buying service credit

[Tybee]

Has anyone done this or gone through calculations with buying additional service credit to get a higher monthly pension amount? We both have tiny pensions for our state university pensions that will start when we retire, but I am curious about buying extra years of service credit. Would I check to see what kind of annuity I could get with the same amount, to see whether it was a good deal or not?

We are planning on both doing the full survivor benefit, taking less money, but guaranteeing the spouse gets it the rest of their life, rather than the higher one if you just take it for your own life.

[LDAHL]

A few years prior to retirement, my state passed a law allowing me to purchase credit for my military service in our state pension system. The payment was based on an actuarial estimate of the future payments to my spouse and me. At the time, I looked at what an equivalent commercial pension would cost, and perhaps unsurprisingly the public pension was a significantly better deal. The law allowed me to pay up to 90% of the cost out of my Section 457 plan while stretching the tax impact over our actuarial life spans.

You mileage may vary, but it was basically a no-brainer for me. It was more cost-effective than a commercial annuity, and less likely to default due to a provider bankruptcy.

We also went with the 100% survivor benefit, as well as an option that guaranteed fifteen years of payments even if we were both to die. It was surprisingly inexpensive.

[pinkytoe]

I looked into it when I retired but went with the standard pension w/survivor benefit. I had my accrued vacation pay rolled over into an IRA.

[Tybee]

A few years prior to retirement, my state passed a law allowing me to purchase credit for my military service in our state pension system. The payment was based on an actuarial estimate of the future payments to my spouse and me. At the time, I looked at what an equivalent commercial pension would cost, and perhaps unsurprisingly the public pension was a significantly better deal. The law allowed me to pay up to 90% of the cost out of my Section 457 plan while stretching the tax impact over our actuarial life spans.

You mileage may vary, but it was basically a no-brainer for me. It was more cost-effective than a commercial annuity, and less likely to default due to a provider bankruptcy.

We also went with the 100% survivor benefit, as well as an option that guaranteed fifteen years of payments even if we were both to die. It was surprisingly inexpensive.

Thanks, LDAHL, that is just the kind of experience I am looking for, and I will look into this more closely. I think it preselects the guaranteed years of payments for beneficiaries if we both die, up to the amount we paid in. I think.

[Tybee]

I looked into it when I retired but went with the standard pension w/survivor benefit. I had my accrued vacation pay rolled over into an IRA.

Thanks, pinkytoe, I also like the survivor benefit option because it will make budgeting easier for the survivor, and we have the exact same pension.

[mschrisgo2]

Are you eligible for social security benefits or just the pension? Makes a difference…

[Tybee]

I am eligible for social security benefits.

[LDAHL]

Thanks, LDAHL, that is just the kind of experience I am looking for, and I will look into this more closely. I think it preselects the guaranteed years of payments for beneficiaries if we both die, up to the amount we paid in. I think.

One thing I learned in the experience was that it took quite a while for the state pension system to produce the cost estimate. Might be something to consider if you’re close to pulling the trigger.

[Tybee]

I am not, just trying to understand how the system works in case we ought to be buying service credit. There is a cost estimate calculator on the state site. And it looks like you have to figure it all out well in advance. So far I have learned that years I spent teaching at other public universities in other states are qualified so I can buy in at one rate. Other years could be purchased, but it is twice as expensive. So far, it looks like if we retired in five years and bought five years to get us to 20 years, it would take 13 years to break even--it's not that much more money. At least that is my preliminary estimate. I'll keep working with it.

[Teacher Terry]

My son figured it out for me and it was really expensive to buy the years and wasn’t worth it. For some people they earned the years when it was cheaper to buy them and it was worth it. I am sure each state has a different way of calculating it.

[Tybee]

Yeah, the handbook said the earlier you buy the years, the cheaper it is.

[dado potato]

A factor to include in the comparison is the COLA or risk-sharing that would be paid along with pension benefits "bought" from the pension plan.

COLA in a Single Premium Immediate Annuity can usually be included in the contract: 1,2,3,4,or 5% increases in the annuity payment on each anniversary. The amount of the first year annuity payment is reduced by the insurance company. No insurance company offers an annuity with a COLA tied to the CPI.

