Pension service credit purchase: yes or no?

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texasdiver
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Pension service credit purchase: yes or no?

Post by texasdiver » Sat Jan 13, 2018 2:19 pm

I'm currently a public school teacher in the middle of my 2nd year of teaching in WA with 9 years of additional experience teaching in TX.

The WA teacher's pension program has a service credit purchase (buy-back) provision allowing me to purchase up to 7 years of experience teaching in another state towards my pension calculation. It is supposed to be actuarially neutral. Essentially you submit a form telling them how many years (up to 7) of out of state teaching experience you want to purchase, document your out of state experience, and then they send you a lump sum bill to cover that cost which I can pay for with an IRA rollover.

The WA teacher's pension program is an traditional pension with COLA calculated at 2% of your final average salary multiplied by the number of years of teaching. So you are essentially buying additional teaching years.

I ran the online calculator on the WA pension web site and came up with the following numbers:

Lump sum cost to buy 7 additional years of teaching experience based on my current age and salary: $73,535
Estimated additional annual pension benefit in 11 years at age 65 (based on my current salary inflation adjusted): $9,500

So basically I can buy a lifetime COLA'd annual annuity for $73,535 that starts paying $9500 in 11 years at age 65 and adjusts upward based on the SSI annual COLA.

How do I know if this is a good deal or not?

NOTE: There are additional factors that could increase or decrease my final average salary in 11 years. WA state is currently searching for ways to boost teacher salaries and my inflation calculations of 2% could be wrong. Plus the teacher salary schedule could change in future years with future union negotiations. I tried to be realistic but conservative and err on the low side. Chances are it could be higher than $9,500 but there is no way to know. I could goose it myself by taking on additional duties for pay in the last years of work but I'm probably unlikely to want to do that.

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sergeant
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Re: Pension service credit purchase: yes or no?

Post by sergeant » Sat Jan 13, 2018 2:39 pm

It almost always pays to buy service time. California PERS eliminated this option (except for military buyback) several years ago due to the costs associated with it. Looking at your numbers I would absolutely do it. The purchase is even better if you have a survivor benefit. The only negative is if the pension plan has really bad funding levels.
Lincoln 3 EOW!

texasdiver
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Re: Pension service credit purchase: yes or no?

Post by texasdiver » Sat Jan 13, 2018 2:58 pm

sergeant wrote:
Sat Jan 13, 2018 2:39 pm
It almost always pays to buy service time. California PERS eliminated this option (except for military buyback) several years ago due to the costs associated with it. Looking at your numbers I would absolutely do it. The purchase is even better if you have a survivor benefit. The only negative is if the pension plan has really bad funding levels.
The pension is adequately funded so not worried about that. They are accommodating increasing pension costs by changing the plans for new employees. You now have a choice of plans when you are hired, the traditional plan (which I elected) and the newer hybrid plan which is more like the Federal TSP with a 50% smaller traditional pension and a generous 401k type match. New young employees mostly seem to go for the new hybrid plan. There seems little or no chance of cuts to existing pensions in this state. At present there is no political movement for it like in some other states.

The plan has 4 different survivor benefit options (0%, 50%, 66.7%, and 100%). You trade off lower monthly pension amounts for higher survivor benefits.

I figure I'll pull the trigger on it when I become eligible after 2 full years of employment in WA. I can just roll over some existing IRA funds to pay for it. I was looking around for some annuity calculators but I couldn't find anything that would give me an apple to apples comparison.

At this point it looks like my wife and I will reach retirement age with the great bulk of our retirement resources in investments and not very much in fixed income pensions and Social Security so it "feels" like a reasonable choice to exchange some investments for the safety of lifetime annuities. I'm just trying to figure out how to calculate if it is a "good deal" or not.

Easy Rhino
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Re: Pension service credit purchase: yes or no?

Post by Easy Rhino » Sat Jan 13, 2018 3:03 pm

My wife bought some calpers credit a few years ago. Also supposed to be actuarily neutral. We were unable to crunch the math definitely. But figured since calpers was discontinuing it because it was costing them money... it must have been a good deal!

anonenigma
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Re: Pension service credit purchase: yes or no?

Post by anonenigma » Sat Jan 13, 2018 3:11 pm

I bought five years of "air time" (not based on any service), and it was the best deal ever. Really enjoying the extra money in retirement. It's also great that my wife, who is younger, will receive the benefit if I go first.

Since you're only in your second year, the purchase cost is low and will only rise with your salary. As your salary rises, so will the value of your purchase.

Assume it takes five years to vest - are you certain you'll stay in the profession? WA teachers pay into Social Security, so the impact of the Windfall Elimination Provision won't be a relevant consideration.

