Teacher Retirement Service Purchase Option Analysis Needed

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Topic Author
FinanceDad
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Teacher Retirement Service Purchase Option Analysis Needed

Post by FinanceDad »

My wife is a public school teacher in MO. We are evaluating whether it would make sense to purchase retirement service credit through the state teacher retirement program (PSRS-psrs-peers.org). I would appreciate some input on whether this makes sense.

Details:

Me- 36
Her - 35
Her current service years - 7.65
Eligible to purchase 2.30 years of service credit for $34,500.
Kids - 4, ages range between 11 and 4

When our third son was born, she took a break from teaching to help care for our children. She also did some partial years when the older kids were born. She has been back full-time for now 3 years and anticipates continuing in teaching until retirement. She is an excellent teacher, loves helping kids, and has no reservations about continuing in this field (apart from the concerns about COVID-19).

MO PSRS Summary:

Eligible for full retirement benefits with 30 years of service at any age or when age plus years of service equals 80 (rule of 80).

Benefits are (currently) calculated as follows (with “full” retirement benefits):

-Last 3 years average salary X 2.5% per month.

-An early retirement benefit exists, but at a reduced 2.2% factor. Current plan is to work until the full benefit factor is available.

-Contributions, including purchases, plus some nominal interest, are vested and can be refunded. This is important in the unlikely event she decides to stop teaching.

Considerations:

It seems there are two different ways to evaluate this purchase:

-Quality of life- being able to retire earlier.
-Financial- a bigger benefit at retirement

Quality of Life:

Earliest eligibility for full benefits without purchasing credit:

-July 2039 (basically retiring after the 2038-2039 school year)

- With the purchase of the credit, she would be eligible for retirement in Nov 2037 (age 53). In reality, she would likely either teach the remainder of the year (and retire after the 2037-2038 school year on July 2038) or we would take advantage of the ability to purchase 0.5 year of service when nearing retirement (and retire after 2037-2038 school year).

Financial:

I think the best way to consider this portion is to consider the difference in benefit amount at earliest full retirement and the benefit amount if retiring the same date and purchasing the service.

Benefit at retirement no additional purchases:

$4,188/month (July 2039 retirement)

Benefit retiring same time with purchase of 2.3 years:

$4,550/month (July 2039 retirement)

NOTE: this is based on PSRS benefit estimator and is based on her current salary increasing 2% per year.

In basic terms, $34,500 now will result in an additional $362/month, indexed for inflation, for her life.

Comparing to immediateannuities.com, a 40 year old paying 34,500 now would receive $223 monthly (the site had a min starting age of 40), so this isn’t a perfect comparison. I am not sure if this sort of product would be indexed for inflation.

Payment Options:

Service credit can be paid for with pre-tax money. We have enough for this purchase in 403b currently invested in a general account earning 3% return (we have been funding the 403b with this purchase in mind).

Other considerations:

-My wife made a sacrifice from her career to stay home with the kids. All things being equal, I would like her to have the ability to retire as early as possible.
-We are saving aggressively and would like the option to retire in our early to mid 50s (of course no one knows what the future will bring). Having a guaranteed pension will be an important part of the plan, allowing us a stable source of income, even if it needs to be supplemented from investments. Our youngest will be 21-23 in 2037-2039 and (hopefully) somewhat launched.
-I was surprised to find we are eligible for this many years (I thought it would be less). Given that, I am inclined to make this purchase now before it expires on Sept 30 and we have to apply again. The cost of the purchase is based on current salary, so if her salary increases, so will the cost.
-No guarantees of course, but the MO PSRS is thought to be in relatively good health.

Questions:
-My primary question is, “does this make sense?” Is $34,500 in 403b money now worth the additional benefit and/or option for earlier retirement?
-Am I missing anything in my analysis?

Thanks in advance for your valuable wisdom. My apologies for the long post, but I wanted to be thorough.
tibbitts
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by tibbitts »

I bought 2 years of credit in my state teachers retirement plan. I bought one year, then a few months later bought the second (most I could buy) - unfortunately the price had gone up - that's a long story and somewhat of a sore subject. But both purchases will probably turn out to be worthwhile, if I live long enough. I would say what mine cost but the terms are very, very different so it's really not comparable. I was within a year of early retirement at purchase (age 60) and calculated break-even (averaging the two costs) at about 13 years, assuming modest earnings on the funds had I not invested. Of course the pension payments eliminate worry about poor investment returns, but in my case come with inflation risk due to no cola.

