Purchasing years of service for a gov pension

[constanz22]

I would think that it'd only be really beneficial if you were close to retirement. I'm not sure why you would do so at this point in your career, but, maybe someone else would have more insight. I, too, am a government employee with a state pension when I retire. I could see buying years of service if you needed to hit 30 yrs service or some such milestone. I know our benefit goes up substantially with 30 yrs and up of service.

[Deleted]

Jan 16, 2011 12:13:33 GMT -5 @wrongsideof30 said:

I have the option of purchasing years of service for my pension and I don't know how to decide if it's worth it. The cost to purchase one year of service is $3,075.

The formula for determining what my pension will be when I retire is:

Final average compensation (3 highest earning years averaged) x 1.5% x years of service.

I started working at this job when I was 26. I've been there for 6.5 years.

Any idea how to figure out if this might be a good option?

Isn't it a bit too early?
I mean you've only been there for 6.5 years and are only 32.
It's not like you plan to retire anytime soon

[The J]

I'd buy the year of service if I expected to be there long term.

[The J]

Depending on what I could afford, I would probably buy 3-4 years of service.

[Deleted]

You don't have to have had worked these years in order to purchase them? That sounds odd. I wish someone would let me do that.

I purchased almost five years of prior service for about $12,000. These were years I had actually worked, however, and withdrawn. I was probably in my early, early fifties. The cost went up 8% for every year you delayed purchasing them. It was all or none, too. Oh, and it has to be done lump sum. I had actually started saving to do this when the rules changed to allow you to use other retirement money like IRAs to make the purchase.

Can you beat whatever factor they will add each year if you keep your money in the market instead? Then you can make the decision later. I was too close to retirement (less than 15 years) to be certain of doing this. It turned out to be a good option for me. With the market fluctuations, it's nice to know there is some security out there for me.

But are you even vested yet? We don't vest for ten years. You can also leave your money there if you leave the retirement system for only a maximum of five years before they will automatically liquidate it. Have you checked out all the fine print yet?

[phil5185]

In almost all cases, buying an annuity gets a lower return than investing on your own. That is because you must pay the annuity writer to (1) accept a risk for you to guarantee an outcome, and (2) manage the account.
The $3075 has a future value of about $70,000 in 30 yrs. Personally, I wouldn't bet on beating that with 1.5% of your salary in retirement, I'd choose the $70,000 (for each yr).

In 6 years, it could cost $11,500 to purchase a year of service

This doesn't seem to track the $3075, one of the numbers is wrong.

[The Walk of the Penguin Mich]

I think you'd be better off investing that money in a Roth and investing for yourself.

At my last job, I was 14 years in the system and my job moved. Despite the fact that I was vested, my payout 25 years from now would have been roughly 10% of my salary. When I did the math, that meant that I would not even receive all the money I had invested, let alone the state's contribution. I was able to remove my contributions from the pension fund because it turned out, me investing it (even very conservatively) it would replace far more income than had I left it in the pension.

Lack of portability is a HUGE drawback and most don't realize this until they have to make a decision. There are a lot of reasons why one would leave a job and many of them will have absolutely NOTHING to do with your job performance. Unfortunately, I had no choice as to my investment vehicles - staff was automatically enrolled in the pension, faculty got to enroll in 403b. That meant my boss (I moved his lab for him) got to keep the 6% that the state contributed to his retirement, but I lost mine.

Fortunately, faculty and staff are treated the same with regards to retirement at my current employer (I'm in a 403b), so I don't have to deal with this situation again. I wish I had known about this back in 1986.

[The J]

Jan 16, 2011 13:45:34 GMT -5 @wrongsideof30 said:

Southernsusana, I don't understand what you mean when you say you purchased years that you actually worked. Can you explain that?

And to answer your question, no I am not vested yet. Not until 10 years. If I quit or was let go before then, all money would be refunded to me. Also, we have a payment plan to purchase years of service. I'm still going through all of the fine print and details to try and figure out if this is a good idea. I will have to use money that would otherwise go into a Roth to do this, if I do it.

Usually, if you work less than a certain number of years, you're not vested and if you seperate from employment your contributions get refunded. If you go back to employment, you can "buy back" those years of service credit.

[Deleted]

Today at 1:45pm, wrongsideof30 wrote: Southernsusana, I don't understand what you mean when you say you purchased years that you actually worked. Can you explain that?

And to answer your question, no I am not vested yet. Not until 10 years. If I quit or was let go before then, all money would be refunded to me. Also, we have a payment plan to purchase years of service. I'm still going through all of the fine print and details to try and figure out if this is a good idea. I will have to use money that would otherwise go into a Roth to do this, if I do it.



Usually, if you work less than a certain number of years, you're not vested and if you seperate from employment your contributions get refunded. If you go back to employment, you can "buy back" those years of service credit.

J explained it exactly. This is sort of what you mean when you say that if you don't vest, then they refund your contributions. Will you get any of their contributions or any interest paid as well? The interest rate I would have received would have been substantially less than 8%, believe me.

[Apple]

30...is this with federal gov? If so, it could also count toward your leave. You know...in the beginning you get 4 hours ppp, then at 5 years 6 hours, at 15 years 8 hours?

