Tag Archives: ERS

National Retirement Security Month

October is National Retirement Security Month. It’s a time to consider the importance of saving and to think about potential sources of income in retirement. Financial security doesn’t just happen—it takes preparation and time. Even if retirement seems far off, it’s never too early to start planning.

NYSLRS and Retirement Security

Check out these blog posts to learn more about how your NYSLRS pension and other sources of retirement income can provide retirement security.

Your NYSLRS Pension—A Defined Benefit Plan

As a NYSLRS member, you are enrolled in a defined benefit plan, also known as a traditional pension plan. When you retire, you will receive a monthly pension payment for the rest of your life. Your pension will be calculated using a preset formula based on your earnings and years of service—it will not be based on the individual contributions you paid into the system.

The 3-Legged Stool Approach to Retirement Confidence

Your NYSLRS pension is a good reason to be optimistic about your finances in retirement. But there is more to a financially secure retirement than having a pension. Think of retirement security as a three-legged stool. Each leg is a source of income to help support you when your working days are done.

Compounding: Use Time to Grow Your Money More

If you want to improve your chances of a financially secure retirement, your plan should include retirement savings. It’s important to start saving early so your money has time to grow. When you invest your savings in an individual retirement account (IRA) or a 401(k)-style retirement savings plan, you earn a return on your investment, and those returns are compounded.

Deferred Compensation: Another Source of Retirement Income

For greater financial stability and flexibility, you may want to invest in a deferred compensation savings plan. The New York State Deferred compensation plans are voluntary retirement savings plans like a 401(k), created for New York State employees and employees of other participating public employers.

Debt and Retirement

As you get close to retirement, it’s a good idea to take inventory of any debt you owe. Paying down your debt—including any NYSLRS loans—will help avoid a pension reduction and can give you more flexibility in retirement.

Visit NYSLRS at the New York State Fair

Find Unclaimed Funds at the State Fair

OSC’s Office of Unclaimed Funds booth will also be in the Center of Progress Building. An unclaimed fund is lost or forgotten money. If an organization such as a bank, insurance company, corporation or state agency owes you money but hasn’t been able to contact you, they turn that money over to the Comptroller’s Office.

You can Search for Lost Money and see if any unclaimed funds are yours. So far this year, State Comptroller Thomas P. DiNapoli and the Office of Unclaimed Funds have returned more than $332 million.

Special Fair Days

Wednesday, August 20

Opening Day

Thursday, August 21

Student Youth Day— Free admission for youths and students under 18 years old. ID showing date of birth may be requested.
Agriculture Career Day

Friday, August 22

Pride Day—The first state fair in America to host an official Pride Day to celebrate the LGBTQIA+ community.
New Americans Day
Family Fishing Day

Monday, August 25

Law Enforcement Day—Free admission for any active or retired law enforcement or corrections personnel with a badge or picture ID from the department where they are or were employed.
State Parks Day
Maple Day

Tuesday, August 26

Fire, Rescue and EMS Day—Free admission for any active or retired member of a fire department, emergency services or EMS organization with a picture ID from that department or organization.
Comptroller DiNapoli Visits the Fair—He is the trustee of the New York State Common Retirement Fund, the administrative head of NYSLRS and custodian of unclaimed funds. He will present area residents and organizations with unclaimed funds and stop by the NYSLRS booth.
Beef Day

Wednesday, August 27

Women’s Day
Sensory Friendly Day

Thursday, August 28

Armed Forces Day—Free admission for any active-duty service member or veteran with military identification (military ID card, form DD-214, or NYS driver license, learner permit or nondriver ID card with a veteran designation).
Dairy Day
Stomp Out Stigma Day

Friday, August 29

Native American Days—Free admission for all members of Native American tribes, no ID required.
Family Fishing Day

Monday, September 1

Labor Day

Requesting Additional Service Credit

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Service credit is a major factor in calculating your NYSLRS pension. You earn one year of service credit for each year of full-time employment with a participating employer. (Read about how you earn service credit when you work part-time or how school employees earn service credit). You may also be able to request additional service credit if you worked for your current or another public employer before joining NYSLRS, or if you served in the U.S. Armed Forces and received an honorable discharge from active military duty. In most cases, you have to purchase additional service credit, but it will usually increase your pension.*

You should request additional service credit as early in your career as possible, and you must do so before retirement. The sooner you purchase your credit, the less it will generally cost.

