Buying service credit on a PERS pension

[skipro3]

I am retiring at the end of this year at age 56. I have a total right now of 39 years of service credit and have the option to buy 5 more. My final pension has several options but the one I'll choose is the one that pays the same amount through-out both my and DW's lives. The pension has a COLA of up to 5% including any years I choose to buy. The final pension for me and DW will be $69,550 before taxes the first year without the 5 year purchase and $79,500 with the 5 year purchase.
The cost is $131,000 for the 5 years. In a nutshell, $131,000 buys me $10,000 a year for the rest of my and DW's lives starting at age 56 with a 5% (max) per year COLA built in.
My retirement includes my medical, dental and vision. I have zero debt. I own my home free and clear and no other loans either. I can pay for this purchase with my 401K as a transfer. If I do, I'll have $250,000 left between my 401K and 457 accounts. I will receive $1,900 a month in 6 years at age 62 from Social Security and DW will receive $500 a month as well.
I am very conservative with investments having seen many market swings and not having the stomach to watch my money fluctuate like that, it's all in Wells Fargo Stable Return Fund M right now earning about 3% last year and about 1.75% this year.

So, does that sound like a good deal?

P.S. I asked this question several months ago, but I now have much more solid #'s for my calc's so I didn't want to dig the old one back up again.

Thanks!!!

****EDIT****
I want to add; my current budget is $4,500 take-home a month average and that covers 100% of my expenses. I imagine it will remain roughly the same, maybe drop a little but I wouldn't count on it.

[arebelspy]

Quote:

Originally Posted by skipro3 The cost is $131,000 for the 5 years. In a nutshell, $131,000 buys me $10,000 a year for the rest of my and DW's lives starting at age 56 with a 5% (max) per year COLA built in.

10k/yr. for a cost of 131k is a return of 7.6% per year. With full survivorship? And COLA'd?

Assuming the pension fund is stable, I say you should absolutely go for it.

[skipro3]

Quote:

Originally Posted by arebelspy 10k/yr. for a cost of 131k is a return of 7.6% per year. With full survivorship? And COLA'd? Assuming the pension fund is stable, I say you should absolutely go for it.

It's PERS in California. Is that stable? I'd think if PERS had troubles then there would be a whole lot of other stock market problems and it wouldn't matter where my money was unless it wasn't in the market at all.

PERS recently lowered their return yield on service credit purchase by .5%. However, I was already submitted and made the cut, so to speak of the higher yield. If I had applied after February, then it would only be 7.1%. I applied in October last year. I just got the final paperwork today to sign and commit last week. I have 30 days to sign and return or I have to start over and that would get me the lower rate.

[Accidental Retiree]

I am also a PERS retiree, although my pension is waaaay smaller. I learned a while ago about Windfall Elimination and Government Pension Offset that will both affect -- decrease -- my social security when the time comes to collect SS.

Have you accounted for those 2 offsets in your expected SS projections?

[skipro3]

Quote:

Originally Posted by Accidental Retiree I am also a PERS retiree, although my pension is waaaay smaller. I learned a while ago about Windfall Elimination and Government Pension Offset that will both affect -- decrease -- my social security when the time comes to collect SS. Have you accounted for those 2 offsets in your expected SS projections?

Windfall Elimination and Government Pension Offset doesn't affect me as my employer withholds Social Security taxes from my salary. Both those you mention kick in only if the employer you work for doesn't pay in to SS.

Quote:

Government Pension Offset: If you receive a pension from a federal, state or local government based on work where you did not pay Social Security taxes, your Social Security spouse’s or widow’s or widower’s benefits may be reduced. This fact sheet provides answers to questions you may have about the reduction.

Quote:

Windfall Elimination: If you work for an employer who does not withhold Social Security taxes from your salary, such as a government agency or an employer in another country, the *pension you get based on that work may reduce your Social Security benefits.

[Mulligan]

I purchased 4 service years in my retirement. Cost me a little under $100k, but it boosted my pension almost 17k (though I could have just worked the 4 years and saved the 100k instead). IF you know the system is secure its a no brainer to do it in my mind. But I would dig a little deeper just to know more before you do it as you are in essence doubling down on your pension and losing control of some of your assets in doing this. When you said PERS from California does this mean CALPERS? I looked at a recent article that had it about a 70% funded ratio with an assumed rate of return of 7.75%. This may not even be your specific pension. A 100% funded pension is what you would want, however, anything over 80% is suggested to be in a strong position. I am not a specialist in this area at all, and I don't know why 80% is considered good shape other than that is what I continually read. My pension fund is about 90% funded, so I feel pretty good about it. I would at least research and be aware of your pensions 1) funding ratio 2) assumed rate of return on investments of fund 3) political climate concerning pension systems in your state and the states financial resources to continue their funding part of the sysytem. For example some states are reducing or trying to eliminate COLAs for current retirees. What you do with the information, I do not know, but at least you know what you are getting into by essentially annuitizing more of your personal money into your public pension and losing control of it long term.