I would do it. The benefits outweigh the cost when you add that in. Many guys I work with are vets and have done this. The ones who waited all wished they had known about it sooner.

[The Walk of the Penguin Mich]

In 6 years, my supervisor will be retiring and my kids will be older. In a perfect world (lol!) I'll take over her position. She makes $70k a year.

The problem with this logic is that your supervisor worked for 20+ years up to a $70K salary. She didn't walk into the position immediately at that paycheck. You're expecting to walk into it with 10 years (and most of those years, part time).

In most positions in government, years of experience factor strongly into salary offered.

[robbase]

would it really be that bad just to work 30 years?

26 + 30 = 56...you would be eligible for the pension at 56 by doing nothing if I am understanding correctly?

[The Walk of the Penguin Mich]

Susana, If I left my job before 10 years, I would receive all of the money I contributed and the interest. I would not receive my employers portion.

That's all I received when I left my pensioned position. In this definition, being 'vested' did not mean that I would also receive my employer's contribution.

[The Walk of the Penguin Mich]

Mich1, my supervisor hasn't been there that long. She just started OLD.

She still has more experience than you will at that time, even if her experience wasn't all at this job.

[The Walk of the Penguin Mich]

Do you get a full year for working part time, or is it pro-rated?

[The J]

Jan 16, 2011 13:38:50 GMT -5 phil5185 said:

In almost all cases, buying an annuity gets a lower return than investing on your own. That is because you must pay the annuity writer to (1) accept a risk for you to guarantee an outcome, and (2) manage the account.
The $3075 has a future value of about $70,000 in 30 yrs. Personally, I wouldn't bet on beating that with 1.5% of your salary in retirement, I'd choose the $70,000 (for each yr).

The $3075 has a POTENTIAL future value of about $70k in 30 years, but that's $70k in 2041 dollars. It also has a guaranteed future value of 1.5% of your FAS. Your choice which is better for you. The FAS will have the inflation adjustment built in.

[stantonjane]

Being able to buy a year's worth of service for $3,000 is super cheap. I'm planning on buying back two years of service at $15,000 a year, which I'm sure has to do with my age and years of service and salary. This will be the net sum of my 457 account plus an extra $1000 or two, but when I crunched the numbers on buying an annuity versus how much extra I would get in my pension by adding to my service years, it still came out to more monthly income to buyback the service time. I did hestitate this decision on the idea of would it pay off if I were to die, since my hubby would only get 1/2 of my check, but all things relative, I'm going to take that chance.

I can well imagine you hesitating based on an unforseen future of your career at that job. These past years have made us government workers very aware that even our jobs are not secure, esp. in today's economy.

[❤ mollymouser ❤]

If I could afford it, I'd buy 3 years of service in your situation.

[Deleted]

When you say that this is a "state pension," you do work for the state, right? Not some county or municipality who is contributing to the state's pension plan?

I just can't see what's in it for them except an infusion of cash that they can "invest" over X number of years. It's different when they let you buy back prior service or even alternative service (veterans can sometimes buy years).

Even state pensions have no guarantees. Although they usually grandfather current employees, I am not aware of any law that requires them to do so. In my state, they can up our contribution, up our retirement age, and lower the percentage per year by an act of the legislature. If you haven't retired, you may be subject to new terms. Case in point: previously, if you retired at or after age 60, you got free single health care coverage and the ability to buy family coverage at what employees pay. A few years back, they changed it to a sliding scale if you retired before working 25 years and eliminated it entirely if you retired and were eligible for another company's insurance plan.

My point is that you don't know what is going to happen. A municipality in Alabama simply quit paying pensions because they didn't have the $$$. We aren't talking "fat cat" pensions . . . the highest paid employee was either the fire chief or the police chief (I forget which), who earned $60,000. Most were just clerks, water meter readers, etc. Many had already retired.

I don't think this will happen if you work for the state, but I don't know. Governments can declare bankruptcy, but I don't know what it does to their pension obligations. One county in my state, Jefferson, is very close to bankruptcy over its sewer debacle.

I'm honestly not particularly trying to be doom-and-gloom here, but you are so relatively young. Putting this into a Roth at a place like Vanguard for the next 25 years would give you more control.

Remember, I did this. But I was in my 50s. I also had 401k $$$ from working retail for about 5 years that had to go somewhere. It was actually a wash financially for me.

Oh, and check your death benefits. If I die before I retire, I threw my $$$ away. That's because my "death" benefit isn't based on the value of my account but rather 2.5X my salary. That's more than I have contributed, but it didn't increase just because I now have more years of service. It is the same. I just didn't think I could average 8% in the years before I retire, and the recent recession would have just made it worse. But you are young, even if you ARE on the "wrong side of 30."

[Frappuccino]

Here in California, I keep hearing people say that eventually the federal laws may change to allow states to go bankrupt in order to avoid paying state pensions. Maybe your money would be safer in a Roth.

[family legacy]

If it's a generous plan, you might be able to buy those years with pre-tax payments at 0% interest. I know plans like that are out there. Check it out, then the decision will be really easy.