*There are certain situations where additional service credit may not increase your pension. For example, special retirement plans for police officers and firefighters allow retirement after 20 or 25 years of service regardless of age, but not all types of public employment count toward the 20 or 25 years in these plans. Contact us if you have questions.

How to Request Additional Service Credit

You can request additional service credit in Retirement Online.

Sign in to Retirement Online.
Look under My Account Summary.
Click Manage My Service Credit Purchases button.
Click Request Additional Service Credit link.

Service Credit for Previous Public Employment

Additional service credit includes work for an employer who later joined NYSLRS or for public employment before you became a NYSLRS member.

Example:
You worked at the town library while going to school and, as a part-time employee, you chose not to join NYSLRS. When you graduated and took a full-time job at the Town Supervisor’s office, you were required to join NYSLRS. You can request credit for the part-time service at the library.

When you apply:

Enter the name of the employer and the approximate dates you worked there.
Upload any proof you may have of your previous service. We will also reach out to your former employer, but you can expedite the process by providing payroll records such as W-2 forms or pay stubs when you submit your request.

You must have two years of service credit before additional service can be credited to you.

Military Service Credit

If you served in the U.S. armed forces, you may be eligible to purchase credit toward your retirement for your military service, regardless of whether your military service was before or after you joined NYSLRS.

There are different sections of the law that allow credit for military service. The amount of military service credit you can receive, and the cost (if any), will vary depending on which section of the law allows the credit. Reserve and National Guard service may qualify if it’s considered active duty.

When applying online:

Enter the branch of military in the field for employer and the dates of your service.
Upload a copy of your Certificate of Release or Discharge from Active Duty (DD-214) or an official document showing the dates of active duty service, the branch of military and the type of discharge (to receive credit for military service, you must have received an honorable discharge).

For certain military service, you must have five years of service credit before you can apply.

Reinstating or Transferring Membership

There may be other ways to increase your retirement service credit. If you had a previous membership in a New York State public retirement system and it was terminated, you may be able to reinstate your membership. If you still have an active membership in another public retirement system in New York State but you are no longer working for the employer that participates in that retirement system, you may be able to transfer your membership to NYSLRS.

For More Information

For more information, visit our Get Credit for All Your Public Service page or read our publication, Service Credit for Tiers 2 through 6 (VO1854).

Taxes and Your NYSLRS Loan

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If you’re thinking about borrowing against your retirement contributions, it’s important to understand whether your NYSLRS loan will be subject to taxes before you apply. Once you submit a loan application and we issue a check, you cannot return an uncashed check, and the loan fee is nonrefundable.

Determining the Taxability of Your NYSLRS Loan

When you apply for a NYSLRS loan, all your existing NYSLRS loans and any loans against other retirement plans will be used in calculating the taxability of a new NYSLRS loan. If you participate in another retirement plan offered through your employer, you must disclose existing loans and the contribution balances for the following types of plans:

Deferred compensation plan (457)
Tax sheltered annuity plan (403-b)
Qualified annuity plan (403-a)
Qualified trust (401)

If You Have Existing NYSLRS Loans

If you have one or more NYSLRS loans and are considering another loan, you’ll have two options:

Multiple loans. With multiple loans, you would take out a new loan in addition to your existing loan(s). Each loan would have separate 5-year terms and minimum payments. The minimum payments for all your loans would be combined into one total repayment amount, which would be higher than the minimum payment for a refinanced loan. However, your total minimum payment would decrease as you pay off each loan.
Refinance your existing loan. With refinancing, your new loan would be consolidated with the balance of your existing loan(s) into a single loan for the entire amount. The total loan amount would be spread over a new 5-year term with one minimum payment, which would be lower than the total minimum payment for multiple loans. However, refinancing would increase how much of your loan is considered a taxable distribution, which would either subject the loan to federal taxes or significantly reduce the amount of the loan to avoid any tax implications.

