Author Topic: Buying pension service time: would you?  (Read 2955 times)

Duchess of Stratosphear

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Buying pension service time: would you?
« on: March 20, 2018, 07:38:15 AM »
Hello mustachioed ones,

I am exploring buying 1.5 to 2 years of service time towards my pension. It would cost me 12 to 16k, which I would roll over from my 403b. I hate to take that money out of my retirement accounts, but buying the time would help me get to my 25 years of service a little faster, and I can feel myself burning out quickly (9+ years to go currently).

My reasoning is that once I get to the 25 years (when I'm about 55 if I buy this time), I can do something else but still be able to collect my pension and health care at age 60 (I have to have 25 years of service to be able to collect at 60; if I have fewer than 25 years, I have to wait until 65 to get the full amount). I'm employed at-will, so I could get sacked fairly easily, so there's some comfort in getting these years in the bag ASAP.

Potential cons: I think that the money would actually earn more if left in my 403b, but my math may be off. I also know that pensions can get gutted in the future, although currently my state (NC) has a pretty strong program, as far as I am aware.

What else am I not thinking about? Has anybody else done this, and what criteria did you use to make the decision?

Many thanks!


TheAnonOne

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Re: Buying pension service time: would you?
« Reply #1 on: March 20, 2018, 08:53:57 AM »
What does "2 years of service" mean in terms of monthly/yearly gain.

If you were paying 16k to gain $2.50 a month, we would call you insane.

Without numbers, this is impossible to answer. Unless all your asking is 2 years of your life worth 16k, for most we would say yes.

Duchess of Stratosphear

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Re: Buying pension service time: would you?
« Reply #2 on: March 20, 2018, 10:05:01 AM »
Yeah, I guess that's a good way to think of it--2 years of my life. It's either two additional years if I stay ten years, or only 8 more years to work if I just aim for my 25 years.

I ballparked the numbers just now (I had a whole post written but lost it) and I think the service buy is worth about $2k a year, whereas if I invested the money, it would yield $13-1400/year (at 4%, of course). If my numbers are right, it's starting to look like a better idea.

cats

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Re: Buying pension service time: would you?
« Reply #3 on: March 20, 2018, 10:17:29 AM »
I guess aside from the straight math calculations, if you are currently feeling burnt out AND you can get the sack fairly easily, are you actually that likely to make it 7 more years vs. 9?  Say you only make it to 5 years--is there a significant benefit to having 23 years of service rather than 21?

Would you be able to buy the same 2 years of service 5-7 years from now, or is this a one-time offer?

Proud Foot

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Re: Buying pension service time: would you?
« Reply #4 on: March 20, 2018, 12:25:12 PM »
How far away are you from your 25 years? And if I understand this portion correctly you get the full pension either way, just at 60 vs 65?
My reasoning is that once I get to the 25 years (when I'm about 55 if I buy this time), I can do something else but still be able to collect my pension and health care at age 60 (I have to have 25 years of service to be able to collect at 60; if I have fewer than 25 years, I have to wait until 65 to get the full amount). I'm employed at-will, so I could get sacked fairly easily, so there's some comfort in getting these years in the bag ASAP.

If you still get the full amount I would not do it. Are you able to use any unused sick leave to buy up years upon quitting? You mentioned NC having a strong program so I am assuming you are a state employee.

Duchess of Stratosphear

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Re: Buying pension service time: would you?
« Reply #5 on: March 21, 2018, 07:52:36 AM »
I don't think it's likely that I'll get sacked (I hope!) but I'm an at will employee, so who knows?

I'm approximately 9.5 years away from having 25. The 25 mark is important because it would allow me to collect at 60 instead of 65 (the full amount anyway). The amount is a function of the average of your highest four years of salary x .0182 x the number of years of service. But if you collect early, it's reduced by a certain percentage. I can use sick leave to add to my time, but I only have 3 months worth of that saved up, and I don't want to count on not having to use that for myself or family.

Good questions to ponder! Thanks!

Cromacster

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Re: Buying pension service time: would you?
« Reply #6 on: March 21, 2018, 08:03:02 AM »
I don't think it's likely that I'll get sacked (I hope!) but I'm an at will employee, so who knows?

