Catch-62

This week, I present a cautionary tale, from which I hope you'll learn a valuable lesson: If you want to be sure your retirement reflects your full career of service, you need to understand your benefits long before you actually retire.

The story involves a Vietnam veteran named Jerry who served in the Air Force from June 1956 to July 1976. Jerry then took a civilian federal job with the Navy and completed another 18 years of service. He retired in 1994 at age 57 with 38 years of combined federal service.

Jerry chose to waive his military retirement when he retired from the civil service. That way, he'd be eligible to retire before he turned 60 using both his military and civilian service to compute his Civil Service Retirement System benefit. Under CSRS, post-1956 military service counts toward your retirement even if you don't make a deposit into the system to receive credit for it, unless -- and this is a big "unless" -- you become qualified for Social Security retirement benefits. (For more on military service credit deposits, see Military Service Payback, Feb. 24, 2006.)

Jerry was too young for Social Security when he retired, and was unaware of the time bomb that started ticking when he didn't make a military service deposit. He didn't know that when he reached 62, the Office of Personnel Management would no longer credit his 20 years of active duty service toward his CSRS retirement. And he had already permanently waived his military retirement, so there was no hope of reinstating that benefit.

Imagine receiving a retirement check computed at 72.25 percent of your high-three average salary for five years and then receiving a notice that as of your 62nd birthday, this benefit was going to be reduced to 32.25 percent of your high-three. In Jerry's case, his retirement was reduced from $1,711 per month to $800 per month. Jerry did qualify for Social Security benefits at 62, but they were not enough to replace the full amount of his retirement that was lost.

If Jerry would have realized the importance of paying his military service credit deposit, he could have avoided the $1,000 a month reduction and still would have been entitled to receive his Social Security benefit. The military deposit is intended to protect your civilian federal retirement benefit; it has no affect on benefits paid by Social Security.

This problem could have been avoided if Jerry had received proper retirement counseling before he left the civil service. He says no one told him about the military service deposit requirements. If only someone would have provided him with two retirement estimates -- one showing his retirement before 62 and the other one showing what would happen if he didn't make a deposit.

Jerry took his case to the Merit Systems Protection Board and then to the U.S. Court of Appeals. In both venues, he was denied the opportunity to pay the deposit for his military service. The rules state that the deposit must be paid prior to retirement. But many CSRS retirees don't understand the effects of their decision until they are trapped in a "Catch-62."

It's been 13 years since Jerry retired, and eight years since he started getting a drastically reduced CSRS retirement. He still writes to me every so often to find out if there is anything that can be done to get credit for his 20 years of military service. Every time he does, I feel bad that there's nothing I can do to help this patient military veteran and longtime civil servant.

Even if I can't help Jerry, I hope that if you haven't retired yet, you'll take the time to understand the decisions you must make. (If you are considering combining your civilian and military careers, you can find additional information in my column, Mixing Civilian and Military Retirement, June 30, 2006).

It's likely there are thousands of Catch-62 victims out there -- and there will be more in the future. I meet veterans at pre-retirement seminars every week who do not understand the consequences of service credit deposit decisions. So if you think that Jerry is an isolated case, think again.

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.