Understanding the Impact on Your Taxes

While a NYSLRS loan is exempt from New York State and local income taxes, it may be subject to federal taxes. If your loan exceeds certain limits, the Internal Revenue Service (IRS) will consider all or part of it as a “deemed distribution from a qualified retirement plan.” In other words, you will have to claim all or part of your loan as taxable income when you file your taxes the next year.

NYSLRS is also required to withhold a percentage of the loan for federal taxes, which will reduce the amount you receive. The tax withholding depends on your citizenship, so the loan application asks if you are a U.S. citizen, resident alien or non-resident alien. However, the amount withheld may not cover the total amount you will owe the IRS. For example, if you take a taxable loan before you turn 59½, the IRS may charge an additional 10 percent tax penalty.

If you take a taxable loan, we’ll mail a 1099-R by January 31 of the following year to file with your taxes.

Remember: Even if a portion of your loan goes to the IRS, you’ll still have to repay the entire amount, plus interest, to NYSLRS.

We recommend that you speak to a tax advisor or a NYSLRS customer service representative before taking a taxable loan. For more information about taking a loan from NYSLRS, visit our Loans: Applying and Repaying page.

Ready to Apply for a NYSLRS Loan?

Retirement Online is the fastest and most convenient way to apply for a NYSLRS loan. When you use Retirement Online, NYSLRS receives your application immediately and can process your loan more quickly. Retirement Online will also let you know how much you can borrow, your repayment options and whether your loan is taxable.

If you don’t have an account or for help signing in to an existing account, check out our Retirement Online tools and tips for step-by-step instructions to register, reset your password, unlock your account and more.

Making Loan Payments if You Leave Public Employment

Making Loan Payments

If you leave public employment, contact us as soon as possible so we can tell you the amount you’ll need to repay each quarter. You are responsible for the repayment of your loan.

Use Retirement Online

Even if you go off the public payroll, Retirement Online is the fastest and most convenient way to manage your loan payments. You can make additional payments or pay your loan in full at any time with no prepayment penalties.

Sign in to Retirement Online.
Look under My Account Summary.
Click Manage My Loans button.

If you don’t already have an account or for help signing in to an existing account, check out our Retirement Online tools and tips for step-by-step instructions to register, reset your password, unlock your account and more.

Pay by Check or Money Order

Make your check or money order payable to the New York State and Local Retirement System and write “loan payment” and your NYSLRS ID on your check so we can ensure it’s applied to the correct account.

Mail payments to:

NYSLRS
Attn: Accounts Receivable
110 State Street
Albany, NY 12244-0001

Making Loan Payments if You Leave Public Employment

Defaulting on Your Loan

If you fail to make quarterly payments or you do not repay your loan within five years, your loan will go into default.

If you default on your loan:

We’re required by law to report your outstanding loan balance to the Internal Revenue Service (IRS) as a taxable distribution to you.
You must include the loan on your federal income tax return for the year the loan defaults. We’ll mail a 1099-R by January 31 of the following year to file with your taxes.
If you are younger than 59½ in the year the loan defaults, the IRS may charge an additional 10 percent tax penalty.
You still owe NYSLRS the amount of the outstanding loan, which will continue to accrue both interest and insurance charges until it is paid in full. If you retire with the outstanding loan, your pension will be reduced. If you withdraw your NYSLRS membership, we will deduct the outstanding loan balance from the refund of your contributions.

Note: Defaulted loans do not appear on your credit history.

