pension buy back?

[myrrh]

As a state employee, I pay into a pension and have access to a 457 account. One of the things I can do is buy up to a year of time ("air time") in the pension so I don't have to work as long to qualify for retirement. I have seven years to go to get to 25 years (retirement under the tier that I started under) and am tired. I really want to retire sooner but I'm not sure if the air time is worth it. I purchased two months previously so I can buy up to 10 more months. The thing is that I can use 457 funds so the air time purchase will be tax free, but of course then I'll have a smaller amount in retirement. I'm likely to get a significant raise in the next few months so if I wait much longer the air time will get a lot more expensive.

I'd like some additional opinions so thought I'd ask you guys, since you may have some views that wouldn't occur to me. 

Month Total Cost

1 $2,573.56

2 $5,147.11

3 $7,720.67

4 $10,294.22

5 $12,867.78

6 $15,441.34

7 $18,014.89

8 $20,588.45

9 $23,162.00

10 $25,735.56


10 months is a couple thousand less than my take home for a year, since I put so much in the 457.

[resolution]

How much do you estimate an extra 10 months of your pension will be?

If you buy the additional 10 months of air time and then end up working the full 25 years anyway, how much would it increase your pension?

If you don't keep working there the full 7 years to qualify for a pension, do you get a reduced pension where the 10 months would still make a difference? Or would there be some kind of lump sum refund with interest?

[Rukh O'Rorke]

Feb 20, 2024 14:27:04 GMT -5 myrrh said:

As a state employee, I pay into a pension and have access to a 457 account. One of the things I can do is buy up to a year of time ("air time") in the pension so I don't have to work as long to qualify for retirement. I have seven years to go to get to 25 years (retirement under the tier that I started under) and am tired. I really want to retire sooner but I'm not sure if the air time is worth it. I purchased two months previously so I can buy up to 10 more months. The thing is that I can use 457 funds so the air time purchase will be tax free, but of course then I'll have a smaller amount in retirement. I'm likely to get a significant raise in the next few months so if I wait much longer the air time will get a lot more expensive.

I'd like some additional opinions so thought I'd ask you guys, since you may have some views that wouldn't occur to me. 

Month Total Cost

1 $2,573.56

2 $5,147.11

3 $7,720.67

4 $10,294.22

5 $12,867.78

6 $15,441.34

7 $18,014.89

8 $20,588.45

9 $23,162.00

10 $25,735.56


10 months is a couple thousand less than my take home for a year, since I put so much in the 457.

seems like you have to pay about a year to get a year?

If the quesion is does it make sense $$ the answer is likely no. If the question is I gotta get out of here before I burst/I need to see the end point to keep going, etc. then it is likely worth the price of admission. But only on a feelings level - unless you provide a lot more information on the exact dollarages, etc.

[myrrh]

So if I choose not to have DH as a 100% joint survivor I would get 0.75*high three years of salary, which I estimate would be about $4800 per month (pretax). If I get the raise I expect and it lasts three years it would be about $5400 per month pretax. Of course this amount will be less because I'm planning to have DH as 100% joint survivor and there will be an unknown amount taken off to account for that.

Second question - I can keep working and accumulate up to 30 years and I get 3% added to my pension each year. For example 25 years = salary x 0.75; 26 years = salary x 0.78

Third question - no lump sum haha. If I were to quit today I would get a reduced pension but I would have to wait until age 61 to claim it, and it would be about $3400 pre tax. As I'm only 47 I feel working until 53 and getting to 25 years is my only choice. It's still retiring "early," i.e. before I can claim SS.

[resolution]

So for scenario 1, if you pay for the 10 months air time and then are able to retire 10 months early in 2031, you would collect $54,000 extra in pension (the 10 early months). If the market performs at 9% per year, the money that you spend now would be worth $47,000 at that time. So you would be able to retire sooner and be a little better off for buying the time.  

For scenario 2, if you pay for the 10 months and then keep working for the full 25 years anyway, it looks like you would get about $2500 per year more from the pension. Comparing it to the 2031 value of the initial investment (47k), it would take around 20 years to get your money back. Possibly longer since if you keep the money in your 457 plan it should keep growing.

For scenario 3, not enough data to guess how the extra investment would work out. Is the retirement age fixed at 61 no matter what or is there some kind of rule of 85 where your years of service will reduce the age? 

Seems to me like it would make sense financially if you can make it the 25 years and then retire 10 months early, but not if you end up moving to a position that you love and wanting to stay longer. If your job is in danger and you might not make it to full retirement, buying the extra time seems like you would be paying a lot for a lower return, since the pension would be lower and further in the future.


 

[giramomma]

So, in terms of options, I would totally buy out a year of the pension if you could. (I should see if I can do that). I feel you on the tired. I'm 48. I quote Lethal Weapon "I'm too old for this sh*t" pretty much once a week now.

Everyone focuses on the pay. I'd be more concerned about health insurance than pay, TBH. I'd be curious to hear your plan for that.

Does your DH work? How does that factor into the plan? Does it? (My DH works part time. Exactly 0 of his pension, 457 contributions factor into my retirement numbers.)

