Episode 23 – The importance of service credit
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS. Today we’re diving into the topic of service credit. And the reason this is so important is because the amount of service credit you have when you retire affects your pension amount, how much you’re getting paid.
So, if you missed some of those credits while you’re working by taking time off for things like maternity leave or National Guard service, then you need to take some steps to restore that service credit. Seth, you said that especially affects teachers a lot.
Seth
It’s really common for folks in teaching to go take half a year off or a year off from employment or take a year sabbatical and they will miss out on service credit on the retirement credit for that time when they’re away. I used to have a colleague here at DRS who would say that nobody feels like they’ve got too much service credit when they retire. Everybody always wants more.
That’s especially true for people who are close to retirement. It’s like when you’re thinking about retirement in your late fifties or sixties, you’re looking for all the service credit that you might have missed. And one of the reasons we want to talk about this now is because it’s usually people in their twenties and thirties who missed the credit that don’t think about purchasing that time back.
Jenny
Yeah, so it’s based on a particular formula. It’s a percentage of generally one or 2% x your average salary, x the number of years of service credit. And so, this particular number creates how much DRS is going to pay you each month of your retirement.
Seth
I always like to think about like simple sort of ways. If you have 25 years of service credit and you’re a Plan 2 member, you’re going to 2% times the years your work times your average salary, so 25 years x 2% is 50%. So, you’re to get 50% of your average salary. So, when you think about that in terms of just the years you have, it’s a pretty straightforward…you just double the number of years you have, that’s the percentage of salary you’re going to get.
And one thing that oftentimes confuses people about service credit years, because we talk about service credit ‘years’, is people think they have to get to a round number. They think I have to get to 25 years or 20 years or 24 years. And one of the things we want to make sure people realize is that that we prorate. For every month you work more than 90 hours, you get a service credit.
And so, if you have four and a half years, you’re going to get well, actually, that’s not good cause you’re not vested because you’re only get 9%.
Jenny
If you work six and a half years…
Seth
Yeah, exactly. Then you’re going to get 13% [of your salary] you know. So that’s the way to think about it. For a lot of people, they want to get to a round number. They think “I started to work in April, so I want to end work in April” or whatever, you know, that mindset is. But the service credit is really month by month.
We look at each month the person works. If they work more than 90 hours, they get a full credit. That’s as simple as it is.
Jenny
Yeah, and I think this is a great point to say that if you’re curious how much service credit you’ve accrued, you can actually go into your online account, log in, click on service credit, and it shows you a full chart of all the months. And hopefully you just see a little number one for every little month that you see in there.
But if you do see some zeros, there’s obviously some options where you can go in and restore that service credit.
Seth
I’m glad you mentioned that chart because in some ways it’s like the most boring thing you can look at. If you had a very super consistent career and just worked every month. It is just all ones. Yeah, you might see some haves, you might see some quarters, you might see some zeros, and those are months where you didn’t earn a full service credit.
And for some people that makes sense. They’re a part time employee or a seasonal employee, and so they might work less than 90 hours If a person works more than 70 hours, but less than 90, they’ll get half a credit. If they work some hours, but less than 70, they’ll get a quarter credit. So, for some folks in some positions, that totally makes sense that you’re going to see this kind of fluctuating amount of credit.
But for a lot of folks, if they’re working more than 90 hours, they’ll see one month. Now, if you take a break, if you take a couple of years off employment, you’re not going to have any credit during that time period as well. And so that’s something to be aware of. That’s credit that you can’t purchase back.
You weren’t employed, so you’re not eligible for credit. But when you start back up employment, the credit just starts adding on to what you already have in your account.
Jenny
Yeah, that’s a really key distinction. But you could still use those years together. Yeah, it’s still combined. You said, like looking at that number of in your retirement years, how many years you actually worked for the state. So, if you worked there for ten years and then you took a five-year break and you come back and you work for another five years, you’re looking at 15 years.
Seth
That’s exactly right. I think sometimes people forget about that, that they have that credit kind of in the bank. This comes in, I think a lot of times when people come back maybe from a second career, you know, they worked for a few years as a teacher and then they went and did something else. And then in their forties and fifties, they come back to teaching and they’re like, “Oh, that’s right, I still have those two or three years.”
And so that just picks right back up. And I think that’s helpful for people to remember that like they’re not losing out on anything because they took that break. It’s just starting back up where it stopped. But yeah, we really wanted to talk about today about those breaks while you are working. Yeah. Whether that’s paternity and maternity leave or sabbatical or an on-the-job injury where a person might be out off of work and not using leave, vacation, leave or sick leave. And what happens in those cases.
