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Use 401k Transfer to Purchase Service on Pension?
Old 09-18-2015, 05:12 PM   #1
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Use 401k Transfer to Purchase Service on Pension?

I am in a situation where I have just retired (58) and can transfer some of my 401k money to purchase service credit on a public employee pension. The purchase can be up to 48 months; but, I am at this time considering only 1 year of service credit purchase that will bring my percentage of full retirement from 73.5% to 79.25%. This is an increase of around $100.00 per month.

However, the cost will be somewhere around $11,000. The balance in the 401k will be around $155,000 after paying the $11,000.

This is what I am thinking, and please correct me if I am off base. The pension is somewhat "guaranteed" while the 401k is market dependent, and I intend to leave the funds in the 401k for at least another 5 years.

Please provide your thoughts as to whether the I should make the transfer. Also note that if I buy 2 years of service, the percentage goes up to 85% of the full retirement amount; 3 years would be 88%, and 4 years would be 91%.

EDIT: Need to edit. I did a more thorough calculation and it turns out that the difference is $90.00 (instead of $100) per month for a total of $1080.00 per year. The cost comes out to around $1080.00 for each month purchased for a total of around $12,900 to purchase 1 year of service.
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Old 09-18-2015, 05:24 PM   #2
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I'd go for the 1-2 years. At an extra $1200-2400/year of pension, you pretty much break even with the transfer in just 10 years.
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Old 09-18-2015, 05:39 PM   #3
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sounds like a no brainer
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Old 09-18-2015, 09:35 PM   #4
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I'd take a 10% payout rate at 58 for as much as I could get. So I'd purchase the two years. After that the payout rate seems less remarkable.
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Old 09-18-2015, 09:37 PM   #5
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Thank you for your responses. After you responded, I edited my original calculations (please refer to the bottom of the original post). I still think its a good way to go. Does it change your opinions.
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Old 09-18-2015, 09:44 PM   #6
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I am in a situation where I have just retired (58) and can transfer some of my 401k money to purchase service credit on a public employee pension. The purchase can be up to 48 months; but, I am at this time considering only 1 year of service credit purchase that will bring my percentage of full retirement from 73.5% to 79.25%. This is an increase of around $100.00 per month.

However, the cost will be somewhere around $11,000. The balance in the 401k will be around $155,000 after paying the $11,000.

This is what I am thinking, and please correct me if I am off base. The pension is somewhat "guaranteed" while the 401k is market dependent, and I intend to leave the funds in the 401k for at least another 5 years.

Please provide your thoughts as to whether the I should make the transfer. Also note that if I buy 2 years of service, the percentage goes up to 85% of the full retirement amount; 3 years would be 88%, and 4 years would be 91%.

EDIT: Need to edit. I did a more thorough calculation and it turns out that the difference is $90.00 per month for a total of $1080.00 per year. The cost comes out to around $1080.00 for each month purchased for a total of around $12,900 to purchase 1 year of service.
The market rate for a fixed payout annuity for a 58 year old male is about 5.8%, so the $1,080 is 8.4% of the $12,900 so that first year is a keeper. Probably the same with the second year but not so for subsequent years based on the information provided.

I assume the pension is not COLAed.
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Old 09-18-2015, 10:09 PM   #7
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The one year purchase gets you an annual rate of return of 6.7% assuming the pension starts at 58 and you live to 83. If there is a COLA...and there often is with a public pension... then the IRR will be even better.
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Old 09-19-2015, 07:08 AM   #8
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Thank you for your responses. After you responded, I edited my original calculations (please refer to the bottom of the original post). I still think its a good way to go. Does it change your opinions.
Still a good deal. Moreso if you get COLA.
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Old 09-19-2015, 09:19 AM   #9
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Thanks for all the responses. Yes, the pension gets a COLA.
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Old 09-19-2015, 09:24 AM   #10
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If the pension is COLAed then I would do as much as you can afford to and are comfortable doing assuming that the plan is well funded. The pricing I posted earlier was for fixed annuities COLA annuity payout rates would likely be 1/2 of the fixed so your buy-in opportunity is particularly good.