[haapai]

Will the cost of buying "air time" increase as you get closer to retirement or if your pay increases?  If so, by how much?

The answers are just part of the equations that you'll need to run or have someone else calculate for you.  A "yes" answer does not mean "buy it now when it is cheaper".  There's a lot of math that needs to be done.  There's also a lot of examination of your own circumstances that should be done after that math has been done. 

[TheOtherMe]

Feb 21, 2024 16:42:08 GMT -5 giramomma said:

Everyone focuses on the pay. I'd be more concerned about health insurance than pay, TBH. I'd be curious to hear your plan for that.

Does your DH work? How does that factor into the plan? Does it? (My DH works part time. Exactly 0 of his pension, 457 contributions factor into my retirement numbers.)

This is always the big question.  Had I not been a federal employee, I could not have retired so young.

[giramomma]

Feb 21, 2024 18:15:25 GMT -5 TheOtherMe said:

Feb 21, 2024 16:42:08 GMT -5 giramomma said:

Everyone focuses on the pay. I'd be more concerned about health insurance than pay, TBH. I'd be curious to hear your plan for that.

Does your DH work? How does that factor into the plan? Does it? (My DH works part time. Exactly 0 of his pension, 457 contributions factor into my retirement numbers.)

This is always the big question.  Had I not been a federal employee, I could not have retired so young.

I'll only get about 4 years of paid premiums. So, I get to slow down, but not stop in my late 50s. First world problems.

[TheOtherMe]

That is still where I have my health insurance.  I pay but it's much better than most plans out there and less expensive because it's a huge group.

[myrrh]

You are right, the health insurance is the big question. I've been told ACA is surprisingly affordable, but the person who told me that was single with no kids, so that may change things. I am pretty sure I'll want to keep insurance on my kids until they're 26 unless they surprise me and get a job with health insurance before that. 

A few years ago the pension was changed so that the age of retiree health care is 55 or older, younger than that you're on your own. It was part of the attempt to make the pension fully funded, along with adding a new tier for the worse for new people. So if I want to retire under 55 then I need the ACA or another job, or get insurance under DH. Which, he's tired too, lol.

More research to do, thanks for the reminder. 

[teen persuasion]

ACA should be less expensive for larger families, as it's based on a % of FPL, which depends on family size. FPL for a single is around $15k. So 150% FPL would be only $22-23k.But FPL for family of 4 is around $31k; 150% would be around $46k.

But kids under 26 is a problem with ACA, when they are no longer your tax dependents. Up to age 26 they can stay on your employer health insurance, but ACA kicks them out to their own "tax family" once they aren't dependents.

[myrrh]

Did not know about ACA "tax families", thanks teen persuasion! That definitely complicates things. I am currently leaning towards no air time, unless I suddenly find lots of time for health insurance research, lolsob.

[susana1954]

I did it many, many years ago.  I wasn't buying "air time" but rather buying back working years that I cashed out, thinking I would never teach again.  I bought back almost 4 years for $12,000, but this was probably 20 years ago.  

In my case, there were other factors to consider.  I highlighted the real negative so you wouldn't overlook it:

• The market was losing money whereas the cost went up 8% a year.  Pretty soon it would be out of my price range.
• If I died before starting the pension,  it was money lost since my family would have received 2.5 x my year income regardless of how much I had contributed to the pension.  So they wouldn't have gotten more just because I had more years or contributed more money.  
• It would allow me to retire with 25 years, which came with some perks of its own including no healthcare penalty.
• Even though I took the money out of my IRA, which was untaxed by both the feds and the state, it was no longer subject to state taxes once it became part of my pension.

I chose to go ahead with the purchase with even the advisor at Merrill Lynch saying it was a wise choice given the market performance and the 8% a year increase.  I am glad I did.  My situation isn't your situation, but it may remind you to look at the entire picture and not just part of it (not that you are doing that).

[myrrh]

Well the cost of retiree health care for family coverage (after age 55 and 25 years of service) is more than double what I pay as an employee. Yikes. But it does say that you can use retiree health care to cover kids up to age 26. I actually have no idea if I can just cover myself and the kids and have DH on ACA. I will see if I have time to research ACA this weekend.

[lund]

Too many moving parts for me here.....

But, some jumbled thoughts:

I agree that you should plan to work at least to 25 years (age 53). If you risk failing that during year 25, buy air time. If you risk earlier, hold on to the money unless there is some other reason for air time.
Working until age 55 (27 years) would be better due to the health care benefits. That way, you would in addition to most probably saving $$$$ have health insurance from 55 to 65 for at least yourself, probably your DH if needed, and you would be insured independently of your DH's work situation. That your children can be covered, even if it would be expensive, is good. How old will you be when the youngest is 26?
Here also come the unpleasant questions about your DH's employment stability and both your health situations. If he, Lord prevent, would lose his job or either of you become very expensive to insure, having your employee/retiree insurance would be of even higher value.

As to working to 30 years, wait and see when you get to 27. At that time, you will know about your DH's work and health insurance situation (if he retires, you might want to retire too, plus the insurance options available for him, and possibly also for your children, after he retires and their costs will be known), and your children's health insurance situations. Also, you are more likely to be empty nesters, which may mean a quieter home life (=less stress in that part of your life) than having younger children most probably means. 