I would say if you can get a refund with interest - like a similar amount of interest you'd get in the 403b fixed account, which is probably more than other "safe" investments now - buying the years probably has more potential upside than downside. The cola aspect, if I understand correctly, is especially appealing. Just don't count on circumstances not changing over the course of so many years.
ubermax
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by ubermax »

FinanceDad wrote: Mon Aug 03, 2020 9:59 am In basic terms, $34,500 now will result in an additional $362/month, indexed for inflation, for her life.

-My primary question is, “does this make sense?” Is $34,500 in 403b money now worth the additional benefit and/or option for earlier retirement?
-Am I missing anything in my analysis?
The question of whether it's best to leave the money in the 403(b) or buy more monthly benefit in a defined benefit pension plan that has a COLA feature is probably best asked of someone who has a very well polished crystal ball .

The more manageable question in my mind is : "Is the $34,500 a reasonable number" - the big problem tackling that question is the fact that your wife is a participant in a municipal plan , i.e. those plans sponsored by state and local governments - these plans , unlike those in the private sector , are unregulated as far as choice of interest and mortality assumptions along with the funding method - the actuarial or pension consulting firm that administers the plan has free reign in choosing all of those necessary components - in contrast the federal government mandates all of them and discloses what they are for plans in the private sector - and so the upshot is that you'll need to rely on the online tool .

My daughter is a teacher in MA and she was involved with something very similar because a few years ago she was transferring monetary credits from the CT system to MA - she didn't have to tap into her 403(b) plan and so it was different - my advice to her at the time was to always consider her DB plan as a valuable component in her financial life and so although not too scientific I'd recommend that you're wife buy that extra benefit , with COLA .
Topic Author
FinanceDad
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by FinanceDad »

OP here:

Thank you for the replies. I'm sorry for the delay in response. I'm camping with the family and away from service (and enjoying it). I'll respond once I'm back on the grid next week.

The crux of both responses and what is causing me to evaluate this carefully is the uncertainty. We would be funding an investment that we are ~20 years from using and my crystal ball is a little fuzzy. So much can change in these 20 years, especially with a pension. At the same time, a DB plan with COLA accessible in our 50s is potentially extremely valuable.

I probably should have mentioned this before, but this $34,500 is a small percentage of our retirement savings (<10%) and we are maxing out most of our available 401k, ROTH, HSA, etc. In short, I would think differently if this figure were half of my retirement bucket.

I am leaning toward making the purchase, but definitely approach the helpful replies.

Thanks again.
tibbitts
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by tibbitts »

I'm not seeing the downside if you are saying you can withdraw these purchase funds with interest - it seems like that's not much different than what would be happening in any deferred retirement plan. Sure, you don't have a choice of investment option, but it seems you could think of it as a fixed income component of your allocation - which is paying more than more fixed income option are now, with less interest rate risk. That's not the case with every pension fund, so other people contemplating a purchase shouldn't assume those terms.
Ron Ronnerson
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by Ron Ronnerson »

I would purchase the service credit in her situation. I'm a teacher in California and wish I had purchased a bit of credit (less than half a year in my case, in order to round my years of service to the next whole number). The opportunity has since closed. In 2013, the law in California was changed and I'm no longer able to do buy time. Keep in mind that pension reforms have been happening in recent years.

For your wife's situation, I would honestly put away the annuity calculator. If you're in your 30s and maxing out a 401k, Roth IRAs, HSA, and more, the difference between a $4500 pension and $4200 pension is not likely to be life-changing money for you in roughly 20 years. The $34k that you would be spending buys something far more valuable than a higher pension: the option for your wife to stop working two years earlier.

You mentioned that your wife likes her job very much. I can totally relate to that but I think it's important to recognize that things can change over time. People's work environments can change, health can change, interests and passions can change. To have the option to leave your job two years earlier is great for such a low cost. Also, it increases the pension as well so you get your money back (and possibly much more) if you live a long life.
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beernutz
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by beernutz »

When I first started teaching I was hired as a temp faculty then offered a tenure track position after my first academic year. The state retirement system offered me the opportunity to buy back that first year of service for $2.2k, but my wife and I thought there was a strong likelihood we'd change unis before I vested in the system so I declined.

Twenty years later, at another university but in the same state sytem, I inquired about buying that service year back and was quoted $16.5k. Again we declined, even though we had the cash in a no-penalty CD, because we had other retirement savings accounts and my wife had a small pension coming in addition to eventually two SS benefits. I wanted to buy the year but she didn't so we compromised and didn't buy.

That was five years ago, and while I regret the first decision I'm fine with the second as that extra $200ish a month for 1 more year of service wouldn't have been life-altering.