I'm approximately 9.5 years away from having 25. The 25 mark is important because it would allow me to collect at 60 instead of 65 (the full amount anyway). The amount is a function of the average of your highest four years of salary x .0182 x the number of years of service. But if you collect early, it's reduced by a certain percentage. I can use sick leave to add to my time, but I only have 3 months worth of that saved up, and I don't want to count on not having to use that for myself or family.

Good questions to ponder! Thanks!

Whats your current situation? (savings rate, expenses, etc)  How much of your expenses would your pension cover?

If it were me I would be figuring out how much I needed to make it to 65 and quit ASAP.

So, No.  I would most likely not buy the extra time.

Debts_of_Despair

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Re: Buying pension service time: would you?
« Reply #7 on: March 21, 2018, 10:29:42 AM »
I bought time from when I was making siginificantly less, like just above minimum wage.  It's an easy decision in that case.  You need to run the numbers...

Duchess of Stratosphear

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Re: Buying pension service time: would you?
« Reply #8 on: March 22, 2018, 07:48:21 AM »
These are all good questions. Luckily, I've already worked enough years that my health coverage at retirement is good to go. I do wish I had bought this time years ago because it is based on your current salary so would have been cheaper, but I don't know if I could have afforded it years ago because I didn't have the cash flow or the savings to do it.

Spartana, your last paragraph describes my thinking: I could quit this job at a younger age but still have the service years to get a decent pension at 60. I will probably still have to work at something, though, but I kind of don't even care what it is so long as it's different.

The pension will be most of my retirement income (and I will be fairly poor, actually). I will hate taking a big chunk out of my 403b to buy the time, but the idea that I could actually be free sooner may be worth it. Whether I actually quit sooner will depend on what happens with healthcare in the U.S.

Sun Hat

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Re: Buying pension service time: would you?
« Reply #9 on: March 22, 2018, 05:36:19 PM »
I bought three years of time for $11K, and for me it was well worthwhile. In my situation, I had been in the Canadian military reserves and transferred to the regular force, so having served the equivalent of three years of active duty time while a reservist, I was allowed to pay pension contributions on those three years to add to my total pension on release. Given that my reserve time was my lowest paid service period (hence the buy-in cost was low), and my pension was calculated on the average of my best five years, the math made a lot of sense.
For each year, it was an additional 2% of the average of my best 5 years of service, which was a bit over $100k
Each year of pensionable time added ~$2K to my annual pension, so I'll recoup my cost in just under 2 years. This doesn't factor for potential lost opportunity cost, but still, it was an easy choice in my situation.
« Last Edit: March 23, 2018, 09:28:23 AM by Sun Hat »

TomTX

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Re: Buying pension service time: would you?
« Reply #10 on: March 22, 2018, 07:24:14 PM »
While I'm sure that your pension is structured differently, I did buy the max amount of time (3 years). Was it expensive? Sure.  It also lets me retire 18 months sooner, and I will get a higher percentage of my salary for the pension.

lhamo

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Re: Buying pension service time: would you?
« Reply #11 on: March 22, 2018, 08:12:00 PM »
Perhaps you can think about it in terms of whether the same amount invested outside the pension would earn you enough to cover the cost of health insurance for the five years from age 60-65.

I used this compound interest calculator, put in 16k invested for 12 years (7 to get you to early retirement at age 55, and then 5 more to get you to the age when you actually get access to the pension + healthcare) -- 7% average return gets you to roughly 36K.  4% average return would only leave you with 25k.

https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator

Hard to say what is going to happen with the ACA and subsidies, so I would tend to lean toward the service buyback, since that gives you a real safety net 5 years earlier if you face health challenges or get forced out of the system at age 55+

Finances_With_Purpose

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Re: Buying pension service time: would you?
« Reply #12 on: March 22, 2018, 10:26:32 PM »
I would also strongly consider whether you'll actually be in this same job in ten years or more.  That's a long time.  How long have you been in the job now?  Long enough to feel comfortable making that kind of commitment.  Who will the boss be then?  What if someone bad takes over? 

It helps to know the tradeoffs: what would happen to the money otherwise?  If it just sits there at 0% interest and they hand it back, then you've taken quite a loss if things don't pan out. 

