Is there any disadvantage from purchasing Additional Retirement Service Credit

[bukopop]

Hi,

I am 35 years old and eligible to purchase 1 to 5 years of Additional Retirement Service Credit (ARSC) through Calpers. My total years of service is 11 years.

I know what is ARSC but I am not a genius in it. I want to buy the maximum additional service credit I could buy (in this case 5 years) simply because I know that it will give me benefit towards the future. But is there really a disadvantage from buying it? Please let me know before I sign up.

Thanks.

 

[clifp]

The devil is in the details in this things. In particular how much does it cost, what is the effect on your pension, and then some individual factor: family longevity, health. I.e. no reason to buy a more generous pension if everybody in your family dies before 75.

That being said, pretty much every time I've seen the numbers being run. They worked out to be a very good deal for government employees buying additional pension credits.

 

[bukopop]

Thank you clifp! To reply to your questions:
"The devil is in the details in this things. In particular how much does it cost, what is the effect on your pension, and then some individual factor: family longevity, health. I.e. no reason to buy a more generous pension if everybody in your family dies before 75."

- It may cost around $400 (more accurate calculation is yet to be sent to me. It can be lesser than that but not more than that). I still have a waste to go to retirement since I am only 35 and fortunately in good health. But of course, like I said, I still have many years ahead of me prior to retirement so we couldn't really say.

My follow up question then is... when you said, " no reason to buy a more generous pension if everybody in your family dies before 75" - I mean, what happens if (God forbid) I die early, won't my family get any of my money or investment to this?

 

[clifp]

Thank you clifp! To reply to your questions:
"The devil is in the details in this things. In particular how much does it cost, what is the effect on your pension, and then some individual factor: family longevity, health. I.e. no reason to buy a more generous pension if everybody in your family dies before 75."

- It may cost around $400 (more accurate calculation is yet to be sent to me. It can be lesser than that but not more than that). I still have a waste to go to retirement since I am only 35 and fortunately in good health. But of course, like I said, I still have many years ahead of me prior to retirement so we couldn't really say.

My follow up question then is... when you said, " no reason to buy a more generous pension if everybody in your family dies before 75" - I mean, what happens if (God forbid) I die early, won't my family get any of my money or investment to this?

Well the numbers, we are looking for are as follows.
I am going to be spending $400 (is that total, per month, annually) and for how long.
When I retire, in Y years, buying these credits should increase my pension from A $/month to B $/month. Generally speaking 5 years credit at Calpers will increase your pension by 10% (5 years by 2%) but it depends on what your job is.

As for what happens if you die it depends entirely on what you have selected as survivor's benefit. But as general rule when you die your pension benefits stop. Most of the time when people buy additional credit they do so right before retiring and spend a lump sum typically in the neighborhood of 25-75,000. I am not familiar with ARSC program.

I'd check out the Calpers website here to get more info.

 

[Indigo Mule]

Definitely explore the CalPERS website. Set up your "My CalPERS" login and run scenarios with the various years of credit. With CalPERS, if you make it to 50 and then die (without retiring), your designated beneficiary can either withdraw the amount of your contributions (but not the employer contributions), or can receive a monthly payment. If you retire, you have both survivor and beneficiary options, which affect your monthly payout. Again, the scenarios can be played with and saved using the calculator. (My current favorite is the "bounceback" option, where you have a reduced monthly payment, and should you die, your spouse would receive the same amount; however, if your spouse dies, your payment bounces back to what it would have been had you chosen the "no survivor" option.)

 

[bukopop]

Hi,

So here are my more accurate calculations and please advise if I should buy Service Credit or not:

My monthly due for service credit is approx: $650 payable in 15 years
This is for approx $85,000 service credit
7.5% interest
I will retire in 20 years
I already earned 12 years
Our retirement formula is 2.7% @ 55
If I purchase this credit it will increase my retirement money to approx: $850/month.
I am currently in good health.

I am concerned because it is quite a lot of money and maybe I should just be investing my $650 to my mortgage and pay it off rather than buying service credit where I already have a decent retirement money approx $150K @ 35.

Pls. advice

 

[doxiemama]

I thought as part of Jerry Brown's pension reform this plan (buying air time) was closed as of January 1st 2013. There was a huge push for anyone interested to get in their applications prior to December 31, 2012.