My point is if you're going to buy the 3 years you should do it now and not wait as the amount is likely to rise and the opportunity to buy it at all may close. I also don't remember reading what the source of the payment would be or whether your wife also pays in to SS and will receive that benefit in addition to her pension.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. --Will Rogers
anonenigma
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by anonenigma »

I bought five years in CalSTRS as the Great Recession was beginning, and it was a great deal for me. Other investments didn't appear promising, and when I calculated the expected annual rate of return (extra pension/purchase cost), it was much better than anything else I could have done with the money - especially with a 2% COLA (and occasional pay raises that increase the calculation). Of course, I was ten years away from retirement, not 25-30 like you guys. My wife is also 15.5 years younger, so with the 75% survivor benefit, there's a great chance that one or both of us will enjoy the fruits of that "air time" for long enough for the investment to more than pay off.

You are far away from retirement, but it doesn't hurt to burrow into the details of your pension plan. You mention a 2.5% age factor. Is that across the board or, as with CalSTRS, does it work its way up between the earliest retirement age and the highest age factor? Time to make a spreadsheet to project what percent of your highest income would be paid every year from age 55-65.

The other consideration is whether to pay for the additional service credit using a defined contribution account like a 403(b). If you do, the additional pension income will be taxable. If you use non-retirement funds, the extra income won't be taxable. The problem for teachers, especially in two income families, is that their marginal tax rate doesn't go down in retirement. Looking back, I would have been better served if I'd used post-tax funds instead of my 403(b). That would have saved me a nice amount in taxes every year.
ubermax
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by ubermax »

FinanceDad wrote: Sat Aug 08, 2020 8:57 am OP here:

The crux of both responses and what is causing me to evaluate this carefully is the uncertainty. We would be funding an investment that we are ~20 years from using and my crystal ball is a little fuzzy. So much can change in these 20 years, especially with a pension. At the same time, a DB plan with COLA accessible in our 50s is potentially extremely valuable.

I probably should have mentioned this before, but this $34,500 is a small percentage of our retirement savings (<10%) and we are maxing out most of our available 401k, ROTH, HSA, etc. In short, I would think differently if this figure were half of my retirement bucket.

I am leaning toward making the purchase, but definitely approach the helpful replies.

Thanks again.
Glad to hear you're enjoying some R&R - I thought your post was well written and thought out - I located a recent actuarial report for PSRS of Missouri , click below to see it for yourself - this report summarizes the assumptions and techniques used to evaluate the assets and liabilities of the pension plan as an ongoing entity - on pages 117 & 118 you'll see mention of an interest rate of 7.5% and a mortality table for active members.

I was curious to see how reasonable that $34,500 amount was at supporting an additional $362 /month - typically what happens when a participant retires is that the employer , in this case the State of Missouri , will purchase an annuity from an insurance company - their assumptions are usually more conservative with the interest rate currently being roughly in the 4.5% to 5.0% range and without more information I just used the mortality information noted on page 118 of the report - on a spreadsheet I found that using a rate of 4.75% the $34,500 would support monthly payments of $362 to almost 90 years old - that also reflects a 1.65% COLA each year which is mentioned on page 117 of the report .

I realize like you that a lot can change in the next 20 years but using only current information I still feel that making the purchase is a sound decision - also it appears that , unlike many other municipal plans , Missouri seems to be on firm ground with respect to funding their pension programs .

Good Luck !!

https://publicplansdata.org/reports/MO_ ... 019_64.pdf
Topic Author
FinanceDad
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by FinanceDad »

tibbitts wrote: Sat Aug 08, 2020 9:22 am I'm not seeing the downside if you are saying you can withdraw these purchase funds with interest - it seems like that's not much different than what would be happening in any deferred retirement plan. Sure, you don't have a choice of investment option, but it seems you could think of it as a fixed income component of your allocation - which is paying more than more fixed income option are now, with less interest rate risk. That's not the case with every pension fund, so other people contemplating a purchase shouldn't assume those terms.
@tibbits - Thanks for your response. I tend to think along the same lines as well.
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FinanceDad
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by FinanceDad »

Ron Ronnerson wrote: Sat Aug 08, 2020 11:12 am I would purchase the service credit in her situation. I'm a teacher in California and wish I had purchased a bit of credit (less than half a year in my case, in order to round my years of service to the next whole number). The opportunity has since closed. In 2013, the law in California was changed and I'm no longer able to do buy time. Keep in mind that pension reforms have been happening in recent years.

For your wife's situation, I would honestly put away the annuity calculator. If you're in your 30s and maxing out a 401k, Roth IRAs, HSA, and more, the difference between a $4500 pension and $4200 pension is not likely to be life-changing money for you in roughly 20 years. The $34k that you would be spending buys something far more valuable than a higher pension: the option for your wife to stop working two years earlier.