Jenny
Definitely. Yeah. So, let’s jump into that a little bit about how to restore the service credit. So, say that I go on to my online account, I look at all those little [numbers] grid and see that I have a couple of zeros for my service. How would someone go about restoring that particular credit?
Seth
It depends a little bit on why you are off of work, on what the steps are going to be. But the first step always is to contact the DRS and let us know, “hey, I’m missing some service credit during this time period. And here’s why.” I was out. I got called up for National Guard duty or I took a three-month sabbatical or whatever that reasoning is, let the DRS know and let us know that you’re interested in repurchasing that credit that you missed.
And what DRS will do at that point is we’ll reach out to your employer and ask in most cases, like what would your salary have been had you worked and we’ll confirm why you were out on leave. And then once we get that information back, we’ll provide you as an employee with a bill for how much it would cost to purchase that service credit back.
And that can really vary depending on how long ago it was. There can be interest accrued on it. In some cases, you only have to pay back your portion of the contributions. In some cases you have to pay your contributions and your employer’s contributions so we can provide you some kind of rough estimates of what those costs could be. And give you a sense.
I think one of the things that’s really hard for people to make that purchase back is that you were off of work during that time, so you didn’t have salary coming in. You don’t have earnings. And so, it makes it more difficult to find the funds to pay for that lost service credit. You’re like, I’m already struggling with whatever is going on possibly. And so, I’m not interested in purchasing that time back now, which is a very rational decision when you’re in your twenties and thirties and then a person in their fifties or sixties is like, “Oh, I really wish I had two or three more months of credit because I’d like to have a little bit higher of a pension.”
Jenny
Oh yeah, exactly. And I think that’s where it’s good to kind of look at it and say, “okay, this is going to affect my pension later when I retire.” So, like you said, even though it may be a large bill, if you’re looking at how much you’re getting paid as a pension over your lifetime from age 65 to when you pass away, that could be a huge amount of money.
Seth
Yeah, it really can. One of the things we’ve talked about a number of times on the podcast is about like helping your future self out and that’s really what you’re kind of doing by saying, “Hey, I’m going to take this sacrifice and pay this bill now and it’s going to increase my future pension 20 or 30 years down the road.”
And one of the things I think is really important for people to realize is with those bills, they could use other retirement funds to pay for that bill. So, if you have a Deferred Compensation account or a previous like 401k or something and you want to roll that money in to pay for that bill, that might be a really effective use of your retirement savings.
Jenny
Okay. But again, that’s only something that I could do when I retire, like if I’m 30…
Seth
No, you can make that transfer at the time you’re purchasing the bill.
Jenny
Okay. Yeah. So, if I’m 35 and if I see that I have some missing service credit, I can go ahead and use some of my DCP funds that I have saved up to restore that service credit.
Seth
Yeah. Basically, you’re rolling the funds over into another retirement account. And this retirement account you’re rolling into doesn’t have an account balance. It’s got a service credit balance. And you’re increasing that service credit balance to increase your future pension benefit. And I think a lot of times people don’t think about that. And that’s one of the big advantages of we’ve talked about this a lot of times as well on the podcast.
It gives you more options. “Well, am I going to want that $20 or $30,000 in the future in my DCP or what? I rather have a higher monthly pension benefit.”
Jenny
Yeah. So, let’s talk a little bit about the five year period too, because this is a big part of service credit. So, if you wait more than five years from when you return, the leave can be much more expensive.
Seth
Yeah.
Jenny
So that’s why it’s good to go into your online account and kind of check maybe once a year to see if you have any of that missing service credit.
Seth
Yeah, for a lot of our bills, there are a lot of the types of service credit you can purchase. There’s a five-year window and if you wait longer than those five years, you can still purchase it. But the purchase is basically the full cost of it. It’s like how much is it going to increase your pension benefit as well?
So, it’s kind of a break even or a wash for folks. And so, for a lot of people they think, well, I’m not really going to do that. It’s so much more expensive. But I think one of the things to be aware of when you’re looking at your service credit online is that there’s a little bit of a lag like in the information that your employers are sending to us.
And I think for teachers, sometimes this is really confusing because they’ll see that they don’t have service credit in the summer, and that’s because they didn’t work any hours in the summer. But there are rules for school district employees for whether you’re a para educator or a teacher or a custodial staff or transportation, that they will still earn credit in the summer as long as they worked 810 hours in the school year.
And so, we don’t know that until the end of the school year, until like August. So, what I would say is just be patient, wait until September, see if that full service credit…because you said, you know, look, check once a year. And so, maybe for teachers, it makes sense to check in December. You know, when you’re kind of doing your annual housekeeping of your retirement to check your make sure your service is there.
