Purchasing Service Credit

[mendota98]

My state employer allows one to purchase from one to five years worth of service credit. Each year would cost $60,000. If I were to purchase four years of credit ($240,000) that would increasr the monthly pension $1750.00 at my present salary. Hopefully I will receive another 20% raise prior to retirement.

Presently my 401 and 457 balances add up to $200,000 that I could use to pay down the $240,000 cost. I could "finance" the remainder over the next 48 months until I retire at about 7% through the state. A monthly cost of $1,144.00. This amount I believe is tax deductible.

My retirement age would be 64 and another 20% salary increase would adjust the pension service credit purchase to a monthly pension increase of $2150.00

By buying four years of service credit I feel I am diversifying. The pension would make up the largest portion of my total portfolio of course.

My thanks to all for your replys.

 

[Mulligan]

Hello Mendota. Assuming you get the raise, your return on your money is close to 10% per year, which isn't too bad at all.If the pension is cola'd it would get better I assume. I purchased 4 years for a little under a $100k, and it raised my pension between 15k-20k ( cant remember exactly as its been quite a few years ago). I have no regrets, but my pension system is near 90% funded, so I feel pretty secure. How well funded and secure is your pension? This is something I would look at closely. Unless I didn't understand you correctly, you are doing the opposite of diversifying. You are doubling down on the trust and payout of your pension, by taking money that you are 100% in control of and are giving it to the pension system.

 

[H2ODude]

I had a similar situation; 10 years cost me ~$250,000. In my case it added I guess about 30k per year annual income, but more importantly allowed be to bail at 60, not 65. Have to figure what your longevity is likely to be (good luck with that) but in any case, having a secure DB income source is, well, almost priceless. Our retirement income, before ss kicks in, is roughly half investment and half pension. Since our expenses are well below those two now, it allows a good bit of security and ability to take a bit more aggressive approach with the investments.

In our case we didn't use tax deferred money, we wanted to leave as much protected as possible.

I'm sure you'll get a lot of response but I'd say your decision is highly dependent on your specific situation.

Edit: Mulligan makes a good point. I'm under the NC system, one of the better if not best for local government. The security of the system should be considered. I got taken horribly in a previous government system...15 years 8% contribution and when left could have vested for chump return; instead I took my roughly $50,000 contributions back, with NO interest. I'm sure they enjoyed my money in the eighties and early nineties.

 

[westcoast]

I bought five years for $100,000, so your per year cost seems high to me, unless it's because your salary is very high and you're older than I am.

Double check about whether your payments will be deductible. I'm not sure why they would be, as they're presumably after-tax dollars. The good news would be that a portion of your pension would also be nontaxable.

 

[Purron]

Hello Mendota. Assuming you get the raise, your return on your money is close to 10% per year, which isn't too bad at all.If the pension is cola'd it would get better I assume. I purchased 4 years for a little under a $100k, and it raised my pension between 15k-20k ( cant remember exactly as its been quite a few years ago). I have no regrets, but my pension system is near 90% funded, so I feel pretty secure. How well funded and secure is your pension? This is something I would look at closely. Unless I didn't understand you correctly, you are doing the opposite of diversifying. You are doubling down on the trust and payout of your pension, by taking money that you are 100% in control of and are giving it to the pension system.

My husband bought back some service credit so this is an issue we've looked at closely. I second the issue Mulligan raised about the security of your pension. By the way, welcome!

 

[SJ1_]

,, How well funded and secure is your pension? This is something I would look at closely. Unless I didn't understand you correctly, you are doing the opposite of diversifying. You are doubling down on the trust and payout of your pension, by taking money that you are 100% in control of and are giving it to the pension system.

I had to make this decision in GA very recently. Even though the pension seemed secure now, down the road who knows. The return was excellent but
I thought mostly in terms of diversifying and decided against it.