For More Information

For more information about your NYSLRS membership and benefits if you leave public employment before you are eligible to retire, read our blog post, Know Your Benefits: What If I Leave Public Employment.

For more information about NYSLRS loans, visit our Loans: Applying and Repaying page.

Applying for a NYSLRS Loan in Retirement Online

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If you are eligible to borrow against your retirement contributions, Retirement Online is the fastest and most convenient way to apply for a NYSLRS loan.

Eligibility is based on your tier. Generally, you’ll need to be on the payroll of a participating employer, have at least one year of service credit and have the required minimum contributions in your account. (Note: Retirees are not eligible for NYSLRS loans.)

Applying for a NYSLRS Loan in Retirement Online

Retirement Online is the Fastest Way to Apply

When you use Retirement Online, NYSLRS receives your application immediately and can process your loan more quickly.

To get started:

Sign in to Retirement Online.
Look under My Account Summary.
Click Apply for a Loan button.

As you work your way through the online application, you’ll see:

How much you are eligible to borrow with or without tax implications;
The minimum repayment amount; and
The expected payoff date.

For Tier 3–6 members, there’s a service charge of $45, which is deducted from your loan check when it is issued.

The current interest rate, which is fixed for the term of your loan, is 5 percent.

NYSLRS loans are exempt from New York State and local income taxes. However, a NYSLRS loan would be subject to federal taxes if it exceeds certain limits. Retirement Online will show you the maximum you can borrow without tax implications.

If you apply for a loan and already have one or more existing loans, you’ll have two options:

Multiple loans. With multiple loans, you would take out a new loan in addition to your existing loan(s). Each loan would have separate 5-year terms and minimum payments. The minimum payments for all your loans would be combined into one total repayment amount, which would be higher than the minimum payment for a refinanced loan. However, your total minimum payment would decrease as you pay off each loan.
Refinance your existing loan. With refinancing, your new loan would be consolidated with the balance of your existing loan(s) into a single loan for the entire amount. The total loan amount would be spread over a new 5-year term with one minimum payment, which would be lower than the total minimum payment for multiple loans. However, refinancing would increase how much of your loan is considered a taxable distribution. To avoid any tax implications when refinancing, the amount of your new loan would be significantly less than taking out multiple loans.

When Will I Receive My Loan Check?

NYSLRS mails loan checks once a week. To check the status of your loan application:

Sign in to Retirement Online.
Look under My Cases.

If your case status is Closed before close of business on Wednesday, your check will be in the mail that Friday.

You will also receive a confirmation letter when your loan case is complete. In your Retirement Online account, click the Find Documents link to search for correspondence.

Repaying Your NYSLRS Loan

Loan payments are deducted from your paycheck. After you receive your loan check, you should review your pay stub to confirm that your employer has started payroll deductions and is deducting the correct repayment amount.

If you choose to repay the minimum amount, the payment may increase periodically to ensure you repay the loan within the required 5-year period.

You can increase your payroll deduction amount, make additional payments or pay your loan in full at any time with no prepayment penalties. Repaying your loan sooner will reduce the total amount of interest you’ll pay on the loan.

Retirement Online is the fastest and most convenient way to manage your loan payments.

Sign in to Retirement Online.
Look under My Account Summary.
Click Manage My Loans button.

If you go off payroll, you must continue to make loan payments directly to NYSLRS and pay off your loan within the 5-year period. Otherwise, you will default on your loan. For more information, read our blog post about making loan payments if you leave public employment.

Retiring With an Outstanding NYSLRS Loan

If you retire with an outstanding loan, your pension will be permanently reduced. In most cases, you’ll need to report at least some portion of the loan balance as income to the Internal Revenue Service (IRS). If you retire before age 59½, the IRS may also charge an additional 10 percent penalty.

If you are close to retirement, use Retirement Online to check your loan balance and make sure you’re on track to repay your loan before you retire.

