Q: I am currently in the FERS system and my salary is $122k/per year. I switched from CSRS to FERS when that option was open in the ’90s.
Prior to that, part of my CSRS service (total 20 yrs) included working 5 years as a “local hire” overseas (Pre 10/01/1982 CSRS Deposit). I’m now looking at retirement–I’m planning on 62–and my human resources office has presented me with the option of depositing $9,645.00 (roughly 3K + 6K interest). If I don’t deposit for the period I was not under CSRS, then I will receive $80.38 less per year in retirement (provided I retire now).
I may be doing the math/figuring wrong, but if I make the deposit, then it will take roughly 10 years to start reaping the benefit of spending the $9645.00. Is that correct? If so, I’m wondering if it is worth it. I have the money available to do this, I’m just wondering if it is a smart move.
A: Your calculations were correct. The break even period for pre 10/01/1982 deposits is ten years. The things you want to consider in whether or not to pay it back are:
- How likely are you to live another ten years? Once you reach the ten year period (assuming no opportunity cost) you’ve broken even.
- What is the opportunity cost likely to be? How much could you reasonably expect to earn by keeping the $9,645 invested rather than using it to pay the deposit?
Of course, both of the considerations require that you make assumptions about the future (i.e., life expectancy and rate of return). Whether you choose to pay it back or not, you’re not shooting yourself in the foot.
The best thing about your situation is that, the time in question is CSRS and the effect of paying or not paying the deposit is (relatively) negligible. Pre-10/01/1982 CSRS deposit service counts for both your eligibility to retire and in your computation; all you face is an annual reduction of 10% of the amount you owe (principal and interest). You’re in a better position than CSRS folks with 10/01/1982 or later deposits and FERS folks with deposit service prior to 01/01/1989 – they have to make a deposit (at a higher interest rate, too) to get any credit at all for their temporary time. FERS individuals with deposit service 01/01/1989 or later get no credit for the time and are not allowed to make a deposit, even if they want to.