Author Topic: Should I buy time in my pension plan?  (Read 2433 times)

blacklab67

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Should I buy time in my pension plan?
« on: July 15, 2016, 07:39:54 AM »
Greetings,

I have a dilemma on the purchase of time at my job. I am allowed to buy 5 years of time in my pension plan, at the cost of 77K.

I am currently 49 and have so far 7 years with my employer. The earliest the plan allows retirement is at age 55 with 20 yrs of service, or after 23 years of service at any age ( or at age 62 regardless of number of years worked). We get 3% of our salary for every year;  Final Average Monthly Pay* x Years and Months of Service Credit x 3% = Monthly Benefit.

The five years i would purchase would both increase my monthly benefit, and count toward eligibility. I would like to have eligibility to retire as early as possible. I font necessarily want to retire at the earliest possibility, but I definitely want to have the eligibility. I can buy the fives years at any time, but the cost is probably least now because they calculate it with current pay and if i advance to a higher salary, the cost of purchase will be higher. Should i go ahead and buy the time now, or wait? I am just not able to figure out if this would be a good investment or if I should just leave the 77 in my IRA and not buy time with it.

Thank you for any input you may have

BL

FIPurpose

  • Handlebar Stache
  • *****
  • Posts: 1350
  • Location: WA
    • FI With Purpose
Re: Should I buy time in my pension plan?
« Reply #1 on: July 15, 2016, 08:39:54 AM »
I have never seen an employer with a 3% factor. That is an insanely nice pension. With 20 years youre looking at 60% of salary. I would still base it completely on what you want. This plan means you need to work at least till 57. Is that an age you want to retire at? If so then this is a good plan. Otherwise, if you already have the money to retire, then you've already won amd don't need the pension.

CheapskateWife

  • Handlebar Stache
  • *****
  • Posts: 1408
  • Location: Central TX...but considering a move
  • FIRE'd and Loving it!
Re: Should I buy time in my pension plan?
« Reply #2 on: July 15, 2016, 08:48:11 AM »
I've done similar calculations for myself as far as buying into a pension...although our rate is a very modest 1% per year of service.  Even with that modest amount I was able to figure out that the amount I was paying in would pay for itself after the first 14 months of retirement.

My calculations look like this and you can do the same comparison for yourself:

10 yrs of service = 10% x 85K(my current salary) = $8500 annually at retirement

$4000 infusion for credit towards 4 years of service

14 years of service = 14% x 85K(my current salary) = $11900 annually at retirement

$11900 - $8500 = $3400 extra per year

Payback period = $4000/ ($3400/12) =14.13 months to breakeven.

What would your payback period be...and is it worth it for you?

Dee18

  • Handlebar Stache
  • *****
  • Posts: 1739
Re: Should I buy time in my pension plan?
« Reply #3 on: July 15, 2016, 09:32:57 AM »
The purchase of time would let you retire at 57 instead of 62.  Are you likely to want to do that?  Do keep in mind that pension plans can change, unless possibly if  there is a state constitutional issue, as with public pensions in Illinois, so you might factor I whether the pension is adequately funded and/or federally guaranteed.  You can get this information from your employer.

Happy in CA

  • 5 O'Clock Shadow
  • *
  • Posts: 54
Re: Should I buy time in my pension plan?
« Reply #4 on: July 15, 2016, 09:51:46 AM »
I purchased 5 years several years ago and have never regretted it.  I researched my payment options and found the best one to be a pretax payroll deduction.  That way you don't need to deplete your IRA to fund the purchase and you reduce your taxable income.  I was originally paying with post-tax dollars, but after having a conversation with my benefits department was persuaded that it was legal as far as the IRS was concerned to pay with pretax payroll deduction.  Furthermore at the time the IRS placed no limit on the amount that could be diverted from your wages to pay for a service credit purchase (unlike annual maximum contributions imposed on most retirement accounts). 

I assume with a 3% factor that you are a (government) public safety employee.  5 x 3% = 15% of your pensionable compensation at retirement -  that is a great deal if your pension plan is reasonably healthy, and if indeed you are a government employee your pension may have further protections.

As to now or later, definitely now.  There is no requirement that an employer offer such a purchase, and even though they are actuarily neutral, meaning you are paying the full cost of this benefit, they are politically unpopular.  If you are both an extremely disciplined and successful investor you may do better investing the 77K yourself - but if you are able to pay with new pretax dollars you should consider your tax savings when making the comparison.

Choices

  • Pencil Stache
  • ****
  • Posts: 516
    • ChooseBetterLife
Re: Should I buy time in my pension plan?
« Reply #5 on: July 15, 2016, 10:18:29 AM »
This is an exciting opportunity, and it's good that you're analyzing it carefully.

I don't know about your specific pension, but in general:
- the rate of return on money invested in a pension is less than the rate of return in a good index fund.
- the pension ends when you die. Money outside the pension can be passed on to your heirs.

Are these statements true for your situation and how do the answers fit with your needs and plans?

JackieTreehorn

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Should I buy time in my pension plan?
« Reply #6 on: July 15, 2016, 11:59:30 AM »
I work as a retirement actuary.  It is a complex decision that depends on a bunch of information, some of which you have provided, but additionally you'd need to consider the following:

Plan Information:
Any early retirement reductions applicable in the plan (e.g. is the 55/20 pension reduced at all?  What about the any and 23 pension?)
What pre-retirement death benefits does the plan have, if any?
Does the plan guarantee a return of participant contributions to the plan?  If so, would the 70k count?
What payment options does the plan offer (e.g. lump sum, life annuity, joint and survivor annuity, life annuity with n years guarantee)?  What option would you most likely take and what if any reductions apply (e.g. typically joint and survivor annuities are reduced somewhat to provide additional coverage to your spouse)?
What happens to the 70k if you quit, die or become disabled prior to retirement)? 
Are you fully vested in the pension plan? (I believe answer is should be yes)

Non-Plan Information:
Your current salary
Your projected salary at retirement
Are you in reasonably good health and expect have a long retirement after you retire, whenever that may be?
What rate of return do you expect to earn on the 70k if you do not buy time in the pension plan?
Any spousal/family information that may be relevant to your decisions regarding the pension.
As another poster mentioned, can you pay the 70k pre-tax?

There are probably even more considerations I'm forgetting.


Cassie

  • Walrus Stache
  • *******
  • Posts: 6591
Re: Should I buy time in my pension plan?
« Reply #7 on: July 15, 2016, 02:57:09 PM »
I could have bought 5 years of service too but it was expensive like yours is. AFter my DH ran the #'s it would have taken me 17 years to break even making me 77 so we decided against it. You really need to figure out where your breakeven point is.