Purchase Additional Pension Service Credits?

[mountainsoft]

I ran a few more numbers to see if buying the additional service credit would help.

We are selecting a 67% survivor option for my wife's pension. As long as she outlives me the increased pension payment worked out "slightly" better in the end.

Unfortunately, if she dies before I do, that's a larger chunk of my income that gets reduced the 67%. In that case, buying the additional credit really hurt my own retirement success.

 

[Sunset]

I ran a few more numbers to see if buying the additional service credit would help.

We are selecting a 67% survivor option for my wife's pension. As long as she outlives me the increased pension payment worked out "slightly" better in the end.

Unfortunately, if she dies before I do, that's a larger chunk of my income that gets reduced the 67%. In that case, buying the additional credit really hurt my own retirement success.

So now run it with 75%, 100% survivorship options and see how it works out.
Plus realize odds are she will live longer than you, that's what the average woman does.

 

[mountainsoft]

So now run it with 75%, 100% survivorship options and see how it works out.

75% is not offered, but I tried 100% this morning. Buying the additional credits only becomes an advantage after I turn 90 (assuming I even make it that far). At 95 the extra service credit results in a few thousand more, but the downside is my IRA drops dangerously low after the first six years (before my wife's social security kicks in).

It was an interesting experiment, but I still don't see that it offers any significant advantage considering the extra work to make it happen.

If we had "extra" money from somewhere (an inheritance or something) it might be good to buy the extra service credit. Otherwise, trading a large chunk of our IRA to fund the service credits just isn't worth it.

 

[Sunset]

75% is not offered, but I tried 100% this morning. Buying the additional credits only becomes an advantage after I turn 90 (assuming I even make it that far). At 95 the extra service credit results in a few thousand more, but the downside is my IRA drops dangerously low after the first six years (before my wife's social security kicks in).

It was an interesting experiment, but I still don't see that it offers any significant advantage considering the extra work to make it happen.

If we had "extra" money from somewhere (an inheritance or something) it might be good to buy the extra service credit. Otherwise, trading a large chunk of our IRA to fund the service credits just isn't worth it.

So you must be comparing the pension increase to keeping the 70K in IRA, are you using a realistic factor for the IRA 70K amount regarding growth, and how about the inflation factor, since I think the Pension is Cola'd ?

I'm sure you know we are only talking about the 70K vs pension increase, not the entire 150K IRA vs pension.

When do you have to make this decision ?

 

[mountainsoft]

So you must be comparing the pension increase to keeping the 70K in IRA, are you using a realistic factor for the IRA 70K amount regarding growth, and how about the inflation factor, since I think the Pension is Cola'd?

Let me see if I can explain... To make comparisons easier, I am using a fixed 6% rate of return on my IRA. Obviously, market fluctuations will be different.

For the baseline run, I simply keep contributing 6500/year to my IRA, and use her calculated pension amount (her retirement system has an online calculator to get easy and accurate estimates).

For the extra service credit run, I start with the same current 73K balance, but stop making contributions. Those contributions would be redirected to a new IRA for my wife. My IRA would grow slower, and hers would be used strictly to roll over into buying pension service credits when she retires.

So, her IRA is essentially out of the equation, other than the four years of extra service credits it would buy at retirement. I took the baseline pension payment, added the increase from the additional service credits, to compute the new higher pension payment.

Then I simply plugged in the new higher pension payment, and removed my IRA contributions from now till retirement. Social security payments stayed the same.

The end results were fairly close, but buying the additional service credits didn't make a huge difference until much later in life (probably after I die). The results changed slightly with different rates of return on my IRA, but not enough to be significant (less than 1 years income).

When do you have to make this decision ?

We can't purchase the extra credits until she retires, about 7 years from now. However, we would have to start a new IRA and redirect our contributions to her IRA now if we expected to roll it over into the service credits.

 

[RetireAge50]

Might as well fund her IRA for the next 7 years. Can make the pension decision later.