If you have nonretirement funds available, consider whether you might want to use those to make the purchase - that way part of your pension benefit won't be taxed.

Good luck - both in the classroom and with this decision.

Grt2bOutdoors
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Re: Pension service credit purchase: yes or no?

Post by Grt2bOutdoors » Sat Jan 13, 2018 3:26 pm

An 11 year deferred annuity for a husband/wife joint survivor with an initial lump sum deposit of $73,535 will yield $480 a month of non-Cola'd income. You can calculate this yourself at www.immediateannuities.com. I think its a great deal for you, to take what is offered. The state of WA is saying they can earn more than what it costs them to pay you, fine, thank them, and take the offer if presented to you.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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sergeant
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Re: Pension service credit purchase: yes or no?

Post by sergeant » Sat Jan 13, 2018 4:29 pm

texasdiver wrote:
Sat Jan 13, 2018 2:58 pm
sergeant wrote:
Sat Jan 13, 2018 2:39 pm
It almost always pays to buy service time. California PERS eliminated this option (except for military buyback) several years ago due to the costs associated with it. Looking at your numbers I would absolutely do it. The purchase is even better if you have a survivor benefit. The only negative is if the pension plan has really bad funding levels.
The pension is adequately funded so not worried about that. They are accommodating increasing pension costs by changing the plans for new employees. You now have a choice of plans when you are hired, the traditional plan (which I elected) and the newer hybrid plan which is more like the Federal TSP with a 50% smaller traditional pension and a generous 401k type match. New young employees mostly seem to go for the new hybrid plan. There seems little or no chance of cuts to existing pensions in this state. At present there is no political movement for it like in some other states.

The plan has 4 different survivor benefit options (0%, 50%, 66.7%, and 100%). You trade off lower monthly pension amounts for higher survivor benefits.

I figure I'll pull the trigger on it when I become eligible after 2 full years of employment in WA. I can just roll over some existing IRA funds to pay for it. I was looking around for some annuity calculators but I couldn't find anything that would give me an apple to apples comparison.

At this point it looks like my wife and I will reach retirement age with the great bulk of our retirement resources in investments and not very much in fixed income pensions and Social Security so it "feels" like a reasonable choice to exchange some investments for the safety of lifetime annuities. I'm just trying to figure out how to calculate if it is a "good deal" or not.
Sorry, I got similar numbers as Grt2bOutdoors on the same website but didn't include them. What happened to your Texas pension? Do the two systems have reciprocity? Does Washington allow you to pay for the purchase through payroll deduction? We purchased a couple years for my wife's county system through payroll deduction which lowered her taxable income.
Lincoln 3 EOW!

suemarkp
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Re: Pension service credit purchase: yes or no?

Post by suemarkp » Sat Jan 13, 2018 4:59 pm

Are you in TRS3 (or TRS2 or TRS 1)? Something important happens at 20 years of service. When calculating my wife's TRS3 pension, I stumbled into this. She can't buy service from teaching elsewhere, so she just needs to work (they may also have a plan to outright buy service credits, but we don't plan to do that). Our planned retirement date puts her at 20 years and 1 month of service. Retiring July 1 -vs- August 1 made a $300/month difference. Perhaps you saw that when running numbers on the TRS/DRS Fortress site? Here is the note it put on the screen: "Your benefit was increased by 0.25% per month from your separation date to your retirement date as you had at least 20 years of service credit upon separation from employment"

I would strongly consider doing what you need to in order to cross that 20 year service line, by either teaching longer or buying credits if the credit cost isn't that much. The math is harder to figure because you need to know how long you'll live. Also note that the penalty to taking your pension before age 65 is rather severe (about a 9% benefit reduction per year for the first 3 years, 6% per year for the next 2) assuming you are TRS3.
Mark | Kent, WA

Grt2bOutdoors
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Re: Pension service credit purchase: yes or no?

