buying pension credits decision

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
camper
Posts: 871
Joined: Thu Dec 04, 2008 11:51 pm
Location: My side of the mountain

buying pension credits decision

Post by camper »

My DW and I are struggling with the decision to buy pension credits through my employer. I started a municipal job while in college. 18 years later, I'm still there and relatively happy. We are both 38. DW is an RN. As far as we can tell the defined benefit plan has 3 components. 1) total years of credited service (earned PTO counts); 2) average 3 highest years of salary; 3) benefit multiplier, which appears to be 2.25%.
Currently, the earliest I could retire would be April 2031-age 50
I received a quote for the purchase of 5 permissive credits for ~$52,500. This represents about half of what I currently have in my 457 plan and about 10% of what we have in retirement accounts. We save around 35% of what we earn. The only debt we have is about 10 years left on a mortgage.
The HR analyst stated that if purchased, the monthly pension payout would increase roughly 10% and I would be retirement eligible Oct 2028-age 48
Is there anything else I should be considering?
Would it be a wise purchase?
Buckeye Chuck
Posts: 57
Joined: Wed Jun 05, 2019 8:54 pm

Re: buying pension credits decision

Post by Buckeye Chuck »

Everyone I know that can purchase pension credits and did was happy. Usually the longer you wait the higher the cost. Every year you can go earlier is priceless. Assuming your pension system is solvent and you are sure it is safe. Pension funds vary widely so you must be certain.
delamer
Posts: 10872
Joined: Tue Feb 08, 2011 6:13 pm

Re: buying pension credits decision

Post by delamer »

Do you want to retire at your earliest opportunity?
User avatar
Topic Author
camper
Posts: 871
Joined: Thu Dec 04, 2008 11:51 pm
Location: My side of the mountain

Re: buying pension credits decision

Post by camper »

delamer wrote: Sat Aug 03, 2019 3:56 pm Do you want to retire at your earliest opportunity?
My wife surely would like me to. She would eventually like to be a traveling nurse.
delamer
Posts: 10872
Joined: Tue Feb 08, 2011 6:13 pm

Re: buying pension credits decision

Post by delamer »

camper wrote: Sat Aug 03, 2019 3:59 pm
delamer wrote: Sat Aug 03, 2019 3:56 pm Do you want to retire at your earliest opportunity?
My wife surely would like me to. She would eventually like to be a traveling nurse.
If that is an important goal for both of you, then being able to retire sooner is a good use of your money.
User avatar
LilyFleur
Posts: 1608
Joined: Fri Mar 02, 2018 10:36 pm

Re: buying pension credits decision

Post by LilyFleur »

Buckeye Chuck wrote: Sat Aug 03, 2019 3:13 pm Everyone I know that can purchase pension credits and did was happy. Usually the longer you wait the higher the cost. Every year you can go earlier is priceless. Assuming your pension system is solvent and you are sure it is safe. Pension funds vary widely so you must be certain.
It made a significant difference in my pension. Good luck!
User avatar
Wiggums
Posts: 3404
Joined: Thu Jan 31, 2019 8:02 am

Re: buying pension credits decision

Post by Wiggums »

Would your DW be able to retire at the same time?

It’s not a big amount to retire earlier. Especially if you want to do other things. I’d buy the credits.
Last edited by Wiggums on Mon Aug 05, 2019 1:15 pm, edited 1 time in total.
Good Listener
Posts: 766
Joined: Wed Dec 30, 2015 5:24 pm

Re: buying pension credits decision

Post by Good Listener »

I cannot answer your question but I can suggest that you ask the question why would they be selling these pension credits? Maybe they need the money.
User avatar
Stinky
Posts: 6836
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: buying pension credits decision

Post by Stinky »

Good Listener wrote: Sat Aug 03, 2019 8:09 pm I cannot answer your question but I can suggest that you ask the question why would they be selling these pension credits? Maybe they need the money.
I agree.

What is the funded status of the pension plan? If it’s 100%, then the purchase may make sense. However, if it’s low (below 70% maybe), I be concerned about the ability of the plan to make full payments for your years after retirement, which could stretch to 2070 or later.
It's a GREAT day to be alive! - Travis Tritt
Grt2bOutdoors
Posts: 23322
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: buying pension credits decision

Post by Grt2bOutdoors »

Stinky wrote: Sat Aug 03, 2019 8:20 pm
Good Listener wrote: Sat Aug 03, 2019 8:09 pm I cannot answer your question but I can suggest that you ask the question why would they be selling these pension credits? Maybe they need the money.
I agree.