[Accidental Retiree]

I paid into SS for 21 years, in work I did outside the public sector as well as in some of my public sector work, and it's only after 30 years of SS payments that my SS would not be affected, as I understand it.

The decreases will be prorated, as best I can tell, but there will be decreases in my SS, both on my own record and when I claim on my husband's record, one day.

I am not a benefits expert; like many others here, I learn as I go along. Learning about how CalPERS and Social Security coordinate, if someone has NOT paid in to SS for a full 30 years, was something I picked up along the way, enough to at least ask questions about.

If you paid both SS and PERS for 30+ years, then I guess it must be the way your contract was negotiated, and it's interesting to see how different public sector contracts work.

[skipro3]

Thanks Mulligan. It is CalPERS but not as a state worker but as a Misc. worker. Actually I work for SMUD, the municipal electric company for Sacramento. I don't know how that ties in with the whole state worker thing, but for sure the press is sure beating up anyone with pension. The press isn't being fair about it either. When I made the decision to take the tortoise role in the race to retirement, I had the option to join up with the dot coms. Fortunes were being made by my old high school chums but I felt the sure thing with a career and a defined retirement was to my temperament. No one then said anything like, 'gee, the poor civil service worker isn't getting anywhere near the compensation we are getting, let's help them out.' Now that these entrepreneurs and other private sector workers are in the doldrums, they want to attack my method of preparing for my retirement. They played for years, thinking the world was theirs and the toys were owed them. So now when my ship comes in after years of austerity they want to take it away. And they can. With a vote. We'll fund illegal aliens with free health care, education, housing, even college scholarships but we'll demonize the civil service worker who's worked decades paying taxes and swapping pay raises for a pension.
I'll look into the exposure to risk that putting more of my cash into the PERS plan SMUD is part of. That's been one of my concerns and you hit my fear on the head; all the eggs in one basket and it's subject to uneducated or flat lied to voters to possibly take it away from me. There is one thing; seems the one sacred cow is the retirement pensions out there for those who are already in retirement. If their pensions are messed with, they are most likely going to go back to work at their old jobs and that's not going to be pretty.

Accidental Retiree; Yes, I paid both SS and my PERS for the full tenure as a civil servant, and every job I've ever worked for that matter. The SS website has all my personal info on that matter and it was the SS website that stipulated what my SS would pay out when I quit this year and begin to draw SS at 62.

[Indigo Mule]

Thank you, skipro3. I've been meaning to look at buying service credits myself, and I finally filled out the paperwork to see if the four years I worked in my 20s are something I can repay. From what the online calculators show, repaying is much more cost effective than buying "air time".

Your comment about temperament resonated with me. The biggest question for me is if I don't buy service credits, how would I invest that money? Would the rate of return be higher? Would it add more stress to my life worrying about it? Would I simply stick it into a totally secure but low-return account or CD?

I am looking at what my 80-year-old self would like me to have done. Would she be thankful for the extra monthly payment? Or will California have gone bankrupt and have tossed pensioners into the ocean? If California has a meltdown that severe, I don't think the alternate investment I could have made with the money is going to be much of a life preserver.

[Mulligan]

My mentality was essentially the same as yours. I think it is great for you that you have that old 3 legged stool for retirement. SS was not taken out of my paycheck, so the 15-20 years of non career SS that has been taken out of my other jobs will net me about $100 because the WEP is whacking it pretty hard. But if I continue to work part time the next 10 years or so I think I can get it up to $150! Like I said it probably is a good deal especially if things hold as is. But just think how much everything has changed in the past 10-12 years, and you could have a long retirement a head of you. I remember reading an article in Forbes or Fortune Magazine around 10 years ago where it basically said you were a fool if you were in a pension plan instead of a 401k. I essentially felt compelled to buy my years since I wanted to retire early and I will not get SS, and my nest egg will never be big enough to live off. But since you are getting a government pension and SS already, you will be going all in on the trust in the government to give you what they promised.

[Mulligan]

Quote:

Originally Posted by Indigo Mule Thank you, skipro3. I've been meaning to look at buying service credits myself, and I finally filled out the paperwork to see if the four years I worked in my 20s are something I can repay. From what the online calculators show, repaying is much more cost effective than buying "air time". Your comment about temperament resonated with me. The biggest question for me is if I don't buy service credits, how would I invest that money? Would the rate of return be higher? Would it add more stress to my life worrying about it? Would I simply stick it into a totally secure but low-return account or CD? I am looking at what my 80-year-old self would like me to have done. Would she be thankful for the extra monthly payment? Or will California have gone bankrupt and have tossed pensioners into the ocean? If California has a meltdown that severe, I don't think the alternate investment I could have made with the money is going to be much of a life preserver.

Im with you Indigo as I bought 4 years myself, but it may not be as simple as thinking if California has a severe meltdown and cant pay and you couldn't have done better. For example, maybe market returns 4% over the next 15 years so they look to cut back the pensions or COLAs because they weren't reaching the 7.75% assumed actuarial return over those years. 4% returns isn't a meltdown, but it didn't meet the projections to sustain the funding level. So it they did cut the pension 15%, you could supplement the difference with your cash sitting in a low paying CD, I Bond, etc. I don't want to portray myself as Mr. Doom and Gloom or as someone who knows the future because I don't. Im just saying there are other possible scenarios to think about which may not change the fact that the best thing to do is buy the years.