You mentioned that your wife likes her job very much. I can totally relate to that but I think it's important to recognize that things can change over time. People's work environments can change, health can change, interests and passions can change. To have the option to leave your job two years earlier is great for such a low cost. Also, it increases the pension as well so you get your money back (and possibly much more) if you live a long life.
Ron - Thanks for your reply. Appreciated. Agree with your thoughts. MO currently has an option allowing anyone nearing retirement (I think within 5 years) to purchase up to a 0.5 year of credit (to round up service credit as you mentioned). Hopefully, this is still available in ~20 years.
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FinanceDad
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by FinanceDad »

ubermax wrote: Wed Aug 12, 2020 3:16 pm
FinanceDad wrote: Sat Aug 08, 2020 8:57 am OP here:

The crux of both responses and what is causing me to evaluate this carefully is the uncertainty. We would be funding an investment that we are ~20 years from using and my crystal ball is a little fuzzy. So much can change in these 20 years, especially with a pension. At the same time, a DB plan with COLA accessible in our 50s is potentially extremely valuable.

I probably should have mentioned this before, but this $34,500 is a small percentage of our retirement savings (<10%) and we are maxing out most of our available 401k, ROTH, HSA, etc. In short, I would think differently if this figure were half of my retirement bucket.

I am leaning toward making the purchase, but definitely approach the helpful replies.

Thanks again.
Glad to hear you're enjoying some R&R - I thought your post was well written and thought out - I located a recent actuarial report for PSRS of Missouri , click below to see it for yourself - this report summarizes the assumptions and techniques used to evaluate the assets and liabilities of the pension plan as an ongoing entity - on pages 117 & 118 you'll see mention of an interest rate of 7.5% and a mortality table for active members.

I was curious to see how reasonable that $34,500 amount was at supporting an additional $362 /month - typically what happens when a participant retires is that the employer , in this case the State of Missouri , will purchase an annuity from an insurance company - their assumptions are usually more conservative with the interest rate currently being roughly in the 4.5% to 5.0% range and without more information I just used the mortality information noted on page 118 of the report - on a spreadsheet I found that using a rate of 4.75% the $34,500 would support monthly payments of $362 to almost 90 years old - that also reflects a 1.65% COLA each year which is mentioned on page 117 of the report .

I realize like you that a lot can change in the next 20 years but using only current information I still feel that making the purchase is a sound decision - also it appears that , unlike many other municipal plans , Missouri seems to be on firm ground with respect to funding their pension programs .

Good Luck !!

https://publicplansdata.org/reports/MO_ ... 019_64.pdf
Ubermax- Thanks for this thorough review. Much appreciated. Will review.
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FinanceDad
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by FinanceDad »

anonenigma wrote: Sat Aug 08, 2020 12:03 pm The other consideration is whether to pay for the additional service credit using a defined contribution account like a 403(b). If you do, the additional pension income will be taxable. If you use non-retirement funds, the extra income won't be taxable. The problem for teachers, especially in two income families, is that their marginal tax rate doesn't go down in retirement. Looking back, I would have been better served if I'd used post-tax funds instead of my 403(b). That would have saved me a nice amount in taxes every year.
Appreciate the response. I did not think about the above (using post-tax funds) so that the additional income would be taxable. Will look into that before finalizing.
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FinanceDad
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by FinanceDad »

OP here:

Appreciate, once again, all of the responses. I think we are going to make this purchase (we have until the end of September until it expires). There seems to be more upside than downside, both financially and from a lifestyle perspective (i.e.- my wife retiring earlier).
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UpsetRaptor
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by UpsetRaptor »

FinanceDad wrote: Tue Sep 01, 2020 5:07 pm
anonenigma wrote: Sat Aug 08, 2020 12:03 pm The other consideration is whether to pay for the additional service credit using a defined contribution account like a 403(b). If you do, the additional pension income will be taxable. If you use non-retirement funds, the extra income won't be taxable. The problem for teachers, especially in two income families, is that their marginal tax rate doesn't go down in retirement. Looking back, I would have been better served if I'd used post-tax funds instead of my 403(b). That would have saved me a nice amount in taxes every year.
Appreciate the response. I did not think about the above (using post-tax funds) so that the additional income would be taxable. Will look into that before finalizing.
Just curious, what did you find out about this piece, and what was your decision?
anonenigma
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by anonenigma »

