Update - Buying back years of service credit (was - Hello, I'm new here)

[Sue J]

Hello all. My husband and I are both 52 and we are seeing the next decade sneaking up on us and we are putting together our retirement plans. I've always been a saver, he's more likely to spend than I am, but in general we are both financially conservative. I run the finances in the family.

Here is our current situation. Hubby has been in his job for 18 years. He works for a local county agency. He does not pay into Social Security, instead he pays into our state's PERS (Public Employee Retirement System). When we graduated from college in 1977 he worked 5 years in another PERS job and he left that job to get his Master's Degree. In 1981 we took out the PERS money from his 5 years, paid taxes and a 10% penalty and used the rest to help pay for his graduate school.

His education was an excellent investment which allowed him to earn enough for us to be a one income family. We are very pleased with how it all turned out.

Here we are, 25 years later and we have the opportunity to buy back the 5 years of PERS service. We would have to pay back the $4146 that he borrowed, plus 26 years of interest ($13,915) for a total of $18,061. The way I figure it, we could pay this back through payroll deductions at $100 per pay, 26 pays a year. He's pretty sure he can have this deducted Pre-tax. Over the next 7 -7.5 years (approx) he would be paid in full. By that time he will have 25 years of service plus the 5 that he'd buy back. He'd be 59 and have 30 years of service credit.

Working this out on paper, this additional 5 years of service would add almost $500 a month to his monthly pension. It looks to me like the cost would be paid back after 3 years. ($500 x 36 months =$18000)

This looks to us like the obvious step to take. I'm posting the details here because I'd like to know if there is something in this picture that I am not seeing. I'm wondering if being IN the situation makes me too close to decide objectively.

Alternatively, we could take the $100 from every paycheck and invest elsewhere, possibly in an IRA or a 403b. But I worry about risk.

In the meantime, I am working part time, specifically for the Social Security credits. When I stopped working to raise the family I only had 33 credits. I will reach 40 in 2008. And I don't spend any of my earnings, I opened an IRA and deposited my entire income.

Now I'll go browsing through the forum and try to get to know some of you.

Sue J.

[yakers]

Hi & welcome. The buyback decision takes a little calculation and includes other issues. We bought back 1 1/2 years of work time on my wife's teachers retirement. As I figured it it came out almost exactly to the return we would get putting that much into a Roth IRA or maybe any long term investment. But we wanted the cash flow and had other ways to make investments to diversify our income flow. Sometimes buying back govt time is more compelling but hers was break even. So do the math and see if it is worth it and what else you could do investing the money.

[jdw_fire]

Quote:

Originally Posted by Sue J Here we are, 25 years later and we have the opportunity to buy back the 5 years of PERS service. We would have to pay back the $4146 that he borrowed, plus 26 years of interest ($13,915) for a total of $18,061. The way I figure it, we could pay this back through payroll deductions at $100 per pay, 26 pays a year. He's pretty sure he can have this deducted Pre-tax. Over the next 7 -7.5 years (approx) he would be paid in full. By that time he will have 25 years of service plus the 5 that he'd buy back. He'd be 59 and have 30 years of service credit. Working this out on paper, this additional 5 years of service would add almost $500 a month to his monthly pension. It looks to me like the cost would be paid back after 3 years. ($500 x 36 months =$18000) This looks to us like the obvious step to take. I'm posting the details here because I'd like to know if there is something in this picture that I am not seeing. I'm wondering if being IN the situation makes me too close to decide objectively. Alternatively, we could take the $100 from every paycheck and invest elsewhere, possibly in an IRA or a 403b. But I worry about risk.

Welcome Sue,

To give you a good answer we are going to need more details, like how is the pension computed (i.e. is it like the fed's FERS where you get 1% * #years of service * avg of high three years of salary or what), what is your husband's likelyhood of getting any salary increases between now and the time he retires, if you invested the money how would you invest it (i.e. what is your risk tolerance), is the pension COLAed to CPI. To provide an answer in context to your retirement picture we would also need to know how does the anticipated pension amount compare to your anticipated retirement expenses, value of other assets and how are they invested?

I understand that this is alot of info but funding a retirement is usually complicated and I would not want to mislead you with an answer based on partial info.

jdw_fire

[Sue J]

His pension is computed as 2.2% of his Final Average Salary times years of service. So 30 years = 66% FAS is the highest 3 years. He's been at the top of his pay rate for 4 years, but they are adjusting the rates and he just got a 2.5% increase. I'm not counting on any more raises, but it's possible there may be small ones in the next 7 years. There's is a 3% COLA.

As for our retirement expenses. The house will be paid off in 3 years. We have 3 years left on a car loan and we keep cars a loooooong time. Hubby currently drives a 1995 vehicle, we will replace that one when the other car loan is over. We live below our income now and our house is the biggest expense. One 20 year old son still in college with 2 years left. A 22 year old son who graduated from college and works. He lives at home for now and pays a nice "contribution to the household".