Post by Grt2bOutdoors » Sat Jan 13, 2018 5:05 pm

suemarkp wrote:
Sat Jan 13, 2018 4:59 pm
Are you in TRS3 (or TRS2 or TRS 1)? Something important happens at 20 years of service. When calculating my wife's TRS3 pension, I stumbled into this. She can't buy service from teaching elsewhere, so she just needs to work (they may also have a plan to outright buy service credits, but we don't plan to do that). Our planned retirement date puts her at 20 years and 1 month of service. Retiring July 1 -vs- August 1 made a $300/month difference. Perhaps you saw that when running numbers on the TRS/DRS Fortress site? Here is the note it put on the screen: "Your benefit was increased by 0.25% per month from your separation date to your retirement date as you had at least 20 years of service credit upon separation from employment"

I would strongly consider doing what you need to in order to cross that 20 year service line, by either teaching longer or buying credits if the credit cost isn't that much. The math is harder to figure because you need to know how long you'll live. Also note that the penalty to taking your pension before age 65 is rather severe (about a 9% benefit reduction per year for the first 3 years, 6% per year for the next 2) assuming you are TRS3.
What you call a penalty is what the pension calls "actuarially neutral". Because you are taking the pension earlier, that means you are cashing those checks much longer than the normal retiree, hence the reduction in check amount.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

texasdiver
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Re: Pension service credit purchase: yes or no?

Post by texasdiver » Sat Jan 13, 2018 5:53 pm

Trying to respond to all the questions here:

1. I am in the TRS-2 plan in WA which is the current traditional pension plan. TRS-3 is the newer hybrid plan with the 401K element. TRS-1 is the older legacy plan with more generous rules that only applies to teachers who began teaching in WA before year 2000 (I think).

2. Yes it takes 5 years to vest in the pension but if I purchase 7 years from my Texas teaching history I would automatically be vested because I'd have 9 years. In other words, the years that you purchase count towards vesting.

3. I don't *know* that I'll stick with teaching for 11 more years. But even if I don't the money spent buying additional service years would not be lost. If I walk away from teaching in a year or two I still have full pension rights for all the years that I purchase, I just wait until age 65 and then start drawing the pension. The only advantage to working until age 65 is that my final average salary for the pension calculation would be higher than if I quit teaching today so the value of the years purchased would be greater.

4. Nothing happens to my Texas pension if I do this. I still have the 9 years of teaching history in TX and will draw that pension starting at age 65. I don't lose those years by buying into the WA pension (unless I cash out those funds to pay for the WA buy-in which I don't plan to do). The TX pension is non-COLA and my last years of teaching there ended in 2016 so it is basically locked in. I can calculate the exact amount which will be about $10K per year. There is no point in cashing it out because I would take a huge hit and lose 50% of the accrued value.

5. As far as I can tell with TRS-2 there is nothing magical about 20 years of teaching except if you are looking to retire early. You are eligible for early retirement once you have 20 years of teaching but if you take early retirement after 20 years you get a reduced pension. Even if I bought the additional 7 years from my TX teaching history I'd only be hitting 20 years when I reach 65 so that's not really a factor. I don't see where I lose anything if I walk away before 20 years except that I have to wait until age 65 to start drawing the pension and it will be smaller due to having less years of teaching history.

6. I have absolutely no plans to work past age 65 unless finances demand it. That is the year our youngest daughter would be scheduled to graduate from college. My wife is 7 years younger and a physician. Our plan when I reach 65 is to either both fully retire or alternatively have her partially retire and do part time locum work around the country from time to time to bring in a little extra income.

7. One reason I do plan to work up until 65 is that I lost 9 years of social security work history from my years of teaching in TX and am subject to the WEP deduction to my social security. Each year that I work teaching in WA reduces my social security WEP reduction and if I teach until age 65 I have all but erased the WEP. So every year of teaching in WA (or any full employment for that matter) basically earns double on my social security. I earn the regular benefits plus I claw back some of the WEP reduction every year.

Valuethinker
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Re: Pension service credit purchase: yes or no?

Post by Valuethinker » Sat Jan 13, 2018 6:05 pm

texasdiver wrote:
Sat Jan 13, 2018 2:19 pm
I'm currently a public school teacher in the middle of my 2nd year of teaching in WA with 9 years of additional experience teaching in TX.

The WA teacher's pension program has a service credit purchase (buy-back) provision allowing me to purchase up to 7 years of experience teaching in another state towards my pension calculation. It is supposed to be actuarially neutral. Essentially you submit a form telling them how many years (up to 7) of out of state teaching experience you want to purchase, document your out of state experience, and then they send you a lump sum bill to cover that cost which I can pay for with an IRA rollover.

The WA teacher's pension program is an traditional pension with COLA calculated at 2% of your final average salary multiplied by the number of years of teaching. So you are essentially buying additional teaching years.

I ran the online calculator on the WA pension web site and came up with the following numbers:

Lump sum cost to buy 7 additional years of teaching experience based on my current age and salary: $73,535
Estimated additional annual pension benefit in 11 years at age 65 (based on my current salary inflation adjusted): $9,500

So basically I can buy a lifetime COLA'd annual annuity for $73,535 that starts paying $9500 in 11 years at age 65 and adjusts upward based on the SSI annual COLA.