UpsetRaptor wrote: Wed Sep 09, 2020 1:05 pm
FinanceDad wrote: Tue Sep 01, 2020 5:07 pm
anonenigma wrote: Sat Aug 08, 2020 12:03 pm The other consideration is whether to pay for the additional service credit using a defined contribution account like a 403(b). If you do, the additional pension income will be taxable. If you use non-retirement funds, the extra income won't be taxable. The problem for teachers, especially in two income families, is that their marginal tax rate doesn't go down in retirement. Looking back, I would have been better served if I'd used post-tax funds instead of my 403(b). That would have saved me a nice amount in taxes every year.
Appreciate the response. I did not think about the above (using post-tax funds) so that the additional income would be taxable. Will look into that before finalizing.
Just curious, what did you find out about this piece, and what was your decision?
You've reversed what I said. If you use post-tax funds, that portion of your pension will NOT be taxable income. I bought almost a year of service time from when I was a substitute teacher and used post-tax funds. As a result, my 1099-R has different numbers in total income and taxable income. I bought my five years of "airtime" with pre-tax funds from my 403b or 457b. In retrospect, I might have been better served had I used post-tax funds so I could pay less taxes in retirement.
unbiased
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by unbiased »

Can the plan sponsors provide you with an estimate of what you get WITH the purchase vs. the benefit without purchase? It helps to know how much of a difference the purchase makes overall.

Once you get that number, try to figure out how much you would need to save to "beat it." Generally, it usually is hard to do.
pshonore
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by pshonore »

anonenigma wrote: Wed Sep 09, 2020 6:37 pm
UpsetRaptor wrote: Wed Sep 09, 2020 1:05 pm
FinanceDad wrote: Tue Sep 01, 2020 5:07 pm
anonenigma wrote: Sat Aug 08, 2020 12:03 pm The other consideration is whether to pay for the additional service credit using a defined contribution account like a 403(b). If you do, the additional pension income will be taxable. If you use non-retirement funds, the extra income won't be taxable. The problem for teachers, especially in two income families, is that their marginal tax rate doesn't go down in retirement. Looking back, I would have been better served if I'd used post-tax funds instead of my 403(b). That would have saved me a nice amount in taxes every year.
Appreciate the response. I did not think about the above (using post-tax funds) so that the additional income would be taxable. Will look into that before finalizing.
Just curious, what did you find out about this piece, and what was your decision?
You've reversed what I said. If you use post-tax funds, that portion of your pension will NOT be taxable income. I bought almost a year of service time from when I was a substitute teacher and used post-tax funds. As a result, my 1099-R has different numbers in total income and taxable income. I bought my five years of "airtime" with pre-tax funds from my 403b or 457b. In retrospect, I might have been better served had I used post-tax funds so I could pay less taxes in retirement.
The amount you contribute with post tax funds is called "investment in contract". Once you have recovered that amount (usually over 20, 25 or 30 years depending on the age you start collecting), the pension will be fully taxable. See the Simplified Pension worksheet at https://apps.irs.gov/app/vita/content/g ... _1040i.pdf
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UpsetRaptor
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by UpsetRaptor »

Thanks pshonore, that's helpful.

Looking through it, I believe people should generally use pre-tax funds given the choice. A tax delayed is a tax saved.

Yes/no?
anonenigma
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by anonenigma »

pshonore wrote: Wed Sep 09, 2020 9:16 pm
anonenigma wrote: Wed Sep 09, 2020 6:37 pm
UpsetRaptor wrote: Wed Sep 09, 2020 1:05 pm
FinanceDad wrote: Tue Sep 01, 2020 5:07 pm
anonenigma wrote: Sat Aug 08, 2020 12:03 pm The other consideration is whether to pay for the additional service credit using a defined contribution account like a 403(b). If you do, the additional pension income will be taxable. If you use non-retirement funds, the extra income won't be taxable. The problem for teachers, especially in two income families, is that their marginal tax rate doesn't go down in retirement. Looking back, I would have been better served if I'd used post-tax funds instead of my 403(b). That would have saved me a nice amount in taxes every year.
Appreciate the response. I did not think about the above (using post-tax funds) so that the additional income would be taxable. Will look into that before finalizing.
Just curious, what did you find out about this piece, and what was your decision?
You've reversed what I said. If you use post-tax funds, that portion of your pension will NOT be taxable income. I bought almost a year of service time from when I was a substitute teacher and used post-tax funds. As a result, my 1099-R has different numbers in total income and taxable income. I bought my five years of "airtime" with pre-tax funds from my 403b or 457b. In retrospect, I might have been better served had I used post-tax funds so I could pay less taxes in retirement.
The amount you contribute with post tax funds is called "investment in contract". Once you have recovered that amount (usually over 20, 25 or 30 years depending on the age you start collecting), the pension will be fully taxable. See the Simplified Pension worksheet at https://apps.irs.gov/app/vita/content/g ... _1040i.pdf
Thanks - didn't know that. If I live long enough, should I assume that the two boxes on the 1099-R will eventually be identical?
anonenigma
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by anonenigma »

UpsetRaptor wrote: Thu Sep 10, 2020 10:10 am Thanks pshonore, that's helpful.

