Buy into pension fund or leave money invested?

[J.P. MoreGains]

This is a question that I'm sure has been discussed before... so if anyone has any feedback on the trade offs.

My Scenario

I'm in a state pension and I have the chance to buy service credit years if I like.

The 5 year mark is the minimum mark to show up on the table and receive a normal benefit distribution after retirement.

This Summer I will have 2 years of service and I can buy in 3 more years to get to the 5 year mark if I want.

The reason I may do this is:
- Buy in to this if I decide to leave so I have this benefit
- A sort of safety net / another form of diversification
- Feels good to have something guaranteed
- I am only scheduled to collect like $750 in Social Security so this would be a good addition
- End of Windfall Elimination Program lets me collect both Social Security and Pension (although my payout is so low I might not have been impacted anyway).
- Every month I work past 2 years the cost gets a little cheaper
- I want to plan this since I'm not sure I really want to stay all the way to 5 years. I could see myself doing that, I'm just not sure.

Numbers on Pension

Total Cost to buy 3 years: $47,728.69 ($1,325.80 per month)

Benefit at age 65: $971 paid per month

Not guaranteed but I plan on living until 90, so 25 years... total of what would get paid out over that time span: $291,300.00

Minus the 47,728.69 I paid to get into it: $243,571.31 I would say this is the "value" I would get at age 65

* I would pay the 47k with pretax money I already have in my 401k. Would be a direct transfer/switch.

Numbers on Investment

At age 65 assuming 7% returns that 47,728.69 would be worth $192,760.93

Comparison

This is kind of an elementary school comparsion but I'm no expert at this stuff.

The $243,571.31 > $192,760.93 so this tells me the pension could be a good value.

Now... I wouldn't take all of the $192k out at age 65 so some of that would be left to grow so that makes things a bit more complex.

But regardless, the pension does have some good value. Plus the security feature of it.

And for only 5 years of service $971 seems pretty good to me.

Questions

- What am I missing here? I'm pretty new to this.

- What would you do?

- Is it just a coin flip? Does either one really work about the same? (I kind of felt this way with picking either a Roth 401k or Regular pre tax 401k. I mean they both work if you save, I opted for pretax to max what I save early on to get some momentum)

- Would you leave to go for higher pay elsewhere or just stick around for the pension? (I only make like 78k as a software dev. There is possibility for more but will never be huge like at private companies). But there are so many great things about where I work so I could see myself staying since I'm happy.

Any thoughts are appreciated.

[spartana]

I bought back 4 years of service credit of my military time (the maximum allowed to buy back) to add those years to my CalPERS state pension. In my case I just had it taken out of my pay as it tax deferred and also had a guareented 6% annual  tax deferred interest rate if I decided to withdraw it instead of take a future pension (which I could get at 50 even though I FIREd much earlier). The the math worked out in my case but it was more of a security issue for me as I had "enough" invested in the market already and the military buy back and guaranteed pension or lump sum amount was a big safety net for me.

[J.P. MoreGains]

Yes, I think the safety net feature is significant. I think there is a pyschological component to having a pension... even if it's only $971. I think it would feel good to have this.

[spartana]

Yes, I think the safety net feature is significant. I think there is a pyschological component to having a pension... even if it's only $971. I think it would feel good to have this.

My pension is also less than $1000/month and, like you, I have low expenses so it covers enough to ride thru any big down turn. However the math says I would have been better off investing but being able to do it tax deferred from my pay check over time made more sense to me. Do you also have a tax deferred 457 plan? They're pretty invaluable for early retirees. I put in the max allowable each year and knowing I could tap that penalty-free at any age once I quit my job was really a great safety net.

[MustacheAndaHalf]

Is there an expiration date on this ability to buy service credit years?  Can you wait until you know how many years you will work to buy credits?

You mentioned working 2 years already, and that less than 5 years earns no benefits.  You get a kind of leverage in that a 5 year person comes from 3 years of credit, without which you'd have 0 years.  If you overpay, do you get credit for that?  If you have 7 years instead of 5 years, is your pension +40% higher?

[J.P. MoreGains]

Do you also have a tax deferred 457 plan? They're pretty invaluable for early retirees. I put in the max allowable each year and knowing I could tap that penalty-free at any age once I quit my job was really a great safety net.

Yes I do... I'm maxing this out along with my 401k. This is a huge part of how I can save so much... between 401k, 457b and HSA I lower my taxable income by 50k... which is like getting a raise by not paying much tax at all.

I'm hoping to be done in 5 years and then use this 457b like you do.

[J.P. MoreGains]

Is there an expiration date on this ability to buy service credit years?  Can you wait until you know how many years you will work to buy credits?

