The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: alexabreana on January 06, 2014, 10:38:43 PM
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Hello,
I am trying to figure out if it's a good idea to buy service credits but not sure if it's a good idea.
I work for the city of San Diego, I have been with them for 15 years, I have the option of buying back 6 years for 63k I can use my 401k money to pay for these years (using tax free money)
If I work 9 more years and purchase the 6yrs I can receive 80 percent of my income for life (sdcer pension) plus I get health insurance for life.
30 yrs gives me 80% of my income, I am hoping to be making 80k by the time I retire.
Or should I just leave the money in the 401k?
Thanks in advance for your help
alexabreana
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I bought 5 years. It was "revenue neutral" so it was pretty expensive, equivalent to about 1.5 years salary, but it allowed me to retire earlier with pension and benefits. I ran some numbers and it basically was like buying an annuity, which many people do to insure a baseline income in retirement.
With a baseline pension income, I feel more confident in investing other assets in equity index funds. I look at the annuity as a hedge against other investment risk.
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63K sounds pretty reasonable. You can use a financial calculator to figure out the effective rate of return based on your life expectancy. I think when I did it, I came up with something like a 7% return, which sounded ok.
If you outlive your actuarial life expectancy, then a pension annuity is a better deal. If you have a family history of shorter life expectancy than normal, you may want to go a different way.
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One thing you need to explore is what happens if you do not complete the minimum number of years required before you can draw on your pension. ie; you become injured or sick or something else comes along in life that requires you to separate from your city employment prior to completing the minimum years required for a full pension. I work for the State of California and am allowed to purchase service credits as well. When I researched the options, I learned that if I were to separate from State Service prior to my minimum number of years required for a full pension (in my case 50 years old), I would lose the service credits purchased and the money spent to purchase the time. Its a gamble and I chose not to purchase the service credits and invest the money instead. Just something to look into.
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I only need 20 years. I already have 15 so if I purchase the 6 yrs. I would have meet the requirements. That's everyone for your advice, I appreciate it.
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Heres a depressing question: what happens if, sometime during your lifetime, the city loses the ability to meet its pension obligations.
I know that pensions provided by private companies are insured by the PBGC. Unfortunately, PBGC insurance covers only a certain dollar amount.
Is there an equivalent to the PBGC for public workers? Do you know whether buying this time would put you above the relevant limit?