For buying insurance in the marketplace, check that the insurance available is accepted around where you live, so that you don't have very few places to go to, long waiting times, and long travels there.

I assume that reaching 55 years of age is a fixed date which you can't buy time to improve. But when you reach 55, can you leave the following day or at the end of that month, or would you have to work to a certain point, such as an end of term or end of school year would be?  (Legally a year may be one year and one day, hence the following day.) Or would it be better due to the job situation to leave after or well before any "busy time"?

If only full working/employment years are counted, and you can leave at the end of your birthday month, consider buying air time to be able to leave at the end of that month. If full months are counted as 1/12 of a year, plan to get to a full month on leaving.

That you might want to consider any pay rises due to the three best years does probably not need to be mentioned.... But also consider when any rises are likely to be. Are your rises yearly or irregular? Are you expecting more substantial raises or "just" COL adjustments, or neither?
And do you have the option to boost your income during one of the last three years by doing something extra (a teacher friend of DH did by strategically doing summer school for the last three years)?


Do you have any cash pay-outs on retiring (such as saved vacation or PTO might be)? Depending on your tax situation, retiring in the beginning of a new year, such as January 31st, could be a good idea if you get into a lower tax bracket that year and thus get the pay-out at a lower tax rate.

As a state employee, will you have any SSRI? If you will, don't forget to check it out. Even if it is no big part of your planning and retirement income, I think that you should know about where it stands. 

[giramomma]

Feb 23, 2024 12:40:05 GMT -5 myrrh said:

Well the cost of retiree health care for family coverage (after age 55 and 25 years of service) is more than double what I pay as an employee. Yikes. But it does say that you can use retiree health care to cover kids up to age 26. I actually have no idea if I can just cover myself and the kids and have DH on ACA. I will see if I have time to research ACA this weekend.

More than double still may not be bad.

I'm currently paying 240 a month for good family health insurance. 

When I retire, and before I hit medicare eligibility, it's going to run us like 2K a month.

It's a known cost. I can't imagine someone being able to pay $500 for a family of 4-5 and have it cover just about everything very comprehensively. Although, my yearly MRI does run $200 or so, out of pocket. 

When DH and I are old enough for medicare, then it drops to 1K a month.

I am willing to pay the premium for the known. I have been using our hospital/clinics for 22 years now. I don't want to risk missing some minute detail on new health insurance that would completely screw things up just so I can save money. And if my cancer comes back, that's not the time I want to be dealing with the stress of an oopsie when it comes to health insurance coverage. My job during the reoccurance is to fight the cancer, not the system.

ETA: Retirement health care information is just as transparent as worker health care information. They publicly post the premium cost, and it hasn't gone up very much in the past decade. (Just like mine. Mine has gone up, $30 total, in 13 years).

[countrygirl2]

Son was in the military for 10 years. When he left and was hired by the DOD he bought that amount of pension and added to his currently. I have no idea what it cost, but he said it was a good deal.

He also wanted to work in Washington state as he got a big raise so more money in the pension fund for later. I think he can retire at 62 or maybe earlier but of course each year he works adds to SS and pension. His dad says he needs to go to 67. He really does, little guy will be nine this year and he will be 19 when his dad is 63, just when he is in college. Son needs to stick those 4 years out to pay for it. I think with his pension, SS, and savings he will be in good financial condition for his retirement.

[NastyWoman]

Pensions, at least in the private sector, can be a fickle thing. When I started at the company I retired from (22 years later)  the promised pension was based on your last 3 years salary. I forget what the exact percentage was. And there was a very good retirement health care deal. Fast forward about 5 years and they changed the formula based on an annual earnings formula, so the early, lower paid years came into play, and the healthcare part became an "allowance" to cover the cost of a Medicare supplement. Then came a series of corporate takeovers. And the very first one did away with the pension. We kept what had been earned to that day but that was it, no COLA ever. And the healthcare allowance died a quiet death, it just disappeared. There was a voluntary contributory part to the pension while it was in place. It was just 1% of your salary and it increased your payout considerably. Fortunately I had been smart/lucky enough to sign up for that and my pension now is a nice addition to my income. Since there is no COLA it will become less over time of course but I'll take it.

All this to say that pensions may not be as safe as they look. Things can and do change. Probably less in the public sphere but never say never...

[TheOtherMe]

Dad's pension changed after he was retired.  He worked for Firestone but he was salaried.  At the beginning, it included excellent health care, all paid for by the company.

Just before they moved here, retirees had to start paying for their health insurance and get Medicare Part D.  They were not given very many options to choose from.  They each got an allowance for reimbursement each year.  

Since mom was a spouse, she got a 50% allowance for reimbursement.  

Both were owed money when they died, as in the allowance did not cover the cost.

The allowance ends when the person dies, so whatever is owed will never be paid.

Since the allowance was paid on December 31 and dad died on December 19, they clawed back what had been paid.  They did tell me that would happen when I called to inform them of his death