You mentioned working 2 years already, and that less than 5 years earns no benefits.  You get a kind of leverage in that a 5 year person comes from 3 years of credit, without which you'd have 0 years.  If you overpay, do you get credit for that?  If you have 7 years instead of 5 years, is your pension +40% higher?

I have to buy credits while I'm still employed... so if I were to get laid off or leave I couldn't go back and buy them. So that is why I want to have everything planned and ready to go.

I don't think it would be 40% higher in that case. So if I stay at this job I don't think it would make sense to buy extra credits over the 5 year mark.

So every month I stay after this July my price to get to that 5 year mark decreases.

The idea is that if I decide to leave I'll buy my credits first to get to that 5 year mark.

I kind of feel like it's a good idea... especially if I like this job and just want to stay longer. I don't make all that much money but it's pretty stress free.

I also feel I could ride it out to the 5 years just working (3.5 years from now) and basically be close to FI with the way I save. I would get that 5 year pension and not have to pay anything for it.

But... there is the temptation of chasing bigger pay and leaving.

[MustacheAndaHalf]

It's good that overpaying results in proportionally higher pension payments.

If you leave money in a bank account, it keeps growing.  Once you buy years of credit, that money stops earning interest.  And it gets cheaper over time, so it sounds like time is on your side.

The more the company depends on the government, the greater the risk of you getting DOGE'ed.  Performance won't matter if most people get laid off.  Is there another risk besides that?  Absent risks, waiting pays.

Hope it works out well.

[slugsworth]

The idea of being able to get vested after 2 years (and some money) is pretty enticing.

I like the idea of a pension as it reduces your sequence of return risk. Will the final pension inflation adjusted?

[spartana]

It's good that overpaying results in proportionally higher pension payments.

If you leave money in a bank account, it keeps growing.  Once you buy years of credit, that money stops earning interest.  And it gets cheaper over time, so it sounds like time is on your side.

The more the company depends on the government, the greater the risk of you getting DOGE'ed.  Performance won't matter if most people get laid off.  Is there another risk besides that?  Absent risks, waiting pays.

Hope it works out well.

This will depend on which state he has a pension with. I have CalPERS and any service credit I buy back (and any portions of my pension I paid into while employed) earns interest. It use to be a tax deferred 6% in my case (much better than bank rates) but probably lower now. So even if he didn't earn enough years to get a pension, he'd be able to get all his buy back money, and the portion of his pension he contributed into, back with earned interest.

AI response:
"Yes, interest accrues when you buy back service credit with CalPERS. The interest is compounded annually. The longer you wait to repurchase service credit, the more expensive it will be."

Also waiting longer to repurchase will increase the cost of the repurchase so a good reason not to hold off longer.

[MustacheAndaHalf]

It's good that overpaying results in proportionally higher pension payments.

If you leave money in a bank account, it keeps growing.  Once you buy years of credit, that money stops earning interest.  And it gets cheaper over time, so it sounds like time is on your side.

The more the company depends on the government, the greater the risk of you getting DOGE'ed.  Performance won't matter if most people get laid off.  Is there another risk besides that?  Absent risks, waiting pays.

Hope it works out well.

This will depend on which state he has a pension with. I have CalPERS and any service credit I buy back (and any portions of my pension I paid into while employed) earns interest. It use to be a tax deferred 6% in my case (much better than bank rates) but probably lower now. So even if he didn't earn enough years to get a pension, he'd be able to get all his buy back money, and the portion of his pension he contributed into, back with earned interest.

AI response:
"Yes, interest accrues when you buy back service credit with CalPERS. The interest is compounded annually. The longer you wait to repurchase service credit, the more expensive it will be."

Also waiting longer to repurchase will increase the cost of the repurchase so a good reason not to hold off longer.

Maybe I misunderstood OP's description - I thought each month costs less if he waits, but OP might have meant he has fewer months to buy, the longer he waits.

- Every month I work past 2 years the cost gets a little cheaper

So every month I stay after this July my price to get to that 5 year mark decreases.

[J.P. MoreGains]

Yes, every month I wait I have less months to buy... that is what I meant by "cheaper".

The money in this account does earn interest but it's not going to grow like investments.

The final pension does have a 1% cost of living increase which doesn't match inflation growth.

I think my plan is to have this all ready to go in case of layoffs or something changing... that way I can execute the plan if I want and get it done I bet in under a month.

[mistymoney]

Is there an expiration date on this ability to buy service credit years?  Can you wait until you know how many years you will work to buy credits?

You mentioned working 2 years already, and that less than 5 years earns no benefits.  You get a kind of leverage in that a 5 year person comes from 3 years of credit, without which you'd have 0 years.  If you overpay, do you get credit for that?  If you have 7 years instead of 5 years, is your pension +40% higher?

