Author Topic: TSP loan to buy annuity?  (Read 733 times)

DeniseNJ

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TSP loan to buy annuity?
« on: December 11, 2019, 02:24:49 PM »
My husband has the opportunity to “buy” 4.5 years of service toward his teachers’ pension.  They have a formula where you divide your number of years by a factor and multiply by your highest annual salary to determine your pension amount.  So the more years you have the more money you get in retirement.  I ran the numbers with his current salary.  He’s looking to retire in about 7 years.  Basically if we buy 4.5 years it will cost about 25K and add 7.5K to his annual pension salary, so he would break even in 3 yrs and 4 months of retirement.  Then he’d continue to get that extra 7.5K a year for the remainder of his life.  He would be 60 at retirement so that could be a really long time.  Seems like a great idea to me.

Problem is we don’t have 25K.  They will allow you to pay out of your pay check but will consider it a loan and charge over 7% interest.  Had to do the math bc he only gets paid for 10 months a year, but basically they say if you pay it over 100 monthly payments it’s about 35K.  I looked into personal loans but they are also 7%.  They won’t take a rollover from a Roth, which is what we have.  I have custodial accounts for the kids, but I wouldn’t touch that.  We don’t have a big enough emergency fund to tap.

I could take a loan out of my TSP (like a 401K).  I have $465K in it.  The market is really high now (the top is in  ) so “withdrawing” now would be alright.  Most importantly, the interest rate is less than 2%, and the interest I would pay would go right back into buying me stock instead of going to NJ Board of Ed, or whoever it goes to.  I think if he borrows from his pension, which is essentially what he’d be doing with the payroll deductions, the interest paid isn’t added to his payout amount—if it did then the payout would be different if you pay up front or schedule payroll deductions over years.

So is buying back years a good idea?  What’s the best way to fund this thing?
« Last Edit: December 11, 2019, 02:57:35 PM by DeniseNJ »

DadJokes

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Re: TSP loan to buy annuity?
« Reply #1 on: December 11, 2019, 02:34:17 PM »
It sounds like a fantastic deal. Since the $7,500 isn't going up with inflation (I assume), we could alter the 4% rule and make it a 7% rule. In that case, $7,500 annually would require $107k, so getting that guaranteed for $25k is a steal. Someone please correct me if my math is way off here.

Is he going to lose this opportunity to buy years of service? If so, I would very strongly consider taking out the loan if you have no other way to come up with the money. A HELOC is another option, though I assume the interest rate would be higher.

erutio

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Re: TSP loan to buy annuity?
« Reply #2 on: December 11, 2019, 02:58:49 PM »
They won’t take a rollover from a Roth, which is what we have. 

Depending on how much you have in your Roth, can't you just withdraw your contributions from that?

If you didn't know, the contributions you’ve made to a Roth can be withdrawn at any time, tax and penalty free, because you’ve already paid taxes on this money.  Earnings in a Roth must be at least 5 years old before they too can be withdrawn without penalty.

DeniseNJ

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Re: TSP loan to buy annuity?
« Reply #3 on: December 11, 2019, 03:14:11 PM »
It sounds like a fantastic deal. Since the $7,500 isn't going up with inflation (I assume), we could alter the 4% rule and make it a 7% rule. In that case, $7,500 annually would require $107k, so getting that guaranteed for $25k is a steal. Someone please correct me if my math is way off here.

Is he going to lose this opportunity to buy years of service? If so, I would very strongly consider taking out the loan if you have no other way to come up with the money. A HELOC is another option, though I assume the interest rate would be higher.
He won't lose the chance to buy them but it will cost more the older he gets and the more money he makes.  And the NJ teachers retirement has no cost of living adjustment.

I just can't get over that if you borrow from your own retirment fund you have to pay the fund 7% interest instead of paying yourself that interest.  At least my interest on loans from my TSP is going right back into my account to buy more stock.  For him, you either pay all upfront, a portion up front and the rest through payroll, all through payroll at loan shark rates, or thourgh payroll until you can pay off the balance.  Options yes, but you can't just make extra payments as you go along.

Basiccally we'd be buying an annuity that starts paying $7.5K in 7 years for $25K now.  Sounds like a good deal.

DeniseNJ

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Re: TSP loan to buy annuity?
« Reply #4 on: December 11, 2019, 03:40:54 PM »
They won’t take a rollover from a Roth, which is what we have. 

