the previous post, but are important things to do if you decide to make a payment to get credit for this service.

When making deposits, be sure to keep copies of your application and any related information that you’re sending, as well as documentation that you receive from your agency.
Have copies of all paperwork placed into your official personnel folder. (I’ve heard from more than a few employees that made a deposit but told me there wasn’t any record of it right before they were ready to retire. They may have had to dig through their files to find copies, but those records came in very handy when proving the payment had already been made.)
Also, when making deposit payments to OPM, pay by check and keep a copy of the canceled check or checks. This will prove that your check was received and cashed.

(If you have other tips or experiences you’d like to share when it comes to deposits, comment below or let me know.)

Conclusion

Making deposits to get credit for service could help you to retire earlier and with more money in your retirement check. Start with my “3 Questions You Must Answer Before Making a Deposit” and get the numbers from your agency so you’ll know whether it makes sense for you. Then, enjoy your retirement -- but bigger and sooner.