What is the funded status of the pension plan? If it’s 100%, then the purchase may make sense. However, if it’s low (below 70% maybe), I be concerned about the ability of the plan to make full payments for your years after retirement, which could stretch to 2070 or later.
That is a ridiculous assumption - there are maybe 2-3 plans in the entire country which are fully funded, and yet you do not see pension plans failing, especially state pension plans. While I don't know which state plan the OP belongs to, short of it being California, New Jersey or Illinois, I'd say buying the pension credits will be a good decision. A low funded plan, I'd say is below 60% funded. As for payments going to 2070, look at the Social Security lifespan table, not many are going to make it to age 90, and each succeeding year thereafter there will be more and more departing. It's the much younger crowd that needs to be concerned, as in those just starting their careers or those who haven't earned credits. It's very difficult to remove vested benefits, it's easier to change benefits that are unvested or unearned.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
User avatar
Topic Author
camper
Posts: 871
Joined: Thu Dec 04, 2008 11:51 pm
Location: My side of the mountain

Re: buying pension credits decision

Post by camper »

Grt2bOutdoors wrote: Sat Aug 03, 2019 8:32 pm
Stinky wrote: Sat Aug 03, 2019 8:20 pm
Good Listener wrote: Sat Aug 03, 2019 8:09 pm I cannot answer your question but I can suggest that you ask the question why would they be selling these pension credits? Maybe they need the money.
I agree.

What is the funded status of the pension plan? If it’s 100%, then the purchase may make sense. However, if it’s low (below 70% maybe), I be concerned about the ability of the plan to make full payments for your years after retirement, which could stretch to 2070 or later.
That is a ridiculous assumption - there are maybe 2-3 plans in the entire country which are fully funded, and yet you do not see pension plans failing, especially state pension plans. While I don't know which state plan the OP belongs to, short of it being California, New Jersey or Illinois, I'd say buying the pension credits will be a good decision. A low funded plan, I'd say is below 60% funded. As for payments going to 2070, look at the Social Security lifespan table, not many are going to make it to age 90, and each succeeding year thereafter there will be more and more departing. It's the much younger crowd that needs to be concerned, as in those just starting their careers or those who haven't earned credits. It's very difficult to remove vested benefits, it's easier to change benefits that are unvested or unearned.
Looks like Tucson's funded ratio is 76.2% on an actuarial basis as of June 30, 2018. The market basis is 78.8%. I'm not sure of the difference.
User avatar
Stinky
Posts: 6836
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: buying pension credits decision

Post by Stinky »

camper wrote: Sat Aug 03, 2019 8:44 pm
Looks like Tucson's funded ratio is 76.2% on an actuarial basis as of June 30, 2018. The market basis is 78.8%. I'm not sure of the difference.
Being funded at mid-70s% isn’t great, but it isn’t awful either. Thank goodness you’re not in Illinois!

Ultimately, the security behind your pension plan is the taxing ability of your municipality. From what I know about Arizona, I think that should be among the better places to be in this country for growth of the municipal tax base.

And yes, you should be looking out to about 2065-70. You’ll be 84 in 2065, and if you make it to retirement age, there’s an excellent chance that you’ll make it to that age or higher.
It's a GREAT day to be alive! - Travis Tritt
Mickey7
Posts: 164
Joined: Tue Jun 20, 2017 1:52 pm

Re: buying pension credits decision

Post by Mickey7 »

I would definitely consider it.

I am on a state plan and about 13 years ago I was eligible to get an extra year, due to being a long term sub, the cost was much lower do it being based on my salary at the time. I jumped on it. :D Now at retirement have found out that I am eligible for another year. However the cost is astronomically higher due to my projected retirement income. This would not be a good use of my funds. :(

I do not know about how your pension is based. For Texas it is the highest 3 years averaged times a multiplier and this was then multiplied by your years of service. You need to take the time to work this out. Five years does sound good at this cost.

While it always hurt to take away from your retirement account, the flip side is to see what it will do for the retirement income flow.
Grt2bOutdoors
Posts: 23322
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: buying pension credits decision

Post by Grt2bOutdoors »

camper wrote: Sat Aug 03, 2019 8:44 pm
Grt2bOutdoors wrote: Sat Aug 03, 2019 8:32 pm
Stinky wrote: Sat Aug 03, 2019 8:20 pm
Good Listener wrote: Sat Aug 03, 2019 8:09 pm I cannot answer your question but I can suggest that you ask the question why would they be selling these pension credits? Maybe they need the money.
I agree.