Realize this could also skew your perspective towards staying in an awful job.  (I suppose the pension option itself does that, but this just piles further into it.)  Makes it easy for bosses to treat you poorly, knowing you can't leave your job - at least not without leaving that pension.

Personally, I would prefer to stay more independent from my employer, any employer.  So, I would lean against this type of option unless the upside was outstanding. 

Duchess of Stratosphear

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Re: Buying pension service time: would you?
« Reply #13 on: March 23, 2018, 07:31:40 AM »
So I'm finding out more from HR, and it looks like I can buy three years for $30,000 (ouch). I can also buy less if I want, so I don't have to roll that much out of my 403b. I didn't think I would be eligible to buy that much, so that's nice. I wish it were a little cheaper, though. Sun Hat, 11k for three years sounds like a bargain, especially at your salary!

To answer some of your questions: I'm not too worried about the volatility of the job, so it's likely I could easily stay here a while. I don't want to do this forever, however, so buying this time would mean I'd only have to work 5.5 more years to get to the 25 mark. Then I can stay in the job and earn more time towards the pension if I decide I can stand it, or I can look for another job, or whatever seems financially feasible by then. If I left before 25 years, I would just have a lower pension and wouldn't be eligible for the whole amount until 65. Not great, but not a total loss either. I would not likely pull the money out if I left early because the health insurance I would have at 65 is too valuable.

I've run different calculations, and leaving the 30k in the 403b would yield a little more income at 4% WR eventually. BUT, I am leaning towards buying the credit. The service buy would be worth maybe 2k/year in my pension, but the freedom to leave this job sooner may be priceless. When I think of how I feel now and project that a few years into the future, it's not pretty. It's not a bad job, I like my coworkers, it doesn't harm anybody, etc., but it's not a good fit for me, and I'm a bit burned out on it and not challenged by it. I feel like I'm losing IQ points daily, and I didn't have a great surplus of those to begin with!

One big con is that this cuts a big hole in my stash and will make it harder for me to have as much saved on the side as I had always planned. But since I think I'll have to work somewhere doing something anyway in the interim between leaving this job and age 60, that could be fixable with additional money I would save during that period. If you look at it in purely mathematical terms, buying the time may not be a great idea, but I think I will derive a lot of comfort from the idea that I could leave sooner. And if I do decide to stay in this system, I'd have 30 years at a younger age and be able to retire before 60 with the full benefits. Can't really see that happening, but you never know.

Pensions are great if you can get them, but they do tend to make you stay in jobs that are maybe not a good match for you. Let this be a lesson to all the young folk out there--don't spend your money on stupid shit when you're in your 20s. I could have been retired already if I'd been smarter a couple of decades ago.

Thanks for indulging me as I think through this. I'm still not sure what I'll do.

lhamo

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Re: Buying pension service time: would you?
« Reply #14 on: March 23, 2018, 08:47:44 AM »
I'm confused about why you mention "the health insurance I would have at 65" above.  Is there some reason why you won't have access to Medicare?  That is the true "golden ticket" for many of us -- yes, there are costs associated, but they are low relative to the level of support it provides.

The real question is how someone who wants to retire early pays for heath insurance in the period between retirement date and 65.  You would be buying the 5 years of coverage from 60-65 for 30k now (not sure what that would grow to if invested -- calculator linked to above isn't working for me any more).  But you would also have to keep working another 5.5 years for that to work.

If you can wait to make the buy in closer to when you actually plan to retire, so that with the buyin you would only be 1-2 years at most from being able to take advantage of the 60-65 health care), I would do that.  Too high a buy in cost and too many unknowns that might make this wasted money at this point. 


fuzzy math

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Re: Buying pension service time: would you?
« Reply #15 on: March 23, 2018, 08:56:50 AM »
Is there a reason you have to do it now? Couldn't you wait 6 years and then do it? I'd want to be much closer to the actual date to make sure they haven't changed benefits retroactively before I;d consider giving them a dime.
I will leave my job with roughly 9 years into a pension and I feel iffy about it enough that I'll probably cash it out! But my scheme is much lower (after they changed away from 2.2% to a 1% metric)

Duchess of Stratosphear

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Re: Buying pension service time: would you?
« Reply #16 on: March 23, 2018, 09:10:35 AM »
My impression has always been that Medicare kinda sucks, not that I have done any research on it. I hope I'm wrong because I absolutely think those types of programs should exist and be robustly supported. But I wonder if the Republicans will have succeeded in gutting those programs by the time I get there anyway (which will really suck because Social Security is crucial to my plans).