How do I know if this is a good deal or not?

NOTE: There are additional factors that could increase or decrease my final average salary in 11 years. WA state is currently searching for ways to boost teacher salaries and my inflation calculations of 2% could be wrong. Plus the teacher salary schedule could change in future years with future union negotiations. I tried to be realistic but conservative and err on the low side. Chances are it could be higher than $9,500 but there is no way to know. I could goose it myself by taking on additional duties for pay in the last years of work but I'm probably unlikely to want to do that.
Am I right in thinking as a Texas teacher you do not have Social Security?

I would really recommend doing this. Even increasing mortgage to do so.

texasdiver
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Re: Pension service credit purchase: yes or no?

Post by texasdiver » Sat Jan 13, 2018 6:07 pm

sergeant wrote:
Sat Jan 13, 2018 4:29 pm
texasdiver wrote:
Sat Jan 13, 2018 2:58 pm
sergeant wrote:
Sat Jan 13, 2018 2:39 pm
It almost always pays to buy service time. California PERS eliminated this option (except for military buyback) several years ago due to the costs associated with it. Looking at your numbers I would absolutely do it. The purchase is even better if you have a survivor benefit. The only negative is if the pension plan has really bad funding levels.
The pension is adequately funded so not worried about that. They are accommodating increasing pension costs by changing the plans for new employees. You now have a choice of plans when you are hired, the traditional plan (which I elected) and the newer hybrid plan which is more like the Federal TSP with a 50% smaller traditional pension and a generous 401k type match. New young employees mostly seem to go for the new hybrid plan. There seems little or no chance of cuts to existing pensions in this state. At present there is no political movement for it like in some other states.

The plan has 4 different survivor benefit options (0%, 50%, 66.7%, and 100%). You trade off lower monthly pension amounts for higher survivor benefits.

I figure I'll pull the trigger on it when I become eligible after 2 full years of employment in WA. I can just roll over some existing IRA funds to pay for it. I was looking around for some annuity calculators but I couldn't find anything that would give me an apple to apples comparison.

At this point it looks like my wife and I will reach retirement age with the great bulk of our retirement resources in investments and not very much in fixed income pensions and Social Security so it "feels" like a reasonable choice to exchange some investments for the safety of lifetime annuities. I'm just trying to figure out how to calculate if it is a "good deal" or not.
Sorry, I got similar numbers as Grt2bOutdoors on the same website but didn't include them. What happened to your Texas pension? Do the two systems have reciprocity? Does Washington allow you to pay for the purchase through payroll deduction? We purchased a couple years for my wife's county system through payroll deduction which lowered her taxable income.
I haven't looked into the reverse reciprocity of buying into the TX program based on my years in WA. I doubt that would make sense because I'd still be locked into the lower average salary calculation in TX that ended in 2016. I can't imagine that they would use my WA salary history to calculate a TX pension. What makes WA a better deal is that I can buy in now and then draw pension on my future average earnings 10 years from now.

There is no payroll deduction option. I wish there was. As far as I can tell, you submit the application, they calculate the lump sum payment amount, and you have 90 days to send them a check for the full amount. You also only get 1 bite at the apple. You can't buy 4 years now and then decide to buy 3 more some time later. You get one chance to do the service credit purchase.

texasdiver
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Re: Pension service credit purchase: yes or no?

Post by texasdiver » Sat Jan 13, 2018 6:12 pm

Valuethinker wrote:
Sat Jan 13, 2018 6:05 pm
texasdiver wrote:
Sat Jan 13, 2018 2:19 pm
I'm currently a public school teacher in the middle of my 2nd year of teaching in WA with 9 years of additional experience teaching in TX.

The WA teacher's pension program has a service credit purchase (buy-back) provision allowing me to purchase up to 7 years of experience teaching in another state towards my pension calculation. It is supposed to be actuarially neutral. Essentially you submit a form telling them how many years (up to 7) of out of state teaching experience you want to purchase, document your out of state experience, and then they send you a lump sum bill to cover that cost which I can pay for with an IRA rollover.

The WA teacher's pension program is an traditional pension with COLA calculated at 2% of your final average salary multiplied by the number of years of teaching. So you are essentially buying additional teaching years.

I ran the online calculator on the WA pension web site and came up with the following numbers:

Lump sum cost to buy 7 additional years of teaching experience based on my current age and salary: $73,535
Estimated additional annual pension benefit in 11 years at age 65 (based on my current salary inflation adjusted): $9,500

So basically I can buy a lifetime COLA'd annual annuity for $73,535 that starts paying $9500 in 11 years at age 65 and adjusts upward based on the SSI annual COLA.