[skipro3]

Thanks again Mulligan. Yes indeed I would be relying on the government paying me what I was promised. However, as part of the baby boom generation, we hold a LOT of voting power. It's not a safe thing to piss off the people who will get you elected. Which means any changes will affect future pensioners, not existing ones. How is that going to be funded then if the market can't bounce back enough to make up the losses? Probably with the new hires. Here's the thing about that; I signed up with certain contracted agreements. Since then, new hires have signed up with their contracted agreements. We all expect to have what was agreed upon upheld. So, someone new hired who doesn't like the agreement offered to them doesn't have to accept the job. Just like I didn't have to accept the job when my predecessors had a better pension than I was being offered.
It wasn't very many years ago CalPERS was super funded for Public Agencies including SMUD. They had so much money that they told SMUD and other PA's to quit sending them money. The year was 2007. Meaning, things change.

[steelyman]

This is a very interesting discussion to me; thanks for starting it and for the contributions. The reason it is especially interesting to me is that it pertains to a similar decision I will have to make later this year. I am slated to formally retire in the fall and will be due a refund of the contributions I made during my working time that represented the survivor's benefit. Since I am single, that portion is to be returned to me. I have a couple of years of service credit that I am eligible to buy, and had intended to do so, but I am no longer sure that is the wisest way to go. I am also in a state (IL) that has succeeded in seriously underfunding its pension system, to the extent that you can't feel like you can count on what was promised. So (to me) it may be better to move towards factors under your control - not the state's.

[skipro3]

I'm in a little different boat than state workers. CalPERS has a couple thousand agencies they fund retirements for. Each one is kept as a separate record/account. As long as SMUD is staying current with what ever funding CalPERS tells them they need, I should be good to go. State workers however may be a different story, although I do believe that the current retiree is the sacred cow that won't be affected. Future retirees will be footing that bill. SMUD is one of the few governmental bodies that hasn't suffered the losses others have in California. The reason is; we actually produce a product; electricity. Other bodies are services and don't produce anything. SMUD has a pretty good track record of fiscal responsibility. Sure wish the rest of the state would take a look at how SMUD is able to prosper in this economy.

Other than holding cash or gold and not in a bank either; they have failed where-as State Pension funds have not yet, I still think buying service credit is worth considering. Certainly going it alone in the stock market isn't any better. How could I manage a retirement fund better than PERS can, with all the resources at their disposal to do so?
Unless I anticipate needing a lump sum at a future date, buying credits also protects me from law suit loss. Seems pensions are protected from being awarded when being sued. If I had $131,000 in my bank account, it could be awarded in a law suit If it's in my pension, it couldn't.

[Mulligan]

Thats the fun in discussing pensions. We come from experiences of our own or public perception, but in reality there are more separate public pension plans than a dog has fleas and making generalizations becomes meaningless. Last year our legislature was trying to pass a bill to put all separate public pension plans under one umbrella to increase efficiency and minimize costs for the systems. Our pension system being the biggest and one of the best funded of the bunch went into attack mode scaring all the pensioners of the system that this was one step away from co-mingling the funds so you could rob Peter to pay Paul. Needless to say the retirees of the system went into attack mode and got the bill killed.

[Chuckanut]

Indeed, there is much uncertainty these days. When I read about all the great buyouts and early retirement packages people are getting from the Mega-Corps, it makes me wonder if I made the right decision.

[MooreBonds]

Quote:

Originally Posted by skipro3 If I had $131,000 in my bank account, it could be awarded in a law suit If it's in my pension, it couldn't.

Because diversification is heavily favored by many here....any chance you could just buy 2 or 3 service years instead of the full 5, or is it an all-or-none proposition?

That way, you will at least have an additional pension payment beyond what your guaranteed minimum is..but will also give you some cash to invest elsewhere "just in case", and let you avoid the pangs of regret of wishing you had done the alternative regardless of what happens.

[skipro3]

I can purchase anywhere from 0 to 5 years in one year increments.

I have more funds than the $131,000, somewhere around $250,000 more.

[Tekward]

I will be looking at this decision in 5 years but in researching it two things that I have not seen mentioned:
- I can buy the service time with pre-tax dollars.
- If I don't live long enough my wife can request refund of the unused difference.

That shifts the equation for me.

[Mulligan]

Quote:

Originally Posted by Tekward I will be looking at this decision in 5 years but in researching it two things that I have not seen mentioned: - I can buy the service time with pre-tax dollars. - If I don't live long enough my wife can request refund of the unused difference. That shifts the equation for me.

Based on my purchasing of credits, buying with taxed or pretaxed will work out in the wash even. I bought part of my service credits with after taxed money (approximately $15k of the 85k spent to buy). Now, $1000 dollars a year of my pension is declared tax free, and I do not have to pay income tax on this amount each year for as long as I stay alive and draw my pension.