Note: Employees’ Retirement System (ERS) members can repay their loan after retiring. If you choose to pay back your loan after you retire, you must pay the full amount of the outstanding balance that was due when you retired in a single lump sum payment. Following full repayment, the reduction would be removed, and your pension benefit would increase going forward—the adjustment would not be retroactive to your date of retirement.

For More Information

For more information about NYSLRS loans, visit our Loans: Applying and Repaying page.

10 Things Retirees Should Know

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NYSLRS is one of the largest retirement systems in the world, administering benefits for more than 1.2 million members, retirees and beneficiaries. Take a look inside NYSLRS and brush up on your NYSLRS knowledge—here are 10 things retirees should know.

Not retired yet? Check out 10 Things Members Should Know.

1. Retirement Online is the Fastest, Most Convenient Way to Do Business With NYSLRS

Retirement Online is the fastest way to manage your NYSLRS account. Skip printing forms, having them notarized and sending them through the mail. When you submit your requests through Retirement Online, NYSLRS has them immediately, and your changes will be completed more quickly. It’s convenient and secure. Check out what retirees can do in Retirement Online.

2. Your Pension Benefits Are Secure

The New York State Common Retirement Fund holds and invests the assets of NYSLRS on behalf of members, retirees and their beneficiaries and continues to be one of the best-funded and best-managed public pension funds in the nation. Comptroller Thomas P. DiNapoli is the administrator of NYSLRS and trustee of the Common Retirement Fund.

3. It’s Important to Keep Your Contact Information Up to Date

Wherever retirement takes you, it’s important to keep NYSLRS informed of any changes to your contact information. That way, you’ll be sure to receive the tax information, news, correspondence and statements we send you. If you receive correspondence and statements by mail, it’s vital you review the address we have on file for you. Changing your address with the United States Postal Service (USPS) does not mean your records will automatically be updated with NYSLRS. To ensure you continue receiving mail from NYSLRS, you must submit a change of address directly to us. This is especially important if you receive your pension payment as a paper check.

4. ‘Go Green’ and Get Your Important Documents Sooner

You can help us ‘go green’ and reduce paper waste by choosing email as your delivery preference for correspondence and other important documents, such as your 1099-R tax form and Retiree Annual Statement. When you have something to view, we’ll send an email notifying you to sign in to Retirement Online. And it will save time—you’ll get access to your important documents sooner than printed copies are mailed. Learn how to get email notifications for important documents.

5. There May Be an Earnings Limit for Working After Retirement

As a NYSLRS retiree, you can work and still receive your pension. However, there may be a limit on how much you can earn each year without affecting your NYSLRS pension. An earnings limit of $35,000 generally applies to NYSLRS retirees who are under age 65 and returning to work for a public employer while receiving a service retirement benefit. However, the earnings limit for retirees employed by school districts or Boards of Cooperative Educational Services (BOCES) is suspended through June 30, 2027.

6. You Should Review Your Beneficiaries Periodically

Most NYSLRS retirement plans provide a post-retirement death benefit for beneficiaries of eligible retirees who die after retiring directly from service or within one year of leaving public employment. It’s a good idea to review your beneficiaries from time to time to make sure they reflect your current wishes. The beneficiary you named before might not be the one you would choose today. You should also review the contact information for your named beneficiaries so we can find them when needed and share this information about reporting a retiree’s death to NYSLRS with your survivors.

7. Adjust Your Tax Withholding Online

Most NYSLRS pensions are subject to federal income tax. If your last federal tax bill or return was not what you expected, Retirement Online is the fastest way to update your federal tax withholding. Changes submitted by the middle of the month will generally be applied to that month’s payment.

8. View Your Pay Stubs for Insight Into Your Monthly Pension Payments

Your pension pay stub gives you valuable insight into your monthly pension payment, including a breakdown of credits and deductions for health insurance, union dues, tax withholding or disbursements under a domestic relations order. Throughout the year, you can access your pay stubs online and see year-to-date totals.