How do I know if this is a good deal or not?

NOTE: There are additional factors that could increase or decrease my final average salary in 11 years. WA state is currently searching for ways to boost teacher salaries and my inflation calculations of 2% could be wrong. Plus the teacher salary schedule could change in future years with future union negotiations. I tried to be realistic but conservative and err on the low side. Chances are it could be higher than $9,500 but there is no way to know. I could goose it myself by taking on additional duties for pay in the last years of work but I'm probably unlikely to want to do that.
Am I right in thinking as a Texas teacher you do not have Social Security?

I would really recommend doing this. Even increasing mortgage to do so.
Yes, I earned no social security during my 9 years of Texas teaching. But I do have 16 years of social security earnings history prior to becoming a teacher in TX (I started teaching in my 40s). All those years of grad school and Peace Corps without SS earnings are coming back to haunt me! I lost about 7 years of potential earnings history by dinging around in my 20s in grad school and Peace Corps. So at present my social security will be reduced by the WEP. Every year I continue to teach in WA goes towards clawing back the WEP and I'll have come close to reducing the WEP to zero (and be eligible for a full social security benefit) if I continue teaching until age 65.

cherijoh
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Re: Pension service credit purchase: yes or no?

Post by cherijoh » Sat Jan 13, 2018 7:30 pm

Grt2bOutdoors wrote:
Sat Jan 13, 2018 5:05 pm
suemarkp wrote:
Sat Jan 13, 2018 4:59 pm
Are you in TRS3 (or TRS2 or TRS 1)? Something important happens at 20 years of service. When calculating my wife's TRS3 pension, I stumbled into this. She can't buy service from teaching elsewhere, so she just needs to work (they may also have a plan to outright buy service credits, but we don't plan to do that). Our planned retirement date puts her at 20 years and 1 month of service. Retiring July 1 -vs- August 1 made a $300/month difference. Perhaps you saw that when running numbers on the TRS/DRS Fortress site? Here is the note it put on the screen: "Your benefit was increased by 0.25% per month from your separation date to your retirement date as you had at least 20 years of service credit upon separation from employment"

I would strongly consider doing what you need to in order to cross that 20 year service line, by either teaching longer or buying credits if the credit cost isn't that much. The math is harder to figure because you need to know how long you'll live. Also note that the penalty to taking your pension before age 65 is rather severe (about a 9% benefit reduction per year for the first 3 years, 6% per year for the next 2) assuming you are TRS3.
What you call a penalty is what the pension calls "actuarially neutral". Because you are taking the pension earlier, that means you are cashing those checks much longer than the normal retiree, hence the reduction in check amount.
But 9% per year sounds rather high to me. I am eligible for a non-COLA pension from a former employer and the penalty for collecting your pension early is only 4%/yr. Maybe the difference is the COLA.

antiqueman
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Re: Pension service credit purchase: yes or no?

Post by antiqueman » Sat Jan 13, 2018 9:39 pm

I have a similar option as OP. Except by statute , the retired employee receives 3% of the previous years benefits, each year.

I have considered buying about 6 years of time. It would increase the monthly benefit substantially .

But---here is the issue-- the plan is only 60% funded. It is a state plan, not municipal . I am concerned about paying around 80k dollars and in 10 years or so, changes are made to the plan. I might not get my principal back.

Would any of you purchase the 6 years if your fund was only 60% funded?

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sergeant
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Re: Pension service credit purchase: yes or no?

Post by sergeant » Sat Jan 13, 2018 10:22 pm

antiqueman wrote:
Sat Jan 13, 2018 9:39 pm
I have a similar option as OP. Except by statute , the retired employee receives 3% of the previous years benefits, each year.

I have considered buying about 6 years of time. It would increase the monthly benefit substantially .

But---here is the issue-- the plan is only 60% funded. It is a state plan, not municipal . I am concerned about paying around 80k dollars and in 10 years or so, changes are made to the plan. I might not get my principal back.

Would any of you purchase the 6 years if your fund was only 60% funded?
Depends on the state. If in California, I would absolutely buy the time. State employees have much more pension protection than local members of PERS. I'm a local member. :|
Lincoln 3 EOW!

survivor
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Re: Pension service credit purchase: yes or no?

Post by survivor » Sun Jan 14, 2018 11:27 am

With PERS and a COLA aren't the total benefits capped? In other words for young retires, with an increase of inflation, after so many years, no more increases in benefits. So if you retire at 50 with 3k per month, then at 75 you reach the cap of maybe 5k, no more raises.

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