Buying Service Credits

[jime444]

I wanted to know what the members of the forum think on the topic of buying additional service credits; 5years/60 months addition.
Just finishing my 30 years service, state government pension and have the opportunity to buy an additional 5 years of service credits. Basically, an single premium annuity that can be funded from a 401k, etc. It appears the state fun is funded well and reasonably stable. Retirement set for May 1, 2016. TG.

Here's the details; $327/month added to pension; $56,500 cost. Cola'd at least payout is tied to an inflation indicator. If I die, the balance of the single payment is paid to my beneficiary, if it exists.

Health is ok to good, not great. "the dice roll"

From my analysis, it's a decent deal for me. However, I'd like to get some confirmation or a "go/no-go".
Thanks in advance.

[hnzw_rui]

$327/mo = $3,924/yr

Initial Cashflow Rate
$3,924 / $56,500 = 6.95%

And you have COLA on top. If I were in your shoes, that's a definite go for me.

[braumeister]

Don't know your age, but one way to look at is with a quote from immediateannuities.com.

A 55 YO male in Washington would pay $68,952 for a non-cola SPIA of $327/month. You're offered the same with a cola for $56,500 and you're hesitating?

[Another Reader]

These are often good deals and they can be funded with pre-tax money. In your shoes, I would strongly consider accepting this offer.

[packrat44]

I totally agree with the others. Go for it. I was a federal employee and paid to have my active duty time in the military added to my civilian time. The crossover for payback made it a no-brainer.

[Helios]

I had that opportunity, took it, and havent regretted it. 1035 exchange from 403b, no tax implications.

[robertf57]

Looks like a great deal to me, provided the pension is well funded/solid.

[Youngster]

I had a similar question recently (Sept./Oct 2015). I was told it was a "no brainer". Maximum I could buy was 4 years, and I did so with a transfer from my 401k from the same employer.
Wish I could have bought more.

[Backpacker]

For my DW, she was able to commit to purchase of 5 years back at hire date and price was based on her wage at that time. Screaming deal and paid monthly with pre-tax money!

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[Mulligan]

In case some wanting to purchase service credits are not aware of, if you pay for credits with after tax money, this portion of your pension is forever tax free. I purchased some of my credits with after tax money and a bit over $1000 each year is now tax free.


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[Chuckanut]

Quote:

Originally Posted by Mulligan In case some wanting to purchase service credits are not aware of, if you pay for credits with after tax money, this portion of your pension is forever tax free. I purchased some of my credits with after tax money and a bit over $1000 each year is now tax free.

Are the earnings on the purchased amount also tax free or only the amount used to purchase the extra credits?



The worst decisions are made when angry or impatient.

[Mulligan]

Quote:

Originally Posted by Chuckanut Are the earnings on the purchased amount also tax free or only the amount used to purchase the extra credits? The worst decisions are made when angry or impatient.

The way I understand it, the Government considers it "revenue neutral" in relation to whether you use pretax or aftertax over a course of a lifetime. I used about $85k to purchase 4 service years. I remember only having 60k in 403B and was about $25k short so I just cut the check with cash in my savings account to pay the rest. My pension rises 2% each year with COLA, but the $1035 that is tax free remains constant. It is actually segregated out automatically on my yearly 1099-R form. So my total pension earned is larger than what I actually report as pension income "earned" each year on my tax return.


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[zinger1457]

Quote:

Originally Posted by braumeister A 55 YO male in Washington would pay $68,952 for a non-cola SPIA of $327/month. You're offered the same with a cola for $56,500 and you're hesitating?

I'd jump on it but it does seem almost too good. The Feds offer an annuity payout for the TSP, according to the TSP calculator a $56500 annuity with increased payments and cash refund would start out with a $132/month payment. How is the state of Washington able to offer something that pays out almost 150% more than what one could get in the public market?

[redshift]

Also from WA state, and just purchased 5 yrs service credit from PERS. Best deal around, especially if you are risk adverse.

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[Mulligan]

Quote:

Originally Posted by redshift Also from WA state, and just purchased 5 yrs service credit from PERS. Best deal around, especially if you are risk adverse. Sent from my VS986 using Early Retirement Forum mobile app

Tell me about it, I spent around $85k to buy 4 years and it bumped my pension almost $17k a year, plus 2% cola.....They have jacked contribution rate up quite a bit since I bought mine about 10 years ago, so the deal is not as sweet as mine was. But the odd thing was pension system said buying years was "immaterial" to system since very few people actually did it, even when I purchased. You had to have social security service years to buy, and very few people had them since the system did not pay into SS.


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[Highbeam]

I'm a WA PERS guy too and hope I have this opportunity as well!