9. Update Your Direct Deposit Information Online if Changing Banks or Accounts

Changing financial institutions or accounts will affect whether you receive your monthly pension payment. It’s important to update your direct deposit information with NYSLRS as soon as possible—and you can update your information quickly and conveniently with Retirement Online. Changes submitted online will generally be applied to your next month’s pension payment. Not using direct deposit yet? Don’t wait to receive a check in the mail—direct deposit is fast, convenient and secure. Sign up for direct deposit now and get your money sooner.

10. Generate a Pension Income Verification Letter Quickly and Easily Online

You may need proof of your retirement income for housing or as part of an application for the Home Energy Assistance Program (HEAP). With Retirement Online, you can quickly and easily generate a pension income verification letter any time you need one.

10 Things Members Should Know

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Retired? Check out 10 Things Retirees Should Know.

1. Retirement Online is the Fastest, Most Convenient Way to Do Business With NYSLRS

2. Your Pension is a Lifetime Benefit—And Your Pension Benefits are Secure

NYSLRS pensions are defined benefit plans, also known as traditional pension plans. When you retire, you will receive a monthly pension payment for the rest of your life. Your pension will be calculated using a preset formula based on your earnings and years of service—it will not be based on the individual contributions you paid into the system. Member contributions support the benefits earned by current and future retirees and are an important asset of the Common Retirement Fund, which holds and invests the money used to pay NYSLRS benefits. The Fund is widely recognized as one of the best-funded and best-managed public pension plans in the nation. Comptroller Thomas P. DiNapoli is administrator of NYSLRS and trustee of the Common Retirement Fund.

3. ‘Go Green’ and Get Your Important Documents Sooner

You can help us ‘go green’ and reduce paper waste by choosing email as your delivery preference for correspondence and other important documents, such as your Member Annual Statement. When you have something to view, we’ll send an email notifying you to sign in to Retirement Online. And it will save time—you’ll get access to your important documents sooner than printed copies are mailed. Learn how to get email notifications for important documents.

4. Your Tier Determines Your Benefits

Your tier, which is based on your date of membership, determines your benefits, such as eligibility for death benefits or taking a NYSLRS loan and the formula used in the calculation of your benefits.

5. Vested Means You Qualify for a Retirement Benefit

Becoming vested is a crucial milestone for NYSLRS members. It means you have earned enough service to qualify for a retirement benefit once you meet the minimum age or service requirements established by your retirement plan. All members who have at least five years of service credit are vested.

6. Review Your Beneficiaries Periodically

NYSLRS retirement plans provide death benefits for beneficiaries of eligible members who die before retiring. It’s a good idea to review your beneficiaries from time to time to make sure they reflect your current wishes. The beneficiary you named before might not be the one you would choose today. You should also review the contact information for your named beneficiaries so we can find them when needed.

7. Request Additional Service Credit as Early in Your Career as Possible

Service credit is a major factor in calculating your pension benefit. You earn a year of service credit for each year of full-time employment with a participating employer. You may also be able to request additional credit if you worked for your current or another public employer before joining NYSLRS or if you served in the U.S. Armed Forces and received an honorable discharge from active military duty. You must submit your request before retirement, and you should do it as early in your career as possible.

8. Estimate Your Pension

Finding out how much you can expect to receive is an important part of retirement planning. Most members can estimate their pension using Retirement Online in just a few quick and easy steps. Retirement Online uses your current earnings and service information to calculate your estimate, including your final average earnings (FAE) and the amounts for the pension payment options available to you. You can fine-tune your estimate or see how different choices would affect your benefit by entering different retirement dates or a beneficiary’s date of birth.

9. Supplement Your Pension with Retirement Savings

Think of retirement security as a three-legged stool. Each leg is a source of income to help support you when your working days are done. It’s important to understand all your potential sources of income to effectively plan for the future and boost your retirement confidence. Your pension can provide a significant part of your retirement income, but it’s a good idea to supplement your pension with retirement savings and start saving early so your money has time to grow.