Looking through it, I believe people should generally use pre-tax funds given the choice. A tax delayed is a tax saved.

Yes/no?
Not quite, I think. If one has maxed out tax deferral opportunities (401k, 403b, 457b, FSA), the question of which funds to use to pay for airtime remains. It depends on what one's retirement tax situation will be. With correction for survivor benefit, my five years of airtime equate to about 10.5% of my highest year's salary, with 2% non-cumulative COLA bumps each year. In restrospect, I might have been better served to have used post-tax dollars - would have saved me around $250 per month in taxes.
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by forgeblast »

I bought back two years of service over time, they let me do $100 a pay check. She earned those years, you want them back because they determine when and how much she can receive for retirement. Trust me once I hit my number of 55 I am done, even if I have to work somewhere else and not touch the pension until 60 I will.
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UpsetRaptor
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by UpsetRaptor »

anonenigma wrote: Thu Sep 10, 2020 2:25 pm
UpsetRaptor wrote: Thu Sep 10, 2020 10:10 am Thanks pshonore, that's helpful.

Looking through it, I believe people should generally use pre-tax funds given the choice. A tax delayed is a tax saved.

Yes/no?
Not quite, I think. If one has maxed out tax deferral opportunities (401k, 403b, 457b, FSA), the question of which funds to use to pay for airtime remains. It depends on what one's retirement tax situation will be. With correction for survivor benefit, my five years of airtime equate to about 10.5% of my highest year's salary, with 2% non-cumulative COLA bumps each year. In restrospect, I might have been better served to have used post-tax dollars - would have saved me around $250 per month in taxes.
Based on the IRS simplified tax worksheet quoted above, if all things (like present/future tax rates) were hypothetically equal, one would end up paying the same nominal amount of tax $ over time either way. It's just a question of paying the taxes in a lump sum earlier (using POST-tax funds) or paying the taxes later (using PRE-tax funds) on a small amount of your pension each year spread over 20-30 years, ending sometime in your 80s. And of course, $250 today is worth more than $250 in 20-30 years, due to inflation.

I guess what you're saying is that if your tax bracket in retirement is higher than when working it might work out better to use POST-tax, at least in nominal terms? That could be true. However,
1) That's not usually the case for most people, and if it is the case it's not usually until SS and RMDs have both kicked in, when a lot of the pension payments have already been made.
2) The POST tax math still has to try to overcome that inflation factor, and we're talking about multiple decades of it.

Edit: Another, somewhat morbid, reason to use PREtax: If you defer the taxes over 20-30 retirement years into your 80s, you have a chance of not having to ever pay it in full, in the event of you perishing. Whereas if you use POST funds, the tax is prepaid in full.

If there's a hole in this logic, I'm open to it, let me know. I'm analyzing this because I have a similar situation myself in upcoming years.
anonenigma
Posts: 807
Joined: Thu Apr 21, 2011 11:58 pm

Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by anonenigma »

UpsetRaptor wrote: Thu Sep 10, 2020 4:21 pm
anonenigma wrote: Thu Sep 10, 2020 2:25 pm
UpsetRaptor wrote: Thu Sep 10, 2020 10:10 am Thanks pshonore, that's helpful.

Looking through it, I believe people should generally use pre-tax funds given the choice. A tax delayed is a tax saved.

Yes/no?
Not quite, I think. If one has maxed out tax deferral opportunities (401k, 403b, 457b, FSA), the question of which funds to use to pay for airtime remains. It depends on what one's retirement tax situation will be. With correction for survivor benefit, my five years of airtime equate to about 10.5% of my highest year's salary, with 2% non-cumulative COLA bumps each year. In restrospect, I might have been better served to have used post-tax dollars - would have saved me around $250 per month in taxes.
Based on the IRS simplified tax worksheet quoted above, if all things (like present/future tax rates) were hypothetically equal, one would end up paying the same nominal amount of tax $ over time either way. It's just a question of paying the taxes in a lump sum earlier (using POST-tax funds) or paying the taxes later (using PRE-tax funds) on a small amount of your pension each year spread over 20-30 years, ending sometime in your 80s. And of course, $250 today is worth more than $250 in 20-30 years, due to inflation.

I guess what you're saying is that if your tax bracket in retirement is higher than when working it might work out better to use POST-tax, at least in nominal terms? That could be true. However,
1) That's not usually the case for most people, and if it is the case it's not usually until SS and RMDs have both kicked in, when a lot of the pension payments have already been made.
2) The POST tax math still has to try to overcome that inflation factor, and we're talking about multiple decades of it.

Edit: Another, somewhat morbid, reason to use PREtax: If you defer the taxes over 20-30 retirement years into your 80s, you have a chance of not having to ever pay it in full, in the event of you perishing. Whereas if you use POST funds, the tax is prepaid in full.

