Should I purchase 'service credits'?

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Brianeboatman

Recycles dryer sheets
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Jul 27, 2014
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I am 38 and plan to move out of Nevada, where I have worked for the state government for the past 12 years. I will be moving when I'm 48. The question is this, should I purchase 5 years of service credits, sometimes referred to as 'air time'? I currently have $75k saved in a 457 plan and continue to save $1,800 per month into it. The max I can purchase is five years and it will wipe out my savings this far, the $75k. I get 2.67% per year of service. If all goes to plan, I will have 22 years of service when I leave Nevada. I have the option of purchasing five years of service that would give me the pension of a 27 year employee. I can claim the pension at age 55. I've been lurking a bit and have seen some pension haters, but give me your 'dollars and cents' evaluation and not your pensions are evil evaluation. Thanks in advance for your thoughts!


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Also, I will continue to save the $1,800 monthly. I could easily be content with $70k per year in retirement. With the 27 years in the pension system, I will be a yearly pension of approximately $61,000. Saving the $1,800 per month for ten years and leaving it until 55 at 6% per year should get me to about $450,000. I hope that helps!


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Here's a thought I've had recently; we are told to buy low and sell high, right? I feel that I've done exceptionally well the last few years and could 'sell high' by locking in these five years of service at $75k. I will then begin to rebuild that account.


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I think that you read some threads wrong... I do not think there are 'pension haters' here... lots of people who do not like annuities, but not pensions..

Well, I will say that some do not like gvmt pensions that are out of line with the contributions and then the people expect the taxpayer to make up the difference.. I am against that... but not pensions in general..


The thing that you do not say is how much difference these 5 years will make in your annuity... that is the important number that is needed to say if it is worth $75K....
 
It's worth $11,300, give or take a bit. I'm basing that off of the following...

2.67% x 5 years= 13.35% of my highest three years salary which is approximately $85,000.

Thank you sooo much for your response. I NEED feedback.

Brian


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Brianeboatman said:
$11,300 per year from 55 until death and also until my wife dies.


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Click to expand...


Sooooo, $11,300/$75,000 sounds pretty good.... almost 15%...


But, you are 38, so you could put that $75K into some other place and earn money... say you earn 6%.... you would have about $200K when you turn 55...

Now... $11,300/$200,000 does not sound as nice.... less than 6%...

But... it is better than what you could get buying an annuity today... and could be much better...


I would say yours is a close one IMO... have to go with looking at it with your other investments and your actual needs... and how you feel... some people love their monthly checks, like one of my sisters...
 
Good response. I feel like the pension credits would be more secure, but I may be wrong. Also, I like the idea of having a big sack of cash, but regular and steady income would be nice...nicer, I think.

Thanks for your comment. It's given me some food for thought.


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I think the fact that the pension is until death is a nice benefit. Also, I failed to mention that after three years, there is a COLA of 2% for three years, then 3% for three more years and then 3.5% for three years and then 4% for three years and then finally 5% each year until death. How does that change your thought process?


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Brianeboatman said:
I think the fact that the pension is until death is a nice benefit. Also, I failed to mention that after three years, there is a COLA of 2% for three years, then 3% for three more years and then 3.5% for three years and then 4% for three years and then finally 5% each year until death. How does that change your thought process?
Click to expand...

Is that a COLA of "up to x%", or a flat step-up of 2%/3%/3.5%/4%/5%? And is the 2% for 3 years 2% PER YEAR for 3 years, or just a flat one-time 2% step-up in year 4, a 3% one-time step-up in year 7, 3.5% one-time step-up in year 10, etc.? Either way it's nice to have step-ups, but the ANNUAL step-ups seem very generous to be guaranteed for 12 years, and then 5% per year until death?

Also, how well funded is the Nevada state plan that you'd be buying credits into? If it's relatively well funded today, odds are they'd likely keep the good funding status...but if it's relatively poorly funded, I might do some more number crunching to see what your alternative investments might yield. It's not an easy decision if it's very poorly funded now, as I don't foresee a huge surge in gambling revenue or other massive economic growth engine to fill up NV coffers with real estate tax/sales tax/income tax revenue.

Bonds for the most part are going to yield little to nothing over the next 20 years. If rates stay flat, your total return will be little. If rates go up, bond funds will drop in value and roughly negate the yield they throw off, so you'll still end up with little to nothing...so if you view this $75k as your bond allocation (and it would be a fairly good bond allocation, pending clarification of the aforementioned COLA questions), you could then put 90% to 100% of future cash into equities and let it grow.
 
