Use 401k Transfer to Purchase Service on Pension?

[Youngster]

Thank you, pb4uski. Sounds like a winner. Gonna go see if I can get the ball rolling later this coming week. Have a meeting with the plan representative this coming week.

 

[Youngster]

Well, I have almost finalized the purchase of service. However, my initial method of figuring it out was off base. I misinterpreted that I could buy age of retirement. It turns out that I am buying months of service so the percentages I gave earlier don't apply. The correct calculation gives me a better monthly payment.

So, for close to $52,000 rollover from the 401K plan to the pension plan, I will receive close to $320.00 more per month with my spouse as a 100% CA. Also, there is, as stated above, a COLA of at least 1% per year. The amount of increase would be $160.00 more if I were to purchase only 24 months of service at a cost of almost $26,000. I think the way to go is with the maximum of 48 months.

Does 48 months sound like the best way to go?

 

[nun]

Well, I have almost finalized the purchase of service. However, my initial method of figuring it out was off base. I misinterpreted that I could buy age of retirement. It turns out that I am buying months of service so the percentages I gave earlier don't apply. The correct calculation gives me a better monthly payment.

So, for close to $52,000 rollover from the 401K plan to the pension plan, I will receive close to $320.00 more per month with my spouse as a 100% CA. Also, there is, as stated above, a COLA of at least 1% per year. The amount of increase would be $160.00 more if I were to purchase only 24 months of service at a cost of almost $26,000. I think the way to go is with the maximum of 48 months.

Does 48 months sound like the best way to go?

if you and your wife are both 58 you have a joint life expectancy of 34 years ie there's a 50% chance that at least one of you will live to 92. Using 34 years and a 1% COLA in an present value calculation gives and IRR of 7.5%. The payout rate of 7.4% is also very good when compared to commercial annuities. Whether you buy the service depends on your other sources of income, tolerance for risk and personal health history. but it looks like a good deal to me as you only have to live 14 more years to get back your principal.

 

[Youngster]

Thank you, Nun. My spouse is 64. If my spouse passes before me, per the plan, the amount goes up about $135.00 per month with retroactive COLA. I was thinking that this approach with a somewhat guaranteed income is less risky than leaving that $52,000 in the 401k plan. The balance in the 401k plan will still be around $115,000, after the rollover.

 

[marinauser]

Would this be treated as a withdrawal from the 401k such that you also have to pay the taxes on the amount withdrawn? Also, would the penalty apply since you are under 59 1/2? I am not sure how under the ERISA rules you could just transfer the money from one plan to another.

 

[Mulligan]

Would this be treated as a withdrawal from the 401k such that you also have to pay the taxes on the amount withdrawn? Also, would the penalty apply since you are under 59 1/2? I am not sure how under the ERISA rules you could just transfer the money from one plan to another.

You can transfer this money to a pension fund with no problems. I did it at age 42 to buy some years...actually used after tax money additionally. The after tax money is treated as non taxable income the rest of your life, so $1000 of my yearly pension is tax free. The pretax transferred money gets taxed as part of the pension the rest of my life...


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[nun]

You can transfer this money to a pension fund with no problems. I did it at age 42 to buy some years...actually used after tax money additionally. The after tax money is treated as non taxable income the rest of your life, so $1000 of my yearly pension is tax free. The pretax transferred money gets taxed as part of the pension the rest of my life... Sent from my iPad using Tapatalk

+1. From my own experience purchase of service can be done with others tax deferred retirement money with zero tax implications. Many public employers have both DB and DC pension plans and also other tax deferred savings like 403b and 457 plans. Using money from any of those would not cause any tax issues. Just as an aside the OP has described their plan as a 401k. If they work for a public employer it won't be a 401k, but might be a 401a or 403b, or a 457 if they work for state or local government. Still bittomline is that this is a good deal.

 

[Youngster]

Nun, in response to your last post, my local governement public employer has 2 plans, a DB 401(a) and a voluntary DC 401k. Participation in the 401(a) DB plan is mandatory with a small percentage of the funding provided by the employee and the rest by the employer.

 

[nun]

Nun, in response to your last post, my local governement public employer has 2 plans, a DB 401(a) and a voluntary DC 401k. Participation in the 401(a) DB plan is mandatory with a small percentage of the funding provided by the employee and the rest by the employer.

If you have a 401k plan it must be quite old as state and local governments haven't been allowed to offer those for many years and use 401a and 403b and/or 457 instead.

 

[Youngster]

Update: The Rollover went through and I was very fortunate regarding the timing. The account grew around $8,000.00 between the time I signed the paperwork and the actual rollover. This is due to the stock market going up after the day I signed the paperwork. I feel very fortunate as the market could have gone down.

 

[nun]

Update: The Rollover went through and I was very fortunate regarding the timing. The account grew around $8,000.00 between the time I signed the paperwork and the actual rollover. This is due to the stock market going up after the day I signed the paperwork. I feel very fortunate as the market could have gone down.

I will be buying "qualified service" I'm my employers pension plan soon. It will cost me a specific amount and so I have the money sitting in a stable value in my 457. I have enough to cover the buy in and don't want any ups and downs. My reasoning is if you have a large purchase within the next year the money should be in something close to cash.

