I work for state government an originally reached out to this forum 7 years ago about whether to buy 5 years of service. The original thread has been archived so I just thought I would post a new followup topic. Maybe it will inspire other young pension workers to by years of service.
8/14/2013
I currently have just over 4 years of service with a state agency. I'm fully vested and our pension is well funded and will most likely be well funded for the next 15 years atleast because of natural resources. So I want everyone to treat my question as if there isn't any doubt the pension fund will stay solvent eventhough I'm fully aware what can happen. I am currently 27 years old and have the opportunity to purchase 5 years of service credit for $14,500 at 8% interest . Our formula for determining our pension payment is (years of service * 2%) * highest average salary over last 3 years of service. If I were to leave before the rule of 85 I would receive this payment beginning at 65 years old with no inflation adjustment. I currently make $3,391 per month.
So I'm currently looking at 8% * 3391 = $271.28 per month at age 65
With 5 more years 18% * 3391 = $610.38 per month at age 65
For some background I have $32,000 in my Roth IRA and $3,000 in Deferred Comp fund.
I have very little expenses and think I can max out my Roth and pay a large chunk of the $14,500 very quickly. I want to do this to suppliment my investing. I see it as diversification. It also decreases my rule of 85 to 50 years old if I manage to enjoy state employment for that long which is possible since there are many state agencies I could work for. The idea of investing in myself is also enticing since I would receive a higher benefit based on each year I keep my employment and everytime I get a raise.
Is it a good idea? I alway read about people purchasing service credits at the end to retire early often paying $90,000 or more. Does it make more sense to do when you are young?
4/28/2016
I thought it might be fun to post a follow up to this a couple years later. The pension years have been paid off for awhile now. I currently have 11 years 7 months of service so I'm looking at a $833.68 per month benefit at age 65 on a average salary of $3,598.61. My current salary is $3,873.00. Currently, I have $50,000 in equity on my $120,000 condo, 12 grand in my roth ira, 12 grand in my deferred comp, 5 grand in my HSA, and my pension which currently has a cash value of $38,267.36 so my focus is currently on my 4% match in deferred comp, maxing out HSA, and maxing out the Roth IRA. I'm trying to get my index funds up since I used a lot of my Roth IRA to purchase my condo using the first time home buyer exemption.
8/16/2020
So it is 7 years later. I still work for state government but have switched employers. I currently have about 16 years of service with a pension payout of $1,360.21 per month. Next month I get a salary increase where I will be earning just under $5,000 per month. I know in the original thread I was told $4,000.00 per month earnings was my break even point so I have surpassed that!
My pension balance is currently $77,711.03. I have $72,774.28 in equity in my $120,000.00 condo. My HSA, Roth IRA, and Deferred Comp accounts add up to $83,231.40 in investments. I pretty much have a 1/3 mix of pension, home equity, and index funds.
I also switched jobs while covid happened so it scared the heck out of me to where I paid off my car and credit cards so my mortgage is my only debt. I'm not quite comfortable at my new job yet but I'm getting there!
8/14/2013
I currently have just over 4 years of service with a state agency. I'm fully vested and our pension is well funded and will most likely be well funded for the next 15 years atleast because of natural resources. So I want everyone to treat my question as if there isn't any doubt the pension fund will stay solvent eventhough I'm fully aware what can happen. I am currently 27 years old and have the opportunity to purchase 5 years of service credit for $14,500 at 8% interest . Our formula for determining our pension payment is (years of service * 2%) * highest average salary over last 3 years of service. If I were to leave before the rule of 85 I would receive this payment beginning at 65 years old with no inflation adjustment. I currently make $3,391 per month.
So I'm currently looking at 8% * 3391 = $271.28 per month at age 65
With 5 more years 18% * 3391 = $610.38 per month at age 65
For some background I have $32,000 in my Roth IRA and $3,000 in Deferred Comp fund.
I have very little expenses and think I can max out my Roth and pay a large chunk of the $14,500 very quickly. I want to do this to suppliment my investing. I see it as diversification. It also decreases my rule of 85 to 50 years old if I manage to enjoy state employment for that long which is possible since there are many state agencies I could work for. The idea of investing in myself is also enticing since I would receive a higher benefit based on each year I keep my employment and everytime I get a raise.
Is it a good idea? I alway read about people purchasing service credits at the end to retire early often paying $90,000 or more. Does it make more sense to do when you are young?
4/28/2016
I thought it might be fun to post a follow up to this a couple years later. The pension years have been paid off for awhile now. I currently have 11 years 7 months of service so I'm looking at a $833.68 per month benefit at age 65 on a average salary of $3,598.61. My current salary is $3,873.00. Currently, I have $50,000 in equity on my $120,000 condo, 12 grand in my roth ira, 12 grand in my deferred comp, 5 grand in my HSA, and my pension which currently has a cash value of $38,267.36 so my focus is currently on my 4% match in deferred comp, maxing out HSA, and maxing out the Roth IRA. I'm trying to get my index funds up since I used a lot of my Roth IRA to purchase my condo using the first time home buyer exemption.
8/16/2020
So it is 7 years later. I still work for state government but have switched employers. I currently have about 16 years of service with a pension payout of $1,360.21 per month. Next month I get a salary increase where I will be earning just under $5,000 per month. I know in the original thread I was told $4,000.00 per month earnings was my break even point so I have surpassed that!
My pension balance is currently $77,711.03. I have $72,774.28 in equity in my $120,000.00 condo. My HSA, Roth IRA, and Deferred Comp accounts add up to $83,231.40 in investments. I pretty much have a 1/3 mix of pension, home equity, and index funds.
I also switched jobs while covid happened so it scared the heck out of me to where I paid off my car and credit cards so my mortgage is my only debt. I'm not quite comfortable at my new job yet but I'm getting there!
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