In my opinion a COLA based on the CPI is a very good inflation hedge. A fixed COLA percentage such as one can get with a SPIA is a partial hedge.

A source of SPIA quotations is http://immediateannuities.com

[dado potato]

Another decision in retirement income planning concerns how long to wait to collect social security retirement benefits. With 2 spouses, each might decide to wait a different period. As the linked article suggests considering the difference between the earnings of each spouse, and also working through scenarios of either spouse being the second-to-die (thus begin to receive survivor benefits). Waiting to age 70 increases the amount of the monthly social security benefit.

www.aarp.org/retirement/social-security/info-2022/best-time-to-start-taking-benefits

[Tybee]

Another decision in retirement income planning concerns how long to wait to collect social security retirement benefits. With 2 spouses, each might decide to wait a different period. As the linked article suggests considering the difference between the earnings of each spouse, and also working through scenarios of either spouse being the second-to-die (thus begin to receive survivor benefits). Waiting to age 70 increases the amount of the monthly social security benefit.

www.aarp.org/retirement/social-security/info-2022/best-time-to-start-taking-benefits (http://www.aarp.org/retirement/social-security/info-2022/best-time-to-start-taking-benefits)

Thanks, dado. We are already on Social Security so this is a rubicon crossed.
The COLA thing showed up when I was looking into the pension yesterday, so I think there is one built into the pension, so yes, that is something to consider too.

[Teacher Terry]

Not only that but in Nevada the years you earned them made a difference. Mine were all high cost years. Some of my coworkers only had to pay 5k/year to buy them whereas mine were 20k/year.

[LDAHL]

Not only that but in Nevada the years you earned them made a difference. Mine were all high cost years. Some of my coworkers only had to pay 5k/year to buy them whereas mine were 20k/year.

That was true in my case as well. The years of service I bought were performed in the 1980s, so my present value formula included a lot of years of excellent investment returns. On the plus side, in the Wisconsin system, years served prior to 2000 also had a higher payout percentage. It was a pretty complicated formula.

[mschrisgo2]

Will you fall under The IRS Windfall Provision Act?
a lot of teachers have lost a lot of benefits with that

[Tybee]

Will you fall under The IRS Windfall Provision Act?
a lot of teachers have lost a lot of benefits with that

Not currently. If I took a new job teaching K-12 in Maine I might. But currently, I do not fall under that.

[Tybee]

I guess I am confused about buying service credit years. The years that I would have credit for start with 1981 and 1982, for example. I did not realize you bought specific years, thought you just bought "additional years."

[LDAHL]

I guess I am confused about buying service credit years. The years that I would have credit for start with 1981 and 1982, for example. I did not realize you bought specific years, thought you just bought "additional years."

From what I understand, that can vary quite a bit between plans. Some do allow you to buy years of service without the need to have actually having worked in specific jobs.

[Tybee]

I think with ours, you can buy the service without the specific job years, but they are about twice as expensive. At least that is what the calculator indicated--if I bought "qualified years" where I worked for the government, which is what my years are, it was about 11000, and if I bought unqualified, it was about 20000. I think.

But confused about whether you buy specific years, like 1981 and 1982 plus others in the 2000's.

[Teacher Terry]

In Nevada it would be cheaper to buy years you actually worked back from the 80’s. They also let employees buy up to 5 years despite not earning them at the expensive price. Some people do that if they have 25 and don’t want to work the last 5 years to reach 30 years where you can retire at any age without penalties.

[San Onofre Guy]

I had the opportunity when my system moved from 2%@62 to 2.7%@55. I had enough in my 457 plan to do it but I didn’t. My reasoning was, I was a single parent at the time and based on my retirement investments, I would clearly be fine with expected results. Also retirement accounts can pass to heirs but pensions not to the same extent.

This was not a good financial move as I had two considerable promotions and was making a lot more income when I retired. I was remarried at retirement three years ago. We have more than enough from my pension to live well and when I am required to pull money from 457 and IRA at age 72 I will get slammed with tax.

Like another mentioned, if you can buy service credit early in your career, it likely makes sense, nut your mileage may vary

[Tybee]

That is interesting. I think I will call next week and try to ask some questions now that I have a better understanding of what to ask. Thank you!