Our biggest asset is our house and we have a 6 month emergency fund in an online savings account earning 5.05%. Another emergency provision is that hubby has built up 15 weeks of paid vacation time. If he left his job he would be paid his full salary for 15 weeks.

I only use credit cards if they pay a cash reward and I pay the balance every month. We have a 0% card with a balance to help with college expenses.

Outside of the pension plan and our emergency fund our only other investment is my very small IRA (invested in a CD) from my part time job.

My risk tolerance is low. I'm concerned about turning on the TV and finding out that I just lost a chunk of earnings because of world events or politics or something else out of my control.

I'm wondering if paying another $18,000 into the same PERS fund is putting all our eggs in one basket.

Being that we were a one income family all these years our focus was saving for college and paying bills. We never had excess money to invest in things like mutual funds or stocks, etc. Now we have a little extra and we are looking around the corner at our 60's and trying to find the best move.

Thanks for the help.

Sue J.

P.S. What's with the "dryer sheets"? Being frugal all my life, I tear mine in half and only use them in loads of laundry that require them. But I'll admit to throwing away dryer lint. Am I supposed to be saving that?

[REWahoo]

Quote:

Originally Posted by Sue J P.S. What's with the "dryer sheets"?

http://early-retirement.org/forums/i...sg7215#msg7215

[Sue J]

Oh, wow. Thanks for the link. I'll read the rest later but for now I feel like many of us have a little something in common.

[jdw_fire]

Quote:

Originally Posted by Sue J Outside of the pension plan and our emergency fund our only other investment is my very small IRA (invested in a CD) from my part time job. My risk tolerance is low. I'm concerned about turning on the TV and finding out that I just lost a chunk of earnings because of world events or politics or something else out of my control.

Sue,

I apparently wasn't clear in my post (i'm sorry) but since you gave a mixture of dollar amounts for some of your numbers and percentages for others I am only left to give you an answer that may have some ambiguity in it. The facts that I will use to provide this answer are 1) buying back the service time will be worth $6000/ year in a pension that has a 3% COLA, 2) you are very risk averse (you current investments are in CDs), 3) your retirement income will mainly be provided by your husbands pension.

Using FIRECalc (a retirement planning tool provided on this website) to get $6000/yr of spending power for 30 years using investments like CDs you would need to have an asset base of $213K (a 2.82% SWR) and there is no way putting $100 every 2 weeks into CDs for 7 years would provide you with that (at 5% interest it would get you about $22K). Therefore, even considering the ambiguity I mentioned earlier, it is a good investment for you to buy back the service time.

Quote:

Originally Posted by Sue J I'm wondering if paying another $18,000 into the same PERS fund is putting all our eggs in one basket.

Yes, you are putting all your eggs in one basket, so you need to consider how strong is that pension fund and how strong is your state, but it is probably safer than alot of companies.

[d0ug]

Welcome to the board.
Most people that don’t plan for the future usually don’t have one. I see that you are so congratulations and I think everything will work out for you just great.

[donheff]

I don't think you need any study. $18,000 investment to get $6,000 per year for life -- probably inflation protected and with an option for spousal survival. That is a 33% SWR. If the amounts are real run to the bank and take a loan out before they change their minds. If that was a $180,000 investment it would be a different story -- are you sure you have your numbers right?

[MooreBonds]

Quote:

Originally Posted by Sue J Our biggest asset is our house and we have a 6 month emergency fund in an online savings account earning 5.05%. Another emergency provision is that hubby has built up 15 weeks of paid vacation time. If he left his job he would be paid his full salary for 15 weeks. ... Outside of the pension plan and our emergency fund our only other investment is my very small IRA (invested in a CD) from my part time job. ... My risk tolerance is low. ... Being that we were a one income family all these years our focus was saving for college and paying bills. We never had excess money to invest in things like mutual funds or stocks, etc. Now we have a little extra and we are looking around the corner at our 60's and trying to find the best move.

Given that your only net worth consists of a generous pension, your home equity, and a 6 month emergency fund, do you know what the terms are of your husband's pension in terms of survivor's benefits? If the 2.2% * years of service only assumes that he draws on it, and a survivor's benefit would draw that benefit down, it's certainly something to include in your analysis.

If there is no survivor's benefit, you should probably think about either adding the survivor's benefit (hopefully one is available), or buying a term life insurance policy, since if your husband encounters an early death, you would be left with just your social security (from a working career that wasn't too heft in terms of SS taxes) and your home equity.