If there's a hole in this logic, I'm open to it, let me know. I'm analyzing this because I have a similar situation myself in upcoming years.
Those who teach a full career can be in the same (or higher) tax bracket because pension income can't be sheltered in a 403b/457b/FSA. Higher taxable income can also lead to higher Medicare premiums (IRMAA). This is more of a problem if one has a younger spouse who continues to work. There's a balancing act required. Assuming one can afford to not touch tax-deferred retirement savings until RMDs kick in at age 72, income/tax management requires planning. Perhaps my wife will retire by the time I reach 72? If not, we'll face bracket creep and an IRMAA cliff.
pshonore
Posts: 6883
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Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by pshonore »

Another data point - until the mid 1990s, I believe most retirement plans that required contributions by employees (like teachers and other government employees) were always post tax. And about the same time, those same folks if not contributing to SS, were required to contribute the 1.45% Medicare portion of SS (with an employer match) if they moved to a new school system or were a new teacher. Prior to that, teachers did not get free Medicare unless they had 40 quarters of SS coverage on their own or became eligible through a Spouse's SS earnings record.
User avatar
UpsetRaptor
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Joined: Tue Jan 19, 2016 5:15 pm

Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by UpsetRaptor »

anonenigma wrote: Fri Sep 11, 2020 12:26 pm
UpsetRaptor wrote: Thu Sep 10, 2020 4:21 pm
anonenigma wrote: Thu Sep 10, 2020 2:25 pm
UpsetRaptor wrote: Thu Sep 10, 2020 10:10 am Thanks pshonore, that's helpful.

Looking through it, I believe people should generally use pre-tax funds given the choice. A tax delayed is a tax saved.

Yes/no?
Not quite, I think. If one has maxed out tax deferral opportunities (401k, 403b, 457b, FSA), the question of which funds to use to pay for airtime remains. It depends on what one's retirement tax situation will be. With correction for survivor benefit, my five years of airtime equate to about 10.5% of my highest year's salary, with 2% non-cumulative COLA bumps each year. In restrospect, I might have been better served to have used post-tax dollars - would have saved me around $250 per month in taxes.
Based on the IRS simplified tax worksheet quoted above, if all things (like present/future tax rates) were hypothetically equal, one would end up paying the same nominal amount of tax $ over time either way. It's just a question of paying the taxes in a lump sum earlier (using POST-tax funds) or paying the taxes later (using PRE-tax funds) on a small amount of your pension each year spread over 20-30 years, ending sometime in your 80s. And of course, $250 today is worth more than $250 in 20-30 years, due to inflation.

I guess what you're saying is that if your tax bracket in retirement is higher than when working it might work out better to use POST-tax, at least in nominal terms? That could be true. However,
1) That's not usually the case for most people, and if it is the case it's not usually until SS and RMDs have both kicked in, when a lot of the pension payments have already been made.
2) The POST tax math still has to try to overcome that inflation factor, and we're talking about multiple decades of it.

Edit: Another, somewhat morbid, reason to use PREtax: If you defer the taxes over 20-30 retirement years into your 80s, you have a chance of not having to ever pay it in full, in the event of you perishing. Whereas if you use POST funds, the tax is prepaid in full.

If there's a hole in this logic, I'm open to it, let me know. I'm analyzing this because I have a similar situation myself in upcoming years.
Those who teach a full career can be in the same (or higher) tax bracket because pension income can't be sheltered in a 403b/457b/FSA. Higher taxable income can also lead to higher Medicare premiums (IRMAA). This is more of a problem if one has a younger spouse who continues to work. There's a balancing act required. Assuming one can afford to not touch tax-deferred retirement savings until RMDs kick in at age 72, income/tax management requires planning. Perhaps my wife will retire by the time I reach 72? If not, we'll face bracket creep and an IRMAA cliff.
I understand all that, but this is still ignoring the inflation problem of using POST-tax funds to prepay the tax, instead of deferring the tax payments until decades later. Back of the envelope, at roughly 2% annual inflation, if an individual is 15 years from retirement (OP) and uses POST-tax funds to prepay the tax instead of deferring the tax across 20-30 years of retirement with PRE-tax funds, for the tax money at the tail end of the pension each $1 of taxes saved in future money will cost $2 in today's money. That's 100%. Granted that's the extreme tail end, and it's a linear slope to that point, but I hope you get the idea.
anonenigma
Posts: 807
Joined: Thu Apr 21, 2011 11:58 pm

Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by anonenigma »

UpsetRaptor wrote: Fri Sep 11, 2020 3:54 pm
anonenigma wrote: Fri Sep 11, 2020 12:26 pm
UpsetRaptor wrote: Thu Sep 10, 2020 4:21 pm
anonenigma wrote: Thu Sep 10, 2020 2:25 pm
UpsetRaptor wrote: Thu Sep 10, 2020 10:10 am Thanks pshonore, that's helpful.