I have to buy credits while I'm still employed... so if I were to get laid off or leave I couldn't go back and buy them. So that is why I want to have everything planned and ready to go.

I don't think it would be 40% higher in that case. So if I stay at this job I don't think it would make sense to buy extra credits over the 5 year mark.

So every month I stay after this July my price to get to that 5 year mark decreases.

The idea is that if I decide to leave I'll buy my credits first to get to that 5 year mark.

I kind of feel like it's a good idea... especially if I like this job and just want to stay longer. I don't make all that much money but it's pretty stress free.

I also feel I could ride it out to the 5 years just working (3.5 years from now) and basically be close to FI with the way I save. I would get that 5 year pension and not have to pay anything for it.

But... there is the temptation of chasing bigger pay and leaving.

but - if you buy the 3, and still work there for 3 years youd get a pension based on 8 years of service right?  What do those numbers look like?

And is pension based on highest 3 years earnings? Could get to be an even better deal.

after you buy and then are vested, will the pension adjust with inflation if you do leave?

[mistymoney]

Yes, every month I wait I have less months to buy... that is what I meant by "cheaper".

The money in this account does earn interest but it's not going to grow like investments.

The final pension does have a 1% cost of living increase which doesn't match inflation growth.

I think my plan is to have this all ready to go in case of layoffs or something changing... that way I can execute the plan if I want and get it done I bet in under a month.

if you bought now and got laid off before July, would you not be vested and just get your money back?

[J.P. MoreGains]

Well... someone just got laid off today on my team. So this is very pertinent... but I think I'm safe.

if you bought now and got laid off before July, would you not be vested and just get your money back?

=> I would not be vested so I could take my money out if I would like to. But... it could be wise to leave it in case I get another state job to then get to the 5 year mark.

Plus anyone with any service credit qualifies for their health care package which is a step up from medicare I hear. Plus it could have some benefits for early retirees... I'd have to see about this. That alone could be very valuable for me.

but - if you buy the 3, and still work there for 3 years youd get a pension based on 8 years of service right?  What do those numbers look like?

And is pension based on highest 3 years earnings? Could get to be an even better deal.

after you buy and then are vested, will the pension adjust with inflation if you do leave?

=> The numbers go up gradually after 5 years... so it would increase but not dramatically. I think the big benefit is going from nothing to 5 years.

=> Pension is based on highest 5 years of earnings.

=> It isn't inflation adjusted but cost of living adjusted which is usually 1% each year. So it doesn't keep up with inflation. So I do think it would adjust if I leave.

[ToughMother]

I would double check that 2 years of service + 3 years purchased = 5 years of service from a vesting perspective. In our state, only service counted towards vesting (10 years!).

[J.P. MoreGains]

I would double check that 2 years of service + 3 years purchased = 5 years of service from a vesting perspective. In our state, only service counted towards vesting (10 years!).

Good point. I feel like I have asked this but I don't know this 100% for sure. I could see your point being the case.

The idea being that they allow you to buy service credit but not do something like I'm proposing to work only two years and be vested by buying in.

[ToughMother]

Good point. I feel like I have asked this but I don't know this 100% for sure. I could see your point being the case.

The idea being that they allow you to buy service credit but not do something like I'm proposing to work only two years and be vested by buying in.

Exactly. Let us know what you learn.

[Must_ache]

You stated a value of $291K but said that there is only a 1% cost of living adjustment.
If inflation runs at 2% and there is 1% erosion of purchasing power each year, it's only worth $268K.
Also, life expectancy at 65 is approximately 19 years.  So if your life expectancy is average, it's only worth $212K.
Given our country's finances, higher than 2% inflation is a risk, that lowers the amounts even more.
If you really believe you have great genes and are living to 90+ that's a pretty good reason though.

[J.P. MoreGains]

You stated a value of $291K but said that there is only a 1% cost of living adjustment.
If inflation runs at 2% and there is 1% erosion of purchasing power each year, it's only worth $268K.
Also, life expectancy at 65 is approximately 19 years.  So if your life expectancy is average, it's only worth $212K.
Given our country's finances, higher than 2% inflation is a risk, that lowers the amounts even more.
If you really believe you have great genes and are living to 90+ that's a pretty good reason though.

These are all the angles I need to consider. I'm good at doing a general ballpark estimate but don't really understand well when factoring in inflation. Higher inflation makes it less valuable.

It might just come down to do I want a pension as a sort of different retirement income source as peace of mind.

The 1% cost of living adjustment is not all that encouraging. But feeling like I have a set pension to plan on would be nice.

Part of me feels like I should blow past my LeanFI number and go a little past FI for safety. Sort of a bit past FI but not Fat Fire