Author Topic: Making a Decision to Purchase Extra Years of Pension Credit  (Read 707 times)

stepitup

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Making a Decision to Purchase Extra Years of Pension Credit
« on: March 17, 2018, 07:42:20 PM »
I'm thinking over a decision of whether or not to purchase some extra years of pension credit for my state job.

I know that there are a bunch of different factors involved in the decision so I'm not looking for a yes/no but rather input as to what factors to consider.

Especially to my main question about general modeling. I'm thinking I could get a ballpark figure by first taking the purchase price and projecting average market gains to the date my pension starts and then seeing the amount of an annuity I would be able to purchase at that time. I could then take that amount and compare it to the additional pension amount I would be getting for purchasing after the credit. Does this seem reasonable for an approximation?

Some complications I recognize that make the modeling tougher is:
1) Investment Gain assupmtions
2) Doesn't model survivor benefits
3) The purchase priced is based on current salary where the pension is based on future salary (which is uncertain)
4) Pension stability (but since its the state I personally am confident it would be paid as agreed)
Any other factors I might be missing but should include?

Thanks!

DeltaT

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Re: Making a Decision to Purchase Extra Years of Pension Credit
« Reply #1 on: March 18, 2018, 09:18:18 AM »
Quote
4) Pension stability (but since its the state I personally am confident it would be paid as agreed)
Any other factors I might be missing but should include?

I would caution you to be very careful with that assumption and level of confidence. Even with historically sacred state backed pensions, the deficits and input/output projections that pensions (state and private) hold right now is quite simply unsustainable. Why? Basic math.

I personally have a pension that I'm vested in, but I PLAN based on not receiving any of it, because I truly believe I won't. Again, because of the laws of basic arithmetic. My suggestion would be to take whatever amount of money you were thinking of using to purchase extra years of pension credit and invest it in a brokerage account or spread it out in IRA contributions. In other words, keep that money in something that you have control over, not handing it over to irresponsible fiduciaries that have created the pension problems that will face a painful reckoning at some point. 

maizeman

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Re: Making a Decision to Purchase Extra Years of Pension Credit
« Reply #2 on: March 18, 2018, 09:31:45 AM »
Like DeltaT I wouldn't be as confident as you are about #4, but leaving aside that personal call.

5) Are the annuity and the pension both inflation adjusted, if so do they use the same metric for inflation?
6) Do you already qualify for the pension or is there a chance you could lose your position before you qualify?
7) Do you get a constant linear increase in pension payout for each additional year of service, or do additional benefits decline or stop after a certain number of years of service?
8) Optionality: If you save the money in your own accounts from now to conventional retirement age, you'll be able to use it for other purposes if you ever need it. If you become very unwell and don't expect to make it to full retirement age, you can use the money for medical treatment, or bucket-list life experiences, or leave it to people you care about when you die, which you wouldn't be able to do if you buy an extra year of a pension.