Depending on how much you have in your Roth, can't you just withdraw your contributions from that?

If you didn't know, the contributions you’ve made to a Roth can be withdrawn at any time, tax and penalty free, because you’ve already paid taxes on this money.  Earnings in a Roth must be at least 5 years old before they too can be withdrawn without penalty.
We don't have the entire $25K in our Roths, unfortunately.  Plus once you withdraw it you can't put it back.  With the TSP/401K I can still put in the 19.5K each year plus hammer away at the loan.

Buffaloski Boris

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Re: TSP loan to buy annuity?
« Reply #5 on: December 11, 2019, 05:22:53 PM »
I’m thinking a few things if this were me;

-it’s a great ROI, so I’m definitely thinking about doing it.

-due diligence. How well funded is the pension fund?

-worse case scenarios. What sort of survivor benefit is there? What happens in case of divorce?

-Absent other alternatives, I’m financing with TSP loan backstopped by Roth contributions. TSP/401k loans usually have to be repaid immediately if the employee quits or retires.

Peachtea

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Re: TSP loan to buy annuity?
« Reply #6 on: December 11, 2019, 07:48:06 PM »
No way would I sink my money into the NJ pension fund. A quick google search shows its one of the top three underfunded state pensions. There are very recent proposals to push the retirement age back to 67 and other “reforms” to deal with it. While vested employees and those closer to retirement usually are the most protected from drastic changes, I wouldn’t over-rely on getting benefits at 60 or that they will be the same as what’s promised now. Plus inflation will eat away the value of the annuity if there’s no COLA.

simonsez

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Re: TSP loan to buy annuity?
« Reply #7 on: December 12, 2019, 10:55:49 AM »
Wow, that is incredibly cheap for purchasing service!  I'm surprised that is a sustainable system.

For a teacher in MO with a salary of 50k, purchasing ONE year of service would cost $14,500 and would benefit an extra $1250 per year for the pension.  Essentially it costs 29% of your highest three years of salary to receive an additional 2.5% in yearly pension benefits.  It is COLA'd.

If your numbers for NJ are correct and you're confident he'll be grandfathered in and receive payment for years to come, it seems like a no-brainer.

DeniseNJ

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Re: TSP loan to buy annuity?
« Reply #8 on: December 12, 2019, 11:27:15 AM »
Wow, that is incredibly cheap for purchasing service!  I'm surprised that is a sustainable system.

For a teacher in MO with a salary of 50k, purchasing ONE year of service would cost $14,500 and would benefit an extra $1250 per year for the pension.  Essentially it costs 29% of your highest three years of salary to receive an additional 2.5% in yearly pension benefits.  It is COLA'd.

If your numbers for NJ are correct and you're confident he'll be grandfathered in and receive payment for years to come, it seems like a no-brainer.
They pay half and we pay half so it would have been 50K for 4.5 yrs or just over 11K for each year bought.  It costs more the older you are and the more you make.  So he makes 91K and is 53--not sure what the calculation is.  He can only buy the number of years he worked in a different state.  And the denominator is based on his "tier" or when he started--his denominator is 55.  So it would be 20yrs/55 times $91K, which is $33K annually forever with no cola. Or if we buy the extra years, 24.5yrs/55 time $91K, which is $40.5K or $7.5K more annually than if we don't buy.  Basically he's getting an annual increase of just over 8% of his final salary.  Again, no cola.

But that's the price now for getting someinthing in 7 years. $25K in 7 years at 5% would be just over 35K.  In ten years when we just be just about breaking even our original 25K would have been almost 41K.  At some point about 13 years from now, our original 25K would have been 47K at 5% if we invested it today.  In 13 years, when he's 66, he would have received 6 years of extra benefits of 7.5K, or 45K total--a bit less than what we'd have had if we had invested it today at 5%.  So if he is retired for 6 or 7 years then it will have been worth it.

If we divorced, I wouldn't sweat the money--I have my own pension, TSP to share, SS benefits, Roth.  If he dies before reitrement, I get whatever we put into it so I'd get the extra 25K back, and everything else he owns and his life insurance through work.

Yes, NJ's pension is under funded.  But I don't see the state not paying it's reitred teachers thier money.  Either way, the more years he has the less he would take a hit if things went bad.
« Last Edit: December 12, 2019, 11:34:16 AM by DeniseNJ »