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Purchasing additional pension years?
Old 02-01-2018, 01:19 PM   #1
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Purchasing additional pension years?

DW and I are in good shape financially, but still need to optimally allocate some of our assets. We are both in our late 50's. I am retired and she is working another few years as a teacher in California (part of the CALSTRS system). She will get a pension through this system, but will have a limited number of years in the system and so will receive a reduced benefit as a result. She has the option of purchasing additional years of pension service credit. The question is whether to do so.

Numbers:

According to the CALSTRS calculator each year of pension credit will cost $26K and result in an increase in her annual pension benefit of $1800.

This is a little bit better than the annuity estimate one gets using immediateannuities.com. Furthermore since the pension will be COLA'd the actual value is greater than the immediateannuities estimate.

The negatives are the usual ones with annuities: possibility of greater payouts by investing the money ourselves, long term risk of insolvency of the CALSTRS system.

As I said, we're in OK shape financially. My non-COLA'd pension covers 80-90% of my expenses (including my share of our expenses in common). With no additions her pension will cover about 75% of her expenses (again including expenses in common). The shortfall will be paid for by a ~1.5% withdrawal rate from our savings. The question is whether to reduce our savings by 5-10% and purchase pension credits so that her pension then covers ~100% (or more) of her expenses.

This probably comes down to philosophy and how one weighs various risk factors, but I'd be interested in the opinions of those who've faced a similar decision.
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Old 02-01-2018, 01:24 PM   #2
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I just want to give you one caveat as far as calstrs goes. You need to check and see if they can clawback any increases that they give you. I'm not calstrs but I'm a little south of you I think. I retired from County in February of 2004. And then I went to work for Private Industry. Walked out as soon as I turn 50. Had I waited until June, they would have had the ability to call back any excess. They define an excess as any amount of money that they need to beef up the shortage. So those who retired a few months after me r constantly concerned about whether or not the county is financially solvent. Those who retired with me, which was relatively few in that the bump up happens May 31st, are not as concerned about whether or not something can be lost.

So research before coughing up 26k for 150 month
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Old 02-01-2018, 01:27 PM   #3
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I retired from NV and when my husband was running the numbers I was not going to break even until mid 80's so we didn't do it.
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Old 02-01-2018, 03:13 PM   #4
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Sounds to me like it is a personal decision on where you want to allocate your money...

When one of my sisters did it, it was so she could retire early.... IOW, she was short a few years and if she bought she could start the pension right away... an easy decision since she got all of her pension for a couple of extra years...
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Old 02-01-2018, 04:28 PM   #5
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This is really a decision as to whether to buy a COLAed annuity, so the first question becomes whether you want or need an annuity.

If you decide that you want one, then a 6.9% COLAed payout for someone in their late 50s sounds like a good deal, subject to potential clawback that gayl mentioned.... one question might be whether the clawback that gayl mentioned applies to additional years purchased or not... though I suspect that all years are treated the same.
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