Should I purchase 'service credits'?

[LitGal]

Hi, Boatman

Starting in 2000, I did exactly as you are describing. After I moved from CA to OH, the fed. govt. changed the portability of 403B's, IRA's and pensions, which allowed me to buy another 10.5 years to add to the 8.3 service credits I had when leaving CA.

My story was a bit unique. As an honors English teacher, in a state where class sizes were averaging 38 at the time, I was also in a district that insisted on the rigorous teaching of writing. To cope with the paper loads, many of us Engl. teachers went on part-time contracts: meaning we worked at least 40 hrs. a week for pt pay. Because I had also withdrawn 3 years of service credit as a down payment on our first house, I left the state with only 8.3 years on my record, for 20 years of teaching.

With the new fed. laws in 2001, I was able to roll over 403B $ and IRA$ to buy 5 yrs. air time, plus all the service credit to replace my 3 yr. withdrawal, an adoption leave, and my college and univ. teaching service. I was also able to transfer in credits earned in OH.

So, by 2012, I had a record of about 18.75 years, which provided a modest CA STRS pension allowing me to retire at 59.

My twelve years of service here in a private school accrued a second modest pension, plus substantial 401k savings to make ER feasible. But my CA STRS pension is the foundation of my ER.

It could not have happened without buying the service credit. Yes, it's expensive. But, after doing the math, it became clear that the savings spent on the service credit could never generate (on their own) anywhere near the monthly income that the public pension could provide.

Also, a note re. those who resent public pensions: I'm only speaking as a CA public school teacher who worked in the conditions described above. Those who taught as I did make pensions that would never allow us to maintain the cost of living in CA. Moving to OH makes this pension go much further. In no way does it resemble the extravagant pensions in some states, publicized in news headlines.

Nonetheless, I highly recommend buying the service credit.

Best of luck!

 

[Brianeboatman]

Thank you, flowers


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[Brat]

I do not resent public pensions. What I do resent is politicians not to fund their commitments.

The private sector did that until, about the 80s. They made some very aggressive assumptions, claimed that they had over-funded their pensions. It ended badly for many retirees and soon to be retirees.

 

[Teacher Terry]

You really need to do the math because it depends on the cost, age you are,etc. The state of Nevada has already changed things for new employees. For instance, they only get 2.5% a year towards pension instead of our 2.67. They also have to work until 62 or have 30 years to get a pension without penalty. Also now if you retire now & then decide to go back to work for the state the next time you retire you will pay the full cost of your health insurance instead of receiving the subsidy for the number of years you worked.

 

[gayl]

I paid 66k to convert in addition to 1/2 my base pay last 3 years prior to retirement. Worth it for me. Gives me 2500 month pension. But new retirees hardly pay anything so not sure if it's worth it for them

I'm a double dipper. Pension funded, now working on ROTH with 2nd career (24 hrs a week but business just sold and I'm odd person out)

 

[gayl]

Can anyone tell me why a pension plan allows this? The only reason I can think of is that it is a break even proposition for them long term and they would rather have the lump sum of money as they try to build the total size of the pension fund.

If its not a break even proposition and the credits really are an incredibly generous deal for the individual person, then the pension fund is going to get itself into trouble financially if too many people take advantage of the service credit purchase plan and the plan administrators are no better than the politicians who have allowed a lot of pension funds to be underfunded.

In my case, you had to meet strict criteria and they were probably banking on us dying b4 the break even point. But I had a 457 & IRA so I was willing to take that chance

 

[Mulligan]

In my case, you had to meet strict criteria and they were probably banking on us dying b4 the break even point. But I had a 457 & IRA so I was willing to take that chance

You bring up a good point I forgot in my pension system's ability to purchase service credit. A person must have earned social security year credits in order to purchase pension years. Our system does not pay into social security and WEP greatly curtails ability to draw it if you were able to. Someone who enters teaching profession right out of college and does not ever work in another career field would be unable to buy any. Mine was more cost effective as I got it around 22% of compensation. It is now 29%. So if someone were making $50k a year with $5k health benefit it would cost $15,950. A person retiring with 30 years would draw $41,250. Buying a year at $15,950 would increase pension to $42625 or a bit under $1400 a year increase.


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[hs2inparadise]

This is a PV of an annuity problem. Plugging the numbers into an online annuity calculator (or spreadsheet) will help you to judge if the decision makes sense. You will have to make some assumptions about the opportunity cost of the 75k you would spend to buy your years now, how long you will live and collect your pension and the discount rate but running the various scenarios will give you an idea of how long it will take you to earn back the cost of those years.


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[Sanbenito1]

Sounds like it may be a close call, so maybe split the difference and buy only 2 or 3 years? That way you would have more cash in the bank for occasional emergencies, travel, etc?

 

[Brianeboatman]

Sanbenito,

That sounds like good advice too


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[Brianeboatman]

Thanks to all for the feedback. Yesterday I submitted the paperwork to purchase four years of service credits. I will consider buying the fifth year over the next year or so. Thanks again!


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[seraphim]

Coming late to the party. Edited my original post: too much info.

Just let me say that buying five years military time permitted me to take advantage of a deferred retirement program at 48 as opposed to 53. Very lucrative in the long run, and permitted me to completely retire earlier, rather than continue working in a retirement job. You never know...

 

[Brianeboatman]

That's what I'm hoping for, to get to thirty years of service by only working twenty five.


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