Purchase of Air or Ghost Time with 401k transfer

[judgejkh]

Hello,

I have the opportunity to purchase 2 and 1/2 years of Air time with my state which would allow me to retire at age 51 (January 2019). My retirement factor is 2.75% per year and must work 27 years for full retirement (or until reach normal retirement age). I can transfer the funds from my 401k but it would deplete most of my 401k. Basically, by buying the time, I can retire at 75% of my salary (presently $112,500). Most who have bought the air time consider it an 8%+ return on investment. Those who began employment after 2001 are no longer eligible to purchase Air time so I'd imagine it's a good thing, in that sense (actually I'm eligible to buy up to 5 years Air time). Another option is to not buy the time, leave the 401k funds alone (I contribute 5% of my salary and 6% to retirement each month) and retire with a 10% penalty on my monthly benefit at the same age. Considering the deductions that are being taken from my salary for Fed tax, State tax, Social Security, Medicare, Retirement, 401k, etc. the 10% penalty would result in "roughly" my take home pay being what it is now (without some of the related employment expenses such as driving, etc). Of course, I can work part-time (or even full time although full-time is not what I consider early retirement and why I'm here asking the question . I am under no time constraints to do this at the present but am beginning to ponder the thought.

Thanks for having me on the forum. I'm sorry that this somehow ended up under "Confused about dryer sheets"; please excuse me due to being new to the forum. I know others have asked questions about purchase of air time before but I wanted to ask because it would pretty well deplete my 401k funds. Thank you.

[pb4uski]

So the incremental benefit of acting would be $8,438 a year ($112,500 * 75% *10%), but you don't say what the incremental cost is other than it would deplete your 401k.

How much of a benefit could you buy if you used the buyout amount to purchase a SPIA? See immediateannuities.com. Is it more or less than the $8,438 a year?

One benefit of buying a SPIA is that you could buy one that will make payments for your remaining life or a certain period, ensuring that your beneficiaries benefit from the annuity even if you get hit and killed by a beer truck walking home from the annuity saleman's office.

[judgejkh]

The cost to buy the 2 1/2 years is roughly $110,000!

[Mulligan]

Quote:

Originally Posted by judgejkh The cost to buy the 2 1/2 years is roughly $110,000!

These things are supposed to work out actuarially if done right. I was able to take advantage of buying 4 years right before I stepped up significantly in salary so I was able to recieve about $15k plus cola off approx. $100k purchase.
I wiped out my 403B to purchase the years. If I hadn't I would have just worked the 4 years anyways and still received the additional 15k. So I really in essence used the money to buy four years of my life and freedom from work. It doesn't appear you are going to work longer to recover the purchased time, so your decision will be a little tougher.
I would make sure your pension system is strongly funded before I would consider buying years though.


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[pb4uski]

So is my understanding correct that you will pay $110,000 at age 51 and receive an additional $8,438 a year for the rest of your life? or the rest of your life and the life of your spouse (if applicable) whoever lives longest?

If the above is correct is seems to me to be a good deal as the payout rate is 6.76%. BTW, this is not a 6.76% return on investment as a good portion of every benefit payment is simply a return of a portion of your $110,000.

Beyond that though... how financially strong is the pension plan? If it isn't in good financial shape then there is no sense in doubling down on a bad situation.

[MissMolly]

Welcome to a fellow Kentuckian! I, too, am a retiree in the State Retirement System. I bought 5 years air time many years ago (back in 1999) and it was much, much more affordable then than it is now. Although it was still a chunk of change for me at the time, it allowed me to retire after 22 years with full benefits. I have not regretted it. For me, it was worth it to get out 5 years sooner, and the cost was less than 1 year of my benefits I am receiving now. I also paid with my Air Time with my 401K money. Good luck to you.

[judgejkh]

Quote:

Originally Posted by pb4uski So is my understanding correct that you will pay $110,000 at age 51 and receive an additional $8,438 a year for the rest of your life? or the rest of your life and the life of your spouse (if applicable) whoever lives longest? If the above is correct is seems to me to be a good deal as the payout rate is 6.76%. BTW, this is not a 6.76% return on investment as a good portion of every benefit payment is simply a return of a portion of your $110,000. Beyond that though... how financially strong is the pension plan? If it isn't in good financial shape then there is no sense in doubling down on a bad situation.

The Retirement Plan is strong and stable for Judiciary in KY, thankfully. I think where others come up with the 8% ROI is the 1.5% annual COLA. You've hit on the sensitive part of the issue (for me) and why it makes it difficult for me to do it. Yes, my wife would receive the benefit upon my death but my son could only receive until age 21 (he's 14 now) if my spouse predeceases me. I was attempting to preserve the money in my 401k for his endeavors and legacy (hopefully medical school). I have purchased a separate life insurance policy for his benefit though. I suppose he will benefit from my monthly pension too, so it may not be a concern in that regard. Thank you so much for replying to me!

[pb4uski]

I don't think your son is a good reason for not doing it, that is what the life insurance is for. If that issue is a hang up for you, just buy some more life insurance and make him the beneficiary.

[judgejkh]

I guess that I should clarify the effect of buying the 2 1/2 years on my situation. If I buy it, my benefit increases by 6.875% and I do not incur that 10% penalty for early retirement (if I retire at 51). Thus, the net effect is 16.875% and I would retire at 74.25% of my then salary (at age 51, January 2019). I would be subject to federal tax but not the other deductions I mentioned earlier. I was considering the term "deferred comp/401k" on my drive to work today and thought "it's a way to start drawing the benefit earlier (and hopefully longer if my life is long and prosperous). I realize there are ways to access the money before age 59 1/2 but going by that rule it would allow me to start receiving 8+ years earlier!

I was wondering if any of you (who receive a pension) have considered what your "break even" point is? That is, considering all the deductions that are taken out of your salary that are not taken out of your retirement! That is probably the number that I need to be most concerned with. I am told it's 70-80% in KY (dependent upon lifestyle, etc) so that should put me right in the middle.

Thank you and for those of you who've retired; enjoy your day! For those of us who haven't, it's another day closer .

[Mulligan]

I imagine you are pretty close. 30 years in our system is supposed to equal net retirement pay to net work pay. I went a bit light retiring with 28 which was about 67% of gross work pay. I began retirement net pay maybe $200 short of working net, but subsequent colas have pushed me higher than what I netted working.
Terms of working pay deductions would be a bit different than yours though. I had 14.5% pretax withheld from check for pension, along with 6% state tax, Medicare, fed 25% bracket, with no Social Security withheld.
Really the best way to determine (and easiest) is just get on an online tax calculator and put in your income and allow for state tax (if any).
These calculators will plug in your standard deductions so you should get a very close idea to what you will net each month after you divide by 12 income left over from taxes owned.


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[judgejkh]

I found out today that the cost of the purchase of the 2 1/2 years airtime=$57,000. Therefore, it would not deplete my 401k and I could repay most of the cost of the transfer itself by age 51 (and let the money be an investment until age 59.5). One financial adviser told me this was a "no brainer" since I could either retire at 51 (at 75% of my salary) or continue to work until 55 and gain the retirement benefit increase 6.875% (2.75/year) by buying the air time, that would be guaranteed. Airtime must be a good deal because it was eliminated for employees in KY beginning after 2002. Still, it's a chunk of money and does require selling of shares of 401k. Of course, that involves market speculation too whereas the purchase of "air time" would be a guaranteed return (and basically a way to start receiving the benefit 8 years earlier). Thanks for any opinions.