Author Topic: Advice Needed on Pension Service Years Purchase  (Read 1259 times)

sdfsdfsf

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Advice Needed on Pension Service Years Purchase
« on: October 22, 2016, 10:21:33 AM »
Hi,

I need some help making decisions about my pension.

I used to be in the MA pension and but I moved and am now in the AZ pension.

In the MA pension, I did NOT vest but accumulated $27,904 in my account and I need to transfer it into my AZ pension via a service purchase.

AZ is allowing me to purchase up to 5 years of pension service due to my MA service, at the following prices:
1 year = $14,783
2 years = $29,687
3 years = $44,556
4 years = $59,492
5 years = $73,770

I will definitely purchase at least 2 years with my MA pension but I am not sure if I should purchase more AZ years of service.

I have put together a spreadsheet showing my different pension payout amounts depending on retirement age and 2 vs. 5 year purchase.
https://docs.google.com/spreadsheets/d/1ViFTvdnHeoh5Q-9gLgW6meP5TLv3NGRxqqgFatf-6a0/edit?usp=sharing

Here are some other details:
1) If I purchase 5 years of service I will have to do a HELOC for $46,000 at 4.05% interest. I should be able to pay this off in 1.5 years.
2) If I only purchase 2 years and do not do a HELOC, I can pay down my mortgage balance faster, $155,000 balance at 3.375%
3) I am currently 39 yrs old and would like to retire at age 55.

I have tired looking at different opportunity costs associated with these choices and am having a difficult time making up my mind. Please share your recommendations with me. Thank you!
« Last Edit: October 22, 2016, 10:41:40 AM by isipwater »

sdfsdfsf

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Re: Advice Needed on Pension Service Years Purchase
« Reply #1 on: October 23, 2016, 12:40:18 AM »
Thank you. Unfortunately, I would have to pay all at once so I would have to do a HELOC

Another Reader

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Re: Advice Needed on Pension Service Years Purchase
« Reply #2 on: October 23, 2016, 12:26:12 PM »
What are the benefits of the Arizona pension?  My recollection is that the State pension is not very good.  You might be better rolling over the Massachusetts funds into a traditional IRA.  Calculate what you would be buying in benefits before you decide.

Cassie

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Re: Advice Needed on Pension Service Years Purchase
« Reply #3 on: October 23, 2016, 01:22:10 PM »
I would only buy the 2 years. I would not take out a loan to buy the rest.

TheDude

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Re: Advice Needed on Pension Service Years Purchase
« Reply #4 on: October 23, 2016, 08:13:08 PM »
I think it kind of depends. Assuming your numbers are correct if you magic number is 54 I say go for it.

MDM

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Re: Advice Needed on Pension Service Years Purchase
« Reply #5 on: October 23, 2016, 10:27:04 PM »
Based on these numbers in your spreadsheet:
"...a difference of $6970 per year [from]...$46,000, [and]...I will pay to borrow $46,000 at 4% interest rate = $1,384.,"
you will be getting ~5% return on your years' purchase.

E.g., see below (rows 70-90 on the 'Misc. calcs' tab of the case study spreadsheet) for one scenario.

It's up to you to decide if that is a worthwhile return.  Looks good vs. current bond yields, not so good if comparing vs. 1970 through ~2006.  What the future holds is anyone's guess - good luck!

One way to evaluate "pension now"  vs. "pension later"
Compare pension payment promised at the later time to either
  - the "Interest generated by Future Value" (Future Value principal is not touched), or
  - the "Constant withdrawal of FV over time L" (principal goes to zero), or
  - "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)
Lump sum nowPV$47000
Payment starting nowPmt_now0$/payment
Interest ratei5.290%/yr
number of yearsn20yr
number of payments/yearfreq1/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$131768
Interest generated by Future ValueFV(i,n,P) * i6970$/payment
Longevity of future pensionL35yr
Constant withdrawal of FV over time LPmt_future8344$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year Trinity-style withdrawalW(FV,L,i,g)6462$/yr
. . 6462$/pmt

sdfsdfsf

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Re: Advice Needed on Pension Service Years Purchase
« Reply #6 on: October 24, 2016, 08:37:43 PM »
Thank you all for your input.

In the end I have decided to only purchase 2 years and not 5 years of service for my Arizona pension for the following reasons:

I could fund the purchase with a pretax payroll deduction, but AZ requires I will have to pay 8% interest each month until the amount is paid off.  Since this is too high, my next best choice would be to do a HELOC at 4%.  If I did the HELOC I would also have to pay more interest on my primary mortgage because I will not be able to pay it off as fast.

Then there is the issue of the pension system itself. A few years ago, AZ had the 7 best pension in the nation. However, now it has fallen to 24th in just a few years. While many states are worse off than AZ, the future of state pensions may face additional headwinds and uncertainty, as political forces continue to work against public and educational employees.

Including opportunity costs, to buy 5 years, the ROI will be almost 15 years after I retire, achieved at age 70, if I retire at 55.

By not purchasing the extra years, I will be able to pay off my house much faster.

Once my house is paid off, I will have significantly more money to add to Vanguard retirements accounts.

Although, I do expect to live past 70, I feel that a 15 year payback is too long. I also prefer to have the peace on mind from eliminating my mortgage faster and growing separate retirement accounts in Vanguard and use the magic of compounding interest.

Thanks again for helping me look at different angles.