ELECTION TO PURCHASE SERVICE CREDIT

[Ginger]

My husband was just informed he could purchase service credit (1.2 years) from his first year he worked for a government agency over 32 years ago and it is based on a his lowest salary during his working career.
(He is retiring after 31 years service). The amount they want him to send in is $5,534 to cover this 1.2 years. This would increase his monthly benefit by approximately $72.00 a month, so it looks like after six years it would break even.... Is this worth the $5,534 right now... or am I missing something here.

 

[Brat]

That would increase his pension, and the survivor pension.  Now you need to go shopping to see if there is a better deal.

Go to the Vanguard website and find the immediate annuity quote area.  Add a couple 0's to the deposit amount, put in his age, your age if he plans a survivor annuity for you, click COLA, and see what it would pay out.

If the Vanguard annuity amount is less (be sure to move the "." point) then I would seriously consider it.  The Fed annuity isn't a 100% COLA, but then there is little credit risk.  Ah, readers, I said 'little" not "no" credit risk. 

 

[maddythebeagle]

Hey ginger, if you run the numbers at vanguard, would you post it here. I would be curious on this.

 

[Ginger]

Thanks for the info, and will check out Vanguard.  He will get a COLA each year - 3%.   Just wished we knew about this years ago, and it would not have cost so much for one year of service buy back.   My DH is retiring mid-October, and we just received the paperwork today on the one year buy back.  Everything else is in place from two government pensions (reciprocal pensions), so this is a small, small  bonus (I am assuming)...   

 

[yakers]

We bought about a year and a half of back service for my wife from her earlier teaching career. It is not as good a deal as what you are proposing. But we wanted to build up her retirement pension and it was before taxes. It was also part of our principle to diversify the sources of retirement funds.

 

[uncledrz]

Seventy two a month, times 12 is 840 a year in income. To purchase that income, you have to pay the lump sum,
5,534 now. The return (840/5534) is 15.6%. If you have an investment for those funds that will get a higher return, then invest there. Otherwise, invest in the increased pension benefits.
Not a bad deal IMHO.
Uncledrz

 

[Brat]

To give you a picture of what an immediate annuity would look like I went to the Vanguard website and faked in a couple of their questions.  I assumed the insured is 60 yoa and the annuity would begin in December and would be paid monthly.  I added a 0 to the deposit amount, if the relationship between premium and monthly annuity were 1:1 then Vanguard would pay you $32.35/mo or 388.20/year  without the cola adjustment or survivor annuity.

uncledrz forgot to consider return of equity in his calculation, or cola increases, so you aren't getting 15.6%, but his bottom line is correct. 

Go for it! 

To check for yourself: http://flagship3.vanguard.com/VGApp/hnw/content/AccountServ/Retirement/ATSAnnuitiesOVContent.jsp

Choose "Lifetime Income Program", then pick "Request a Quote" off to the left of the screen.

 

[maddythebeagle]

Just wished we knew about this years ago, and it would not have cost so much for one year of service buy back.

I wouldn’t kick yourself over. I assume your program costs are based on his highest earning year(s). I actually think it is better to wait to the last minute to purchase unless some part of the pension is variable (meaning-if you put the money in earlier, how much would it return) vs. paying a little bit more right before retirement. I believe most of these require you to purchase before you retire.

 

[tozz]

I will be curious what you decide, too, Ginger.  My summer jobs in college involved either tacking up Fallout Shelter signs or pawing through people's dirty underwear.  I have 11 months where CSRS retirement deductions were not take.  Supposedly OPM will contact me in a few months and ask if I want to buy those months of credit.  I have given up trying to understand the formula.

 

[Ginger]

We could also make 180 payments of $46.23 per the letter Do the math on that one! (It is a 6% loan.) Totally against our grain to pay interest on anything. So we will probably mail in the total amount and be done with it. I keep thinking $5,500 can be put to better use (or fun) but it does make sense in the long run to send in the check. My DH says "it is one less cruise we will take."

 

[Brat]

This would increase his monthly benefit by approximately $72.00 a month

We could also make 180 payments of $46.23 per the letter

Let me see.. $25.75 per month ahead, at least, and you would still have money in the savings fund for the cruse. If you both passed on in less than 15 years OPM would be stiffed.

Either way, you win.

 

[JohnP]

Ginger and Tozz - I retired in 2003 under CSRS and paid for 4 years service credit based on my military time (as an officer - enlisted time counts without buying the service credit, IIRC) just before retiring.  It was a chunk but, as I remember, the payback was less than 2 years.  SOOOOO, I would recommend recalculating the benefits and just do it.

As I remember, I was required to pay the service credit in full before retirement day, so maybe re-check the rules for your situation to ensure that you know your options. 

By the way, the cost of this service credit is a small fraction of what I've heard about for our local teachers. 

Best regards
JohnP   

 

[Ginger]

I wrote the check out last night for the full amount and mailed off this morning. The hardest part so far of my upcoming DH's retirement is dealing with all the paperwork from two different retirement systems (but reciprocal benefits).