 

[wkoukios]

I have been struggling with the math for a similar situation. I can buy up to 24 months of service. Each year adds 2.5 % to my pension. The pension has a 3% cola. Salary pension is based on is 100k, so that math is easy. The hard math is it cost 41k per year so for 82k for two years Of credits, I can receive 5k a year additional in pension. Pension goes from 60k to 65k.
So bottom line for 82k I receive 5k with a 3% cola. So the first year is aprox. 6% .
I'm torn. Leaning towards not buying any. I retire June 3, 2016. Any comments, suggestions??
Thanks.

 

[Mulligan]

I have been struggling with the math for a similar situation. I can buy up to 24 months of service. Each year adds 2.5 % to my pension. The pension has a 3% cola. Salary pension is based on is 100k, so that math is easy. The hard math is it cost 41k per year so for 82k for two years Of credits, I can receive 5k a year additional in pension. Pension goes from 60k to 65k.
So bottom line for 82k I receive 5k with a 3% cola. So the first year is aprox. 6% .
I'm torn. Leaning towards not buying any. I retire June 3, 2016. Any comments, suggestions??
Thanks.

You are getting in essence a 6% return on your money with a 3% kicker every year compounded. Was it Ben Franklin (or somebody famous) that said compounding is the "8th wonder of the world"?
I think many people even here would swear off their love for Wellesley to receive that if investing needs did not require liquidity obligations.
On return of money it cant be beat long term. But a person must address liquidity needs and safety of pension obligations, also before making decision.


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[sengsational]

Not that much if this is very accurate, but I just put $82K 58 yo male wisconsin single life non-cola into immediateannuitys.com and it came up to $4740/yr. A COLA annuity would be worth more.

With the PE10 at historical highs, I'd be more inclined towards buying it than if it weren't so high. But you would be giving-up some ability to control your income, and presuming two people, the 60K is already pretty close to the ACA cliff, and the extra 5K would certainly put you over. But maybe your company has great retiree healthcare benefits and you don't need to worry about the ACA?

 

[Mulligan]

Not that much if this is very accurate, but I just put $82K 58 yo male wisconsin single life non-cola into immediateannuitys.com and it came up to $4740/yr. A COLA annuity would be worth more.

With the PE10 at historical highs, I'd be more inclined towards buying it than if it weren't so high. But you would be giving-up some ability to control your income, and presuming two people, the 60K is already pretty close to the ACA cliff, and the extra 5K would certainly put you over. But maybe your company has great retiree healthcare benefits and you don't need to worry about the ACA?

Good point about ACA, and maybe there are other peripheral issues that need to be looked at also. But in just the terms of pure investment on return of money, the drumbeat of time really benefits the pension. Just a mental math guesstimate would suggest that $6k a year, becomes 8k a year in 10 years due to compounding.


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[MooreBonds]

I have been struggling with the math for a similar situation. I can buy up to 24 months of service. Each year adds 2.5 % to my pension. The pension has a 3% cola. Salary pension is based on is 100k, so that math is easy. The hard math is it cost 41k per year so for 82k for two years Of credits, I can receive 5k a year additional in pension. Pension goes from 60k to 65k.
So bottom line for 82k I receive 5k with a 3% cola. So the first year is aprox. 6% .
I'm torn. Leaning towards not buying any. I retire June 3, 2016. Any comments, suggestions??
Thanks.

Does that include survivor's benefits? Are you married? What other assets/pensions do you and your spouse have? Social Security? If the above includes survivor's benefits at 100% or 75%, and your pension income is not more than, say, 60% of your total projected income, I'd feel comfortable buying it....but I wouldn't want to have me and my spouse depending entirely on this pension, and then when you pass on they get nothing. Depends on your overall portfolio and what % this pension represents of your other cash flow sources.

 

[redshift]

I plan to purchase 5 years of service credit when I retire next month. It is COLA'd and transferable to spouse, and will increase pension by 10% of salary. I like the recent poster's plan of putting the required funds in stable value pool until transfer. I'd hate to take a big hit on the value in the last month, although I'd love for it to go up...

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[Youngster]

wkoukious, sorry I don't know the answer to your question; but, is that a guaranteed 3% COLA every year? If so, that is pretty nice. Also, maybe I missed it; but, how old are you (may be a factor in your decision)?

 

[redshift]

Does that include survivor's benefits? Are you married? What other assets/pensions do you and your spouse have? Social Security? If the above includes survivor's benefits at 100% or 75%, and your pension income is not more than, say, 60% of your total projected income, I'd feel comfortable buying it....but I wouldn't want to have me and my spouse depending entirely on this pension, and then when you pass on they get nothing. Depends on your overall portfolio and what % this pension represents of your other cash flow sources.

Curious why it would matter if their pension income is more than ~60% of their total projected income?

 

[wkoukios]

Very good points all of them. You can see why I'm unsure what to do. It's a Illinois Firefighter pension so it is within control of a corrupt, bankrupt state. That is another issue entirely.
With businesses and people of means leaving in droves, betting on Illinois is not prudent either.

 

[Mulligan]

Very good points all of them. You can see why I'm unsure what to do. It's a Illinois Firefighter pension so it is within control of a corrupt, bankrupt state. That is another issue entirely.
With businesses and people of means leaving in droves, betting on Illinois is not prudent either.

Do you know the funding ratio of your specific pension plan?


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[wkoukios]

54% funded.

 

[Mulligan]

54% funded.

Ew....That is shaky... "Experts" say a sound pension system is 80% funded... I dumped most of my extra cash into buying 4 service years which was about $100,000. But our system is close to 90%. Personally I would not have put my money in if it was 54%. I feel for you.


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