Looking through it, I believe people should generally use pre-tax funds given the choice. A tax delayed is a tax saved.

Yes/no?
Not quite, I think. If one has maxed out tax deferral opportunities (401k, 403b, 457b, FSA), the question of which funds to use to pay for airtime remains. It depends on what one's retirement tax situation will be. With correction for survivor benefit, my five years of airtime equate to about 10.5% of my highest year's salary, with 2% non-cumulative COLA bumps each year. In restrospect, I might have been better served to have used post-tax dollars - would have saved me around $250 per month in taxes.
Based on the IRS simplified tax worksheet quoted above, if all things (like present/future tax rates) were hypothetically equal, one would end up paying the same nominal amount of tax $ over time either way. It's just a question of paying the taxes in a lump sum earlier (using POST-tax funds) or paying the taxes later (using PRE-tax funds) on a small amount of your pension each year spread over 20-30 years, ending sometime in your 80s. And of course, $250 today is worth more than $250 in 20-30 years, due to inflation.

I guess what you're saying is that if your tax bracket in retirement is higher than when working it might work out better to use POST-tax, at least in nominal terms? That could be true. However,
1) That's not usually the case for most people, and if it is the case it's not usually until SS and RMDs have both kicked in, when a lot of the pension payments have already been made.
2) The POST tax math still has to try to overcome that inflation factor, and we're talking about multiple decades of it.

Edit: Another, somewhat morbid, reason to use PREtax: If you defer the taxes over 20-30 retirement years into your 80s, you have a chance of not having to ever pay it in full, in the event of you perishing. Whereas if you use POST funds, the tax is prepaid in full.

If there's a hole in this logic, I'm open to it, let me know. I'm analyzing this because I have a similar situation myself in upcoming years.
Those who teach a full career can be in the same (or higher) tax bracket because pension income can't be sheltered in a 403b/457b/FSA. Higher taxable income can also lead to higher Medicare premiums (IRMAA). This is more of a problem if one has a younger spouse who continues to work. There's a balancing act required. Assuming one can afford to not touch tax-deferred retirement savings until RMDs kick in at age 72, income/tax management requires planning. Perhaps my wife will retire by the time I reach 72? If not, we'll face bracket creep and an IRMAA cliff.
I understand all that, but this is still ignoring the inflation problem of using POST-tax funds to prepay the tax, instead of deferring the tax payments until decades later. Back of the envelope, at roughly 2% annual inflation, if an individual is 15 years from retirement (OP) and uses POST-tax funds to prepay the tax instead of deferring the tax across 20-30 years of retirement with PRE-tax funds, for the tax money at the tail end of the pension each $1 of taxes saved in future money will cost $2 in today's money. That's 100%. Granted that's the extreme tail end, and it's a linear slope to that point, but I hope you get the idea.
I get what you're saying, and I did use tax-deferred funds to buy the five years of airtime from my pension plan. I think that one of the incentives of defined contribution plans is that, instead of paying taxes in today's dollars, the taxes will be paid with future dollars that will presumably buy fewer goods and services. As a retiree with no way to shelter my pension income and the higher Medicare cost through IRMAA (which I didn't know about ten years ago), I think about how my tax + IRMAA obligation would be lower if 10-12% of my pension were not taxable and part of MAGI for IRMAA purposes.

I can't do anything about it at this point, of course, but this thread made me wonder what I might have done in retrospect. In 2009, investments didn;t look great (except for those who see crashes as buying opportunities). If I had enough money to purchase the airtime with either tax deferred funds or funds that had already been taxed, and if I had understood taxes + IRMAA in retirement better, I would definitely have looked closely at using post-tax funds.
softwaregeek
Posts: 566
Joined: Wed May 08, 2019 8:59 pm

Re: Teacher Retirement Service Purchase Option Analysis Needed

Post by softwaregeek »

For us, the window closed before my wife had earned the required service period of five years to buy in.

We are in California. I bitterly regret that we didn't have the option. It means her retirement is 60 with full benefits. To retire earlier means leaving a huge amount of money on the table. Basically, to retire at full benefits would be 2% per year of service. To retire three years early gets almost nothing.

This means that we both will have to work until 60. Because realistically, I can't sit at home while she goes off to work. Our marriage doesn't work that way.

I would take the deal in a heartbeat. I suspect the window will close for you too, and sooner rather than later.

Also, your comparison with Immediate Annuities probably doesn't include the inflation protection.
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