Expert's View

You may never have (probably never have) heard the term "present value factor." Present value factors are a set of numbers based on economic and demographic assumptions that change only rarely—most recently, in June of this year—that can have an impact on a retirement annuity under some circumstances.


For both CSRS and FERS, they apply to the reduction in your annuity if you elect a survivor annuity for someone you marry after you retire. And for retiring employees, they apply if you are going to receive the alternative form of annuity or are getting credit for certain service with NAF instrumentalities. For CSRS retiring employees alone, they also apply if you don’t redeposit the money you took as a refund for service before October 1, 1990.

As determined by the Board of Actuaries of the Civil Service System, which covers both CSRS and FERS, those present value factors have a broad span. If you are under CSRS, they range from 290.4 at age 40 to 44.1 if you are 90. For FERS it’s 185.8 to 43.3.

To illustrate how present value factors affect an annuity, I’ll use the example of a CSRS employee who owes a redeposit because he took a refund of his retirement contributions when he left government, and later returned. As noted above, that service had to have been performed before October 1, 1990. Now that he’s looking ahead to retirement, he’s considering whether he ought to redeposit that money plus accrued interest or let his annuity be reduced.

The formula used to determine the reduction is simple. You divide the present value factor for your age into the redeposit you owe, and you’ll have your answer. For example, suppose you met the age and service requirements to retire of 55 and 30, had a high-3 of $80,000, and owed a redeposit of $18,000 (refunded amount plus accrued interest, which does pile up). If you made a redeposit, your annuity would be $45,000 per year or $3,750 per month.

If you chose not to redeposit the money, the actuarial reduction would depend on your age. At age 55, your present value factor would be 230.4. Therefore, your reduction would be $78.13 ($18,000 divided by 230.4), resulting in a new monthly annuity of $3671.88. On the other hand, if you were age 62, the numbers would look like this: present value factor 193.2, annuity reduction, $93.17 ($18,000 divided by 193.2), new monthly annuity, $3,656.83.

The question before you is this: is it better to redeposit that money and have a higher annuity for the rest of your life or accept the reduction and put your money someplace else? It wasn’t that long ago that the answer was simple: accept the reduction and invest the difference. These day, with interest rates near zero and the market not doing all that well, there’s a good deal more to consider.

As for those changes in June, the net effect was to somewhat reduce the monthly reduction on the assumption that recipients will, on average, be paying back over a longer period. That is, the assumption is that you will live longer in retirement. So that’s something to cheer about, at least.