I hate having all the eggs in the same basket, but the credits seem to be an incredibly generous deal. With $61k cola pension you don't need much outside savings.
 
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.
 
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States, unlike the Feds, cannot print money. Many (all?) state retirement systems are under-funded. I would be concerned that the terms of my pension would be changed at some point.
 
I am retired from the State of Nevada and the fund is fairly stable. YOu have to really run the numbers to see what is better. I looked at buying 5 years but because of my age I would not have broke even until almost 80 so decided against it. Also if you do not have 30 years of service you lose 4% a year taking it before age 60 unless you are a prison guard, etc so you may want to be sure about this. I think the state makes out on some instances because if you die they give a pension to your spouse but probably make out on having your lump sum $ for so long.
 
The COLA's are every year once you have 3 years in retirement.
 
Brianeboatman said:
I think the fact that the pension is until death is a nice benefit. Also, I failed to mention that after three years, there is a COLA of 2% for three years, then 3% for three more years and then 3.5% for three years and then 4% for three years and then finally 5% each year until death. How does that change your thought process?
Click to expand...

That's quite a good COLA plan and far more generous than I get and many others get. I can see why you are tempted.

How well funded is the plan? Given the Detroit example, I would be concerned about future revisions to the promised benefits.
 
@teacher terry
I was a police officer for 10 years so I can start drawing at age 55. I only plan to work until 48 in Nevada and then will move home ( Washington). I will work doing 'whatever' until 55 and start retirement then.

I did know about the 4% penalty per year, but appreciate the heads up!

I am 38 now and will have to pay $15,250.22 per year. I think it 'maths' out with the COLA increases.

One of my concerns is the state changing the rules down the road. I'm hoping that they will leave me be and scree the new employees. Horrible, I know.


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Changing pension benefits for new hires isn't "screwing" them. They don't have to take the job if they don't want it.
 
Amen, brother. I just would feel screwed if I knew that previously hired folks got a better/different benefit. I agree tho!


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utrecht said:
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.
Click to expand...


I can't speak for Nevada, but for mine, it is supposed to be break even...general formula for funding system is 14.5% employer AND 14.5% employee match and 8% return on these investments. Buying years costs 29% as employee will not pay. But, what doesn't factor in to me is that you are then also allowed to retire earlier by buying the years which means you start drawing earlier. But, many people don't get to the 5 year vesting period or pull their money out and quit. All matching employer money stays in the system. I was told by the pension system very few people even take option to buy years because they simply don't have the money to do it.
OP, FWIW- I purchased 4 years and like you the math was favorable. But I spent almost a 100k buying those and it about wiped me out doing it. Yes, the payback is good, but I in essence doubled down on a one legged retirement stool. So while I am very pleased now, I don't control my financial destiny as COLAs and monthly check could in theory be cut. Of course since I am not managing a big portfolio that may be a good thing too as I may have invested it poorly also.


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Mulligan,

Thank you for your post. We think alike. I have been saving fairly diligently and this $75k would all but wipe me out. I will continue to save like mad because that's just what I do. I am placing a lot of faith in Nevada and nevada's future if I make the purchase. I called a financial planner friend of mine and he's running some numbers. At this point, I think I will regret the purchase ONLY if Nevada doesn't honor it's promises. (Fingers crossed) I like what you said about a one legged stool...it's so true and scary.


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Brianeboatman said:
Mulligan,

Thank you for your post. We think alike. I have been saving fairly diligently and this $75k would all but wipe me out. I will continue to save like mad because that's just what I do. I am placing a lot of faith in Nevada and nevada's future if I make the purchase. I called a financial planner friend of mine and he's running some numbers. At this point, I think I will regret the purchase ONLY if Nevada doesn't honor it's promises. (Fingers crossed) I like what you said about a one legged stool...it's so true and scary.


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Click to expand...


Braine, the only thing I really did since I am "one legged" was to make sure I could survive a pension cut. After I finish up some pesky one time expenditures I am able to live reasonably on 60% of my take home pay. In addition to my yearly COLAs, I will get a big one time COLA adjustment in about 15 years or so when I pay off my house. Sounds like an odd statement, but I continue to save for retirement while retired, as you never know down the road.


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