What is the funded status of the pension plan? If it’s 100%, then the purchase may make sense. However, if it’s low (below 70% maybe), I be concerned about the ability of the plan to make full payments for your years after retirement, which could stretch to 2070 or later.
That is a ridiculous assumption - there are maybe 2-3 plans in the entire country which are fully funded, and yet you do not see pension plans failing, especially state pension plans. While I don't know which state plan the OP belongs to, short of it being California, New Jersey or Illinois, I'd say buying the pension credits will be a good decision. A low funded plan, I'd say is below 60% funded. As for payments going to 2070, look at the Social Security lifespan table, not many are going to make it to age 90, and each succeeding year thereafter there will be more and more departing. It's the much younger crowd that needs to be concerned, as in those just starting their careers or those who haven't earned credits. It's very difficult to remove vested benefits, it's easier to change benefits that are unvested or unearned.
Looks like Tucson's funded ratio is 76.2% on an actuarial basis as of June 30, 2018. The market basis is 78.8%. I'm not sure of the difference.
The two largest employers in that region are the medical center and Raytheon. If Raytheon consolidates with United Technologies proposed merger that could have a negative impact on economic base, though how much is uncertain. Still a 76% funded ratio is pretty darn good for a municipality. Nice downtown btw, I like what they did with the trolley and revitalization.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
retiredflyboy
Posts: 238
Joined: Sun Dec 02, 2018 10:02 pm

Re: buying pension credits decision

Post by retiredflyboy »

I don’t think you will regret purchasing the credits. Life time income is a wonderful thing!
Facts are stubborn things. Everything works until it doesn’t.
Valuethinker
Posts: 42041
Joined: Fri May 11, 2007 11:07 am

Re: buying pension credits decision

Post by Valuethinker »

camper wrote: Sat Aug 03, 2019 3:03 pm My DW and I are struggling with the decision to buy pension credits through my employer. I started a municipal job while in college. 18 years later, I'm still there and relatively happy. We are both 38. DW is an RN. As far as we can tell the defined benefit plan has 3 components. 1) total years of credited service (earned PTO counts); 2) average 3 highest years of salary; 3) benefit multiplier, which appears to be 2.25%.
Currently, the earliest I could retire would be April 2031-age 50
I received a quote for the purchase of 5 permissive credits for ~$52,500. This represents about half of what I currently have in my 457 plan and about 10% of what we have in retirement accounts. We save around 35% of what we earn. The only debt we have is about 10 years left on a mortgage.
The HR analyst stated that if purchased, the monthly pension payout would increase roughly 10% and I would be retirement eligible Oct 2028-age 48
Is there anything else I should be considering?
Would it be a wise purchase?
I would do it if you plan to stay w this employer.

Arizona is still growing in population so I have fewer worries re demographic death spiral.

50k is not a lot of money for potentially 2 years of your life handed to you free of work commitments.

It's also not too much money if this turns out to have been the wrong decision. Because it is unlikely to be 100 per cent wrong.
Valuethinker
Posts: 42041
Joined: Fri May 11, 2007 11:07 am

Re: buying pension credits decision

Post by Valuethinker »

Good Listener wrote: Sat Aug 03, 2019 8:09 pm I cannot answer your question but I can suggest that you ask the question why would they be selling these pension credits? Maybe they need the money.
Usually it is something the unions negotiated.

There is an absence of fiduciary responsibility to future tax payers because current rate payers will not face the pain and in fact don't understand the issues.

So in negotiations officials tend to concede these points.
ralph124cf
Posts: 2653
Joined: Tue Apr 01, 2014 11:41 am

Re: buying pension credits decision

Post by ralph124cf »

An important point to make: The 10% additional pension appears not to be 10% of your pension, but 10% of your salary for the last three years.

Assuming that your pension would be less than your salary, then your pension would increase more than the quoted 10%.

Ralph
User avatar
sergeant
Posts: 1706
Joined: Tue Dec 04, 2007 11:13 pm
Location: The Golden State

Re: buying pension credits decision

Post by sergeant »

Do it. You're probably a safety member if you can retire at such an early age. It gets tougher every year especially as you near 50. I would purchase it using payroll deduction to further lower taxable income. Leave the 457b alone to grow.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
Buckeye Chuck
Posts: 57
Joined: Wed Jun 05, 2019 8:54 pm

Re: buying pension credits decision

Post by Buckeye Chuck »

Yes 50 was the point it got tough. 51 and still going but takes more effort. The time has flown by and I will miss some things when I finally pull the trigger for retirement.
Post Reply