So you can buy an 8.4% payout where a commercial annuity might be 3% or so. Even deeper in where the payout rate declines to 4% or so it is still much better than 3%.
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Old 09-19-2015, 09:36 AM   #11
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Thanks. I don't know if I would be comfortable with more than 24 months; however, it is tempting. I figured that 24 months would be around $25,500, 36 months around $38,500, and 48 months would be around $51,500. The 48 months would deplete the 401k to the point where there would still be over 100k.
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Old 09-19-2015, 10:16 AM   #12
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This forum is great. It makes me think.
I did a little more figuring. Based on my most recent analysis, it would be beneficial to purchase no more that 24 months. Here's why. The increase in monthly payout (in round figures) would be around $90 for 12 months purchased, another $90 for 24 months purchased, $50 for 36 months purchased, and $50 for 24 months purchased. Based on these figures, the greatest return is for up to 24 months purchased.
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Old 09-19-2015, 10:25 AM   #13
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Thanks. I don't know if I would be comfortable with more than 24 months; however, it is tempting. I figured that 24 months would be around $25,500, 36 months around $38,500, and 48 months would be around $51,500. The 48 months would deplete the 401k to the point where there would still be over 100k.
Is your pension COLAed? Why are you uncomfortable using 401k money to buy a pension that gives you an IRR of around 6.7%. I'm being offered something similar by my public employer and I'm buying 10 years of service and cashing in a 401a with around $263k in it. (actually you probably also have a 401a or maybe a 403b or 457 as a 401k is for private profit making companies and not public employers). Is there a survivor benefit as well? You should also consider your income needs and whether you need access to capital in the future. The buy in looks like a good deal so I would probably buy enough to cover my basics retirement income needs, but make sure you keep enough principal as well.
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Old 09-19-2015, 10:39 AM   #14
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This forum is great. It makes me think.
I did a little more figuring. Based on my most recent analysis, it would be beneficial to purchase no more that 24 months. Here's why. The increase in monthly payout (in round figures) would be around $90 for 12 months purchased, another $90 for 24 months purchased, $50 for 36 months purchased, and $50 for 24 months purchased. Based on these figures, the greatest return is for up to 24 months purchased.
Yes, but what is the return.....do you have a COLA? or any survivor benefit?

So to summarize

You are 58, (M or F, do you have a spouse)

$12900 buys 12 months of service and gets you an additional $1080 a year
$25800 buys 24 months of service and gets you an additional $2160 a year

The next 12 and 24 month purchases would give you $50/month more ($600 a year)

$38700 buys 36 months of service and gets you an additional $2760 a year
$51600 buys 48 months of service and gets you an additional $3360 a year

Using the 48 month number that's a 6.5% pay out rate and (assuming 0% COLA and you live to 83) is an IRR of 4.2%.

The 24 month number is a payout rate of 8.4% and an IRR of about 6.7%.
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Old 09-19-2015, 10:46 AM   #15
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Nun, to answer some of your questions, it is COLA'ed. Also, the figures I came up with are based on a 100% CA payment, and if CA passes before I do, the amount will go up to the what the allowance would have been (plus COLA) if the benefit were for my lifetime only.
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Old 09-19-2015, 10:51 AM   #16
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Yes, but what is the return.....do you have a COLA? or any survivor benefit?

So to summarize

You are 58, (M or F, do you have a spouse)

$12900 buys 12 months of service and gets you an additional $1080 a year
$25800 buys 24 months of service and gets you an additional $2160 a year

The next 12 and 24 month purchases would give you $50/month more ($600 a year)

$38700 buys 36 months of service and gets you an additional $2760 a year
$51600 buys 48 months of service and gets you an additional $3360 a year

Using the 48 month number that's a 6.5% pay out rate and (assuming 0% COLA and you live to 83) is an IRR of 4.2%.

The 24 month number is a payout rate of 8.4% and an IRR of about 6.7%.
Thank for your responses. I posted my last post without seeing this one.
There is a survivor benefit, and I do have a spouse that is older than I am (64), and it is COLA'ed.
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Old 09-19-2015, 11:35 AM   #17
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Thank for your responses. I posted my last post without seeing this one.
There is a survivor benefit, and I do have a spouse that is older than I am (64), and it is COLA'ed.
is your entire payment COLAed, what is the COLA percentage? This makes the pension worth considerably more.
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Old 09-19-2015, 12:30 PM   #18
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is your entire payment COLAed, what is the COLA percentage? This makes the pension worth considerably more.
The COLA is on the monthly benefit, and based on CPI-U, but won't exceed the CPI or 6%, the least of the 2. It also factors growth in the fund. I think, but am not sure, that the minimum COLA in a given year is 1%. It has been 1% for the last 4 or 5 years.
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Old 09-19-2015, 12:53 PM   #19
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The COLA is on the monthly benefit, and based on CPI-U, but won't exceed the CPI or 6%, the least of the 2. It also factors growth in the fund. I think, but am not sure, that the minimum COLA in a given year is 1%. It has been 1% for the last 4 or 5 years.
OK assuming a 1% annual COLA for the 24 month buy in your IRR (assuming you live to 83 and ignoring survivor benefit) goes up to 7.8% and the 48 year buy in has an IRR of 5.1%. I'd definitely buy 24 months and depending on your need/desire for guaranteed income I might buy more. The COLA and survivor benefit are big benefits.
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Old 09-19-2015, 01:19 PM   #20
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Are the pension benefit increases based on a COLAed single life pension or a COLAed joint life pension? Even though your spouse is older joint mortality would likely come into play so the pension is even more attractive.
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