10. Your Retirement Plan Publication is an Essential Resource

Your retirement plan publication is an essential resource that explains your NYSLRS benefits in detail—how long you’ll need to work to receive a pension, how your benefit is determined, what death and disability retirement benefits may be available, and more. You should consult it throughout your career, but it’s especially important to read as you prepare for retirement.

Public Service Recognition Week

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This Public Service Recognition Week, we proudly celebrate more than 713,000 members and 522,000 retirees of the New York State and Local Retirement System (NYSLRS) for their service to the people of New York State.

Origin of Public Service Recognition Week

This week was created in 1985 to honor those who serve our nation as federal, state, county, local and tribal government employees. Congress officially designated the first full week of May as Public Service Recognition Week. This year, it is being celebrated May 4 through 10.

NYSLRS Members Deliver Critical Services

Whether they are protecting public health and safety, driving our children to school or clearing snow from the roads, NYSLRS members deliver essential services New Yorkers depend on, and you can find NYSLRS members at all levels of government such as:

New York State;
Counties, cities, towns and villages;
School districts;
Correctional facilities;
Public libraries; and
Fire and water districts.

Many members and retirees also give back to our State by volunteering in their communities or supporting charitable causes. That’s in addition to the other important ways retirees contribute to New York State’s economy.

Comptroller DiNapoli’s Faith in Public Service

New York State Comptroller Thomas P. DiNapoli is the administrator of NYSLRS and trustee of the Common Retirement Fund. He began his own public service career at the age of 18, when he won his first election to become a trustee on the Mineola Board of Education. This made him the youngest person in New York State history elected to public office. He is also the second longest-serving Comptroller in New York State history.

Comptroller DiNapoli often speaks about the contributions New York’s public employees make to their communities and their State. He encourages young people to consider a career in public service. “It’s more than a job,” he says. “It’s a career with purpose.”

Compounding: Use Time to Grow Your Money More

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Financial security doesn’t just happen; it takes planning and time. You know you can count on your NYSLRS pension in retirement. But, if you want to improve your chances of a financially secure retirement, your plan should include retirement savings. It’s important to start saving early so your money has time to grow.

When you invest your savings in an individual retirement account (IRA) or a 401(k)-style retirement savings plan, you earn a return on your investment, and those returns are compounded. That means your money increases in value by earning returns on both the original amount and your accumulated profits. This is different than earning simple interest. Let’s see how they both work.

How Simple Interest Works

In banking, simple interest is a certain percentage you are paid on the money you put into your account. With simple interest, the amount of interest you earn is based on the original (or principal) amount of the deposit.

Let’s say you open a certificate of deposit (CD), which pays 5 percent simple interest if you agree to keep your money in the CD for a year. If you deposit $1,000 in January, you’ll have $1,050 at the end of the year. That’s $50 more than you started with, so you might decide to keep your money there for another year. With simple interest, the interest you earn the second year and every year after would still be based on the principal amount of $1,000—no compounding.

How Compounding Works

With compounding, your initial investment is reinvested along with your earnings. If you earn the same 5 percent, with compounding, it’s applied to the full balance of your account. So, you would still have that $1,050 at the end of the first year, but by the end of the second year you’d have $1,102.50 in your account instead of $1,100.

In this example, that’s just a difference of $2.50, but, over time, compounding can mean a difference of hundreds or thousands of dollars.

If you’re already building retirement savings, think about giving your savings a boost. If you haven’t started saving yet, right now is the best time to start. The New York State Deferred Compensation Plan (NYSDCP) is available to New York State employees and some municipal employees. Once you’ve signed up, your retirement savings—which may be tax-deferred depending on the plan you choose—will be automatically deducted from your paycheck. Remember, the sooner you start saving, the more time your money has to grow.