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Thread: buying service credit

  1. #1
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    buying service credit

    Has anyone done this or gone through calculations with buying additional service credit to get a higher monthly pension amount? We both have tiny pensions for our state university pensions that will start when we retire, but I am curious about buying extra years of service credit. Would I check to see what kind of annuity I could get with the same amount, to see whether it was a good deal or not?

    We are planning on both doing the full survivor benefit, taking less money, but guaranteeing the spouse gets it the rest of their life, rather than the higher one if you just take it for your own life.

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    A few years prior to retirement, my state passed a law allowing me to purchase credit for my military service in our state pension system. The payment was based on an actuarial estimate of the future payments to my spouse and me. At the time, I looked at what an equivalent commercial pension would cost, and perhaps unsurprisingly the public pension was a significantly better deal. The law allowed me to pay up to 90% of the cost out of my Section 457 plan while stretching the tax impact over our actuarial life spans.

    You mileage may vary, but it was basically a no-brainer for me. It was more cost-effective than a commercial annuity, and less likely to default due to a provider bankruptcy.

    We also went with the 100% survivor benefit, as well as an option that guaranteed fifteen years of payments even if we were both to die. It was surprisingly inexpensive.

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    I looked into it when I retired but went with the standard pension w/survivor benefit. I had my accrued vacation pay rolled over into an IRA.

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    Quote Originally Posted by LDAHL View Post
    A few years prior to retirement, my state passed a law allowing me to purchase credit for my military service in our state pension system. The payment was based on an actuarial estimate of the future payments to my spouse and me. At the time, I looked at what an equivalent commercial pension would cost, and perhaps unsurprisingly the public pension was a significantly better deal. The law allowed me to pay up to 90% of the cost out of my Section 457 plan while stretching the tax impact over our actuarial life spans.

    You mileage may vary, but it was basically a no-brainer for me. It was more cost-effective than a commercial annuity, and less likely to default due to a provider bankruptcy.

    We also went with the 100% survivor benefit, as well as an option that guaranteed fifteen years of payments even if we were both to die. It was surprisingly inexpensive.
    Thanks, LDAHL, that is just the kind of experience I am looking for, and I will look into this more closely. I think it preselects the guaranteed years of payments for beneficiaries if we both die, up to the amount we paid in. I think.

  5. #5
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    Quote Originally Posted by pinkytoe View Post
    I looked into it when I retired but went with the standard pension w/survivor benefit. I had my accrued vacation pay rolled over into an IRA.
    Thanks, pinkytoe, I also like the survivor benefit option because it will make budgeting easier for the survivor, and we have the exact same pension.

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    Are you eligible for social security benefits or just the pension? Makes a difference…

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    I am eligible for social security benefits.

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    Quote Originally Posted by Tybee View Post
    Thanks, LDAHL, that is just the kind of experience I am looking for, and I will look into this more closely. I think it preselects the guaranteed years of payments for beneficiaries if we both die, up to the amount we paid in. I think.
    One thing I learned in the experience was that it took quite a while for the state pension system to produce the cost estimate. Might be something to consider if you’re close to pulling the trigger.

  9. #9
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    I am not, just trying to understand how the system works in case we ought to be buying service credit. There is a cost estimate calculator on the state site. And it looks like you have to figure it all out well in advance. So far I have learned that years I spent teaching at other public universities in other states are qualified so I can buy in at one rate. Other years could be purchased, but it is twice as expensive. So far, it looks like if we retired in five years and bought five years to get us to 20 years, it would take 13 years to break even--it's not that much more money. At least that is my preliminary estimate. I'll keep working with it.

  10. #10
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    My son figured it out for me and it was really expensive to buy the years and wasn’t worth it. For some people they earned the years when it was cheaper to buy them and it was worth it. I am sure each state has a different way of calculating it.

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