[Sue J]

Quote:

Originally Posted by jdw_fire Sue, I apparently wasn't clear in my post (i'm sorry) but since you gave a mixture of dollar amounts for some of your numbers and percentages for others I am only left to give you an answer that may have some ambiguity in it. The facts that I will use to provide this answer are 1) buying back the service time will be worth $6000/ year in a pension that has a 3% COLA, 2) you are very risk averse (you current investments are in CDs), 3) your retirement income will mainly be provided by your husbands pension. Using FIRECalc (a retirement planning tool provided on this website) to get $6000/yr of spending power for 30 years using investments like CDs you would need to have an asset base of $213K (a 2.82% SWR) and there is no way putting $100 every 2 weeks into CDs for 7 years would provide you with that (at 5% interest it would get you about $22K). Therefore, even considering the ambiguity I mentioned earlier, it is a good investment for you to buy back the service time. Yes, you are putting all your eggs in one basket, so you need to consider how strong is that pension fund and how strong is your state, but it is probably safer than alot of companies.

The specifics are that he makes $65,400/year. Each year of service credit at 2.2% is worth $1438 a year. But we would choose the retirement option that would be a reduced amount but for both of our lifetimes. If he died first I would continue to get the same amount rather that a smaller amount. This would be 79% of the full benefit.

25 years full benefit = $35,970 x 79% = $28416/year or $2368 a month
30 years full benefit = $43,164 x 79% = $34099/year or $2841 a month

That's a difference of $473/month. I did these calculations before his recent raise of 2.5%.

I agree that this looks like a wonderful thing to do. I will reread his PERS newsletters again, but it always looked pretty strong. The PERS program was mandatory so we had no choices. His employer also offers a 403b, but there is no employer match. We are in the 15% bracket now and will still be there after retirement. Reading online about 403bs it seems like a lot of people are dissatisfied with their options and discouraged with the fees.

Our home is worth about $150,000 and we owe $12,700 at 2.99 fixed.

It's looking very obvious that we should go ahead and start buying back the service credit. I just wanted an outside opinion from people who know more about retirement than we do. I was afraid that I wasn't seeing something because I'm too close to the situation.

Thanks so much for all the help and responses. You seem like a great group of people with a lot of knowledge and experience. And a good sense of humor.

Sue J.

EDIT to respond to -

Quote:

Originally Posted by MooreBonds Given that your only net worth consists of a generous pension, your home equity, and a 6 month emergency fund, do you know what the terms are of your husband's pension in terms of survivor's benefits? If the 2.2% * years of service only assumes that he draws on it, and a survivor's benefit would draw that benefit down, it's certainly something to include in your analysis.

I know what happens if he dies after retirement, with the plan I mentioned earlier I would continue to get the same amount. If he dies before retirement, I'm not sure what happens. I will check that out.

Quote:

If there is no survivor's benefit, you should probably think about either adding the survivor's benefit (hopefully one is available), or buying a term life insurance policy, since if your husband encounters an early death, you would be left with just your social security (from a working career that wasn't too heft in terms of SS taxes) and your home equity.

We do have term life insurance on both of us. I'd have to double check but we have 20 year terms that I think we started at age 40 or 42. I learned the TERM LIFE vs WHOLE LIFE lesson early on!

[Coach]

Quote:

Originally Posted by Sue J P.S. What's with the "dryer sheets"? Being frugal all my life, I tear mine in half and only use them in loads of laundry that require them. But I'll admit to throwing away dryer lint. Am I supposed to be saving that?

Sue, clearly you've found a new home here. Welcome!

Coach

[Sue J]

Thank you for all the responses. We've decided that buying back the years of service credit is a very good idea and should be our top priority.

We've weighed the options of doing this pre-tax through payroll deductions and it has it's drawbacks. In the system that he's in you can do pre-tax payments but once you start you cannot increase, decrease or discontinue payments until the entire service credit is repaid or until you terminate employment.

If you pay back with payroll deductions after tax, you can increase, decrease, discontinue, start up again and pay lump sums. Being that we are in the 15% bracket now and will still be in the 15% bracket in retirement, unless rates go up, we've decided that paying with after tax money would be the way to go.

I've been reading a lot of intelligent posts in these forums and it sounds like a good idea to have some tax free income in retirement and the 15% tax now is a known factor vs. who-knows-what down the road.

We played with some numbers and decided to buy back half the time with cash from our savings and then pay back the rest with after tax payroll deductions, about $200 a month. The interest on the amount we have to pay back is accruing at 6%, our savings is at 5%.

It felt good to make the decision and make a plan.

And then yesterday I got a credit card offer in the mail. 2.99% FOR LIFE on balance transfers. I worked out the numbers and even though I hate to pay a balance transfer fee, it would definately be worth it to owe money at 2.99% instead of 6%!

The credit card offer will only allow up to $11,000 so we will still pay $7000 - $9000 out of savings and then do a balance transfer for the remainder. I called and asked questions about minimum monthly payments and a few other questions and this is very do-able.