I would much prefer to take the pension at 60 because then that health insurance is really valuable. I'm hoping for ACA coverage or coverage at another job I like better than this one between 55 and 60. I'm hoping buying this credit will help ensure that I can take the benefits at 60 rather than having to wait because I fall short of the 25. I can take the pension earlier than 60 as long as I have 20 years, but at a hefty reduction in the benefit.   

If I wait longer to buy the credit, the price goes up! Wish I had bought it ten years ago.

lhamo

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Re: Buying pension service time: would you?
« Reply #17 on: March 23, 2018, 09:24:00 AM »
Medicare most decidedly does not suck.  Yes, people like to complain about it, but it is one of the best/most reliable forms of healthcare available in the US.  You should try to understand it better before you sink more money into your pension system.


Duchess of Stratosphear

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Re: Buying pension service time: would you?
« Reply #18 on: March 23, 2018, 09:35:31 AM »
I feel like there are other more important things for me to consider than the availability of Medicare way out at 65 (that's nearly 20 years, so that program may not even be there anymore. Then again, my pension program could get gutted too). A more important concern to me is being able to have some freedom in a few years to explore other career paths. The pension health benefit is important, but it's definitely not what my decision will hinge on.

Thanks for helping me think of potential issues, though.

Sun Hat

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Re: Buying pension service time: would you?
« Reply #19 on: March 23, 2018, 09:44:49 AM »
The only reason that I got to buy 3 years service for $11k was that I earned MUCH less during those years than I did at the end of my career.

Before putting $30k in, look into your options for what happens if you find that you can't bear another 5.5 years, because that can be a long time when you're already feeling burnt out. Are there opportunities for you to change jobs within the same pension scheme if you need a change of scenery and some new challenges? Could you take an unpaid leave of absence to recharge for a while and then come back? I'm not advocating against buying some of the time as a gamble that bets on your ability to stick it out, but I'd want you to know how to stack the odds in your favour.

koshtra

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Re: Buying pension service time: would you?
« Reply #20 on: March 23, 2018, 10:18:41 AM »
Hmm. I would want to be REALLY sure that I wanted to keep this job clear through to age sixty before I sank more resources into it. It sounds like you're already tired of it: that feeling is not likely to diminish :-)

Duchess of Stratosphear

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Re: Buying pension service time: would you?
« Reply #21 on: March 23, 2018, 12:24:06 PM »
Spartana, I have to buy it as a lump sum. I wish I could do it like you are suggesting, but as far as I know right now, I can't. I'm not sure about the earnings on it. I know with my regular contributions I would get some interest if I cashed out since I'm vested. But I don't plan on cashing out. If I buy the time, I'll have nearly 20 years, and I think that makes it worth staying in the system. 

Sun Hat, since it's the whole state system, I would have other options for jobs in the same pension system, especially if I were willing to move (maybe, but would rather not).

I filled out the paperwork, which doesn't commit me but should give me a more exact idea of the amount, number of years I can buy, etc. Thanks again, y'all.




Goldielocks

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Re: Buying pension service time: would you?
« Reply #22 on: March 23, 2018, 12:44:51 PM »
I bought time from when I was making siginificantly less, like just above minimum wage.  It's an easy decision in that case.  You need to run the numbers...

This!  If you think you will get a large raise or promotion in the next 9 years, and you have a "best 4 years" in your calculation, this can make sense to buy the service credit.

Also, the pension fund formula rewards the older (over 45) year employee, because you are that much closer to retirement, the company's portion of the matching works out to more. 

If you are in your 50's and will get a step up in income soon, it makes a lot of sense to buy service.**

**  I am assuming you don't have one of those horrible plans that force the employee portion to be the majority of the contribution, because of chronic under funding and the employer portion is quite minor