But if you just see like the last month is missing, that’s usually just like catch up. Yeah, you wait another month or two and it’ll be there.
Jenny
Yeah, but if it’s been more than a year and you see some zeros, then that’s kind of your indication to be like, “Oh, maybe I should ask DRS about this.”
Seth
Yes. Something’s missing. And if you know that you went on leave, if you know that you were going to be out… I had a friend who’s a teacher who took six months off. I told him when he left, make sure to contact us when you come back if you want to purchase this time back. So, I think that’s something that you can be aware of.
“Oh, I had this on-the-job injury. I’ve now come back to work.” Now I know I’ve got this missing credit that I’m going to have the opportunity to purchase back and least consider how much it’s going to cost.
Jenny
Yeah, that’s great. Yeah. So, we talked about if you’re on leave for maternity leave or a National Guard service or a sabbatical, but what about if I have to take leave for Paid Family Medical Leave or like you said, an injury through L&I?
Seth
Yeah. This oftentimes confuses people if they have like, supplementary disability insurance. An employee will feel like they’re still receiving a payment. And so, they think like, “Oh, I’m still receiving a payments, I’m getting retirement credit.” And retirement credit is only based on the hours you work. So, if L&I is paying you a disability benefit or Paid Family Medical Leave is paying you or you’re receiving some sort of supplementary disability payment, those don’t count towards your retirement.
So you’re still losing the retirement service credit or you’re missing out on the retirement service credit.
Jenny
So that’s where you might go into your online account and you’ll see those zeros there through in your service credit.
Seth
Yeah, that’s exactly right. And I think that’s where it can sometimes be confusing for folks because they still feel like they’re receiving salary, but it’s not actually salary through your employer. Now, it gets confusing because, like, you paid into your insurance program or you paid into the Paid Family Medical Leave, like that’s all being paid for, but that’s supplementary payments that aren’t really coming from your employer.
Jenny
Yeah.
Seth
So, I think that’s really something to keep in mind. And once again, it’s the reason people sometimes forget about the retirement piece. They’re like, “Oh, I’m still receiving a paycheck, but it’s not my paycheck from my employer for hours worked or for vacation leave or sick leave.” So, if you’re using vacation leave or sick leave, that’s like you worked that’s coming from your employer. There’s hours associated with it. And so, you’re still getting retirement credit for that time.
Jenny
Yeah. Cool. Okay.
Seth
One other thing. There’s something called purchase service credit. And folks, you can purchase up to 60 months or five years of credit when you retire. Yeah. And that is not real service credit. It’s really you’re purchasing an annuity and we’ve talked about annuities on other episodes.
Jenny
Yeah. Or like how I like to think about it is you’re purchasing lost credit. Yeah. Like I can’t retire at 50 and buy five years of service credit and say that I retired at 55.
Seth
That’s exactly right. It’s not… It’s sometimes referred to as air time. It’s not like real time, but really it’s just you’re exchanging only at time of retirement. You’re exchanging some lump sum of money for a monthly benefit. And so oftentimes people think like, “oh, I want to get to 30 years of retirement credit, so I’m going to purchase… and I’ve got 27 years….
So, I’m going to purchase three years.” It’s not real credit. So, it doesn’t get you to that point. But, you know, if you had three kids and you were out on maternity leave three different times for a year, you could purchase each one of those and get to 30 real years of credit. Yeah.
Jenny
So, really just those back payments.
Seth
Yeah. It’s credit that you lost out on because you were off the job for some reason but still employed. Because that’s the other thing that sometimes confuses people is like, oh, I took two years off of employment and then I went to a different employer. That’s not actually time you can purchase back either.
Jenny
Cool. Great. Is that everything?
Seth
I think it’s almost everything. I think we also want to make sure to remind our audience if they have other retirement subjects they want us to talk about, especially DRS specific things. They can email the podcast at drs.podcasts@drs.wa.gov
Jenny
Yup. And of course, we also have a number of videos that you can watch on our website that talk about service credit and restoring that service credit.
Seth
Yeah, we’ve got webinars, we’ve got recorded videos, there’s articles on the website and you can really dive deep into some of these topics. And then like, we said at the start, if you have more questions about your specific service credit, look in your online account and if you see that you’re missing credit, it’s a really great time to contact DRS and see if you can purchase that time back.
Jenny
Cool.
Seth
All right. Thanks, Jenny.
Jenny
Thank you.
[music outro]
Disclaimer
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