 

[bukopop]

Doxiemama, Yes you are right. But I made it to the cut off and the entire process is taking more than 6 months. So yes, I am eligible for that buying air time plan.

 

[bukopop]

Anyone would like to give me advice on my situation:

o here are my more accurate calculations and please advise if I should buy Service Credit or not:

My monthly due for service credit is approx: $650 payable in 15 years
This is for approx $85,000 service credit
7.5% interest
I will retire in 20 years
I already earned 12 years
Our retirement formula is 2.7% @ 55
If I purchase this credit it will increase my retirement money to approx: $850/month.
I am currently in good health.

I am concerned because it is quite a lot of money and maybe I should just be investing my $650 to my mortgage and pay it off rather than buying service credit where I already have a decent retirement money approx $150K @ 35.

Pls. advice

 

[doxiemama]

OK that make sense now, your application made the deadline. So you already have 12 years in and will work 20 more years for a total of 32 years.

32 x 2.7 = 86.4% of your final pay. At that point you won't be funding CalPERS any more. I assume you are funding it now or will be. With pension reform, employees have to fund their portion which is 8%. I don't know if you pay into FICA or not (social security). If you do then that will be another 6.2% you won't have to fund when retired. I pay both so when retired I get a 14.2% raise by not having to fund them anymore, so I see a 86.4% pension as a full paycheck. My friends that retired at less than that amount have told me that are netting more since they are paying less in taxes.

If your purchase the five years your formula would be:

37 x 2.7 = 99.9% of your final pay and let's just call it 100% pension.

I would say pay down your mortgage and keep funding your 457 or 401 plans. For you to get that extra amount you will be paying $650 per month for 15 years = $117,000. That is a lot to purchase something I don't think you really need. Don't forget you will be getting hopefully COLA's in the next 20 years.

I would rather see you invest that in your 401 or 457 and over the next 20 years I think that money will grow quite a bit and then you can draw it down when you are retired and at the same time you can pre-pay your mortgage and have a paid off house when you retire.

You are in a position of having almost a 100% pension without purchasing the "air time" so why lock yourself into those payments for 15 years?

How great a 86.4% pension will be and worth several million dollars in 20 years if you had to have the equivalent in the bank and draw out that amount at a 4% withdrawal.

I did purchase 4 years of air time but I had the money and rolled it over from an IRA and I worked in the private sector for 20+ years. I did not start a government job until age 42 so my final percentage will be much smaller than yours and our formula is 2.5 @ 55. I consider myself totally blessed, lucky whatever you want to call it to have a pension at all.

So in summary you are smart, lucky, blessed, you have 2.7 @ 55, you already have saved $150,000 at age 35 which is excellent you are not just counting on your pension, so keep saving, paying down the house, and keep that government job no matter what!

 

[doxiemama]

One more thought: Not everyone bought 5 years, I bought 4, some of my friends bought 3. If you chose 5 you might not get to change horses mid-stream though. But that might give you peace of mind, to buy a couple of years. But again, my answer is you don't really need it since you started a government job young, the ones that really needed it, where it paid off, were the old folks like me, starting a government job in their 40s.

 

[bukopop]

Doxiemama,


Thank you so much for such insightful advice! I'm glad to have some people like you who cares answering these questions!!

I barely have anything in Social Security. I only worked in private sector 3yrs... the rest is government job.

You are right about not having to change my horses with spending $600/mo. It is a lot of money that is why I have to be careful where I spend that.

Again, thank so much!

 

[doxiemama]

You are welcome. It is hard to give advice because every agency is different.

I have a government job but we do pay into social security so we are not totally dependent on CalPERS.

Since you are so young I think you need to save in your 401 or 457 or what ever your agency offers. That money is pre-tax (a benefit in itself), so you will have some money in addition to your CalPERS. There is all kinds of crazy pension reform going on. Just read the thread about Ohio and it will give you nightmares. So don't put all your eggs in the CalPERS basket. Build up some savings that you will have control over. At your age you could save half a million in addition to your CalPERS without much reduction to your lifestyle.
Pay off your house. And keep racking up the years in CalPERS and you will be better off than 99% of the people in the U.S. when you retire.