The upside to this is the lower interest rate and the idea that my husband will own the 5 years additional service credit immediately rather than accumulating it slowly as we pay back through the PERS system.

The downside is that this will show on our credit reports as a hunk of credit card debt. We both have very good scores and we won't be needing a mortgage, but possibly a car loan in the next 3-5 years.

So thanks for all your comments. I'm enjoying the forums and learning a lot, everyday.

Sue J.

[chris2008]

Go for it and then use all extra income to pay back the card asap.
I would do more than minimum payments per month. The interest looks small but it reduces your profit from the buy-back.
The card I would freeze or cut directly after arrival.

[OAG]

SueJ: I would suggest you look into Pentagon Federal Credit Union (www.penfed.org) for your CD's and/or future Car Loans. They have some of the best insured rates in the nation and generally low rates on car loans. Look at the membership requirements which are very liberal -- worst case you would have to pay a one-time $20 membership to a group that is granted membership.

[Texas Proud]

I have not read the whole thread (to many long posts)....

BUT, I have never seen a buyback that should not be done... the extra pension is worth more than buyback...

Now, buying 'extra' years is a different matter... they are a closer call..

[Sue J]

Quote:

Originally Posted by chris2008 Go for it and then use all extra income to pay back the card asap. I would do more than minimum payments per month. The interest looks small but it reduces your profit from the buy-back. The card I would freeze or cut directly after arrival.

We won't be seeing the extra income for a while, he's not retiring just yet, he's hoping to stay for another 7 years and get to 30 years at age 59 but he will be eligible to retire at age 55 with a reduced benefit.

Yep, that card will go in the drawer with all the other cards that we never use. I only use specific cards if they have a cash rebate and pay the balance every month.

We plan to pay more than the minimum.

Quote:

Originally Posted by OAG SueJ: I would suggest you look into Pentagon Federal Credit Union (www.penfed.org) for your CD's and/or future Car Loans. They have some of the best insured rates in the nation and generally low rates on car loans. Look at the membership requirements which are very liberal -- worst case you would have to pay a one-time $20 membership to a group that is granted membership.

Thanks, I looked at Pentagon Federal Credit Union when someone posted a link in another topic, I think it was about a CD Rate. I'll keep that in mind. I didn't realize you could pay to join.

[jazz4cash]

Quote:

Originally Posted by Texas Proud I have not read the whole thread (to many long posts).... BUT, I have never seen a buyback that should not be done... the extra pension is worth more than buyback... Now, buying 'extra' years is a different matter... they are a closer call..

Someone at Ray Lucia's seminar had a similar question...at first Ray thought it was not worth buying the time....after asking a few more questions, he suggested that it was attractive after all and added " I've never seen one of these gov't service buyback programs that was NOT a good deal for the employee."

I skipped thru some posts also, but I am amazed that you would consider doing after tax if you have the option. I also wondered what is the interest rate as it may be more attractive to invest outside and buy the time all at once (assuming after tax payments).

[Texas Proud]

Jazz,

I think you are suggesting that you do not put money into the system and then late in your life buy it back (if I am reading your post wrong, let me know)...

From the people I know that are in these systems, this is NOT possible. They take out the money while you are working. Usually the buyback is if you quit and took out your money AND then went back to the same system. They will let you put your money back in with interest... but, the payback is a lot more than what you contributed which is why it is a good deal...

Now, the buying 'extra' years... it is according to how long you had worked. My sister was at 41 years when she retired... buying more years (up to 3) cost almost as much as an annuity, so it was not a great deal.

So, buy back service years YES, buy extra years (from what I have seen) NO..

[Sue J]

Quote:

Originally Posted by jazz4cash Someone at Ray Lucia's seminar had a similar question...at first Ray thought it was not worth buying the time....after asking a few more questions, he suggested that it was attractive after all and added " I've never seen one of these gov't service buyback programs that was NOT a good deal for the employee." I skipped thru some posts also, but I am amazed that you would consider doing after tax if you have the option. I also wondered what is the interest rate as it may be more attractive to invest outside and buy the time all at once (assuming after tax payments).

We are still waiting for the paperwork so nothing has actually happened yet. We are considering after-tax because we are in the 15% bracket now and will be in the 15% bracket after retirement, unless tax rates rise, which is probably more likely than rates falling, although they may stay the same. Also, if we pay back with pre-tax through payroll deductions we cannot increase, decrease or stop the deductions once they start. I like to leave my options open. Life happens, things change.

The interest rate accruing on the money we had refunded and now want to pay back is 6%, our money is in an online savings account earning 5.05%. So far the plan is to pay half up front out of savings and pay the other half from a HELOC and then very quickly do a balance transfer from a 2.99% credit card to pay off the HELOC.