Buying Back Years Pension Years

[dmr1168]

My wife is leaving the public school system for the private sector. She can buy back 4 yrs that she did not pay into the pension system at the tune of $31K (which she can borrow against her 403b). Here are a few more facts:

$31k pension a year if she doesn't buy back the years, $39k if she does. She has about 22 years before she can touch it.

$90k sitting in her 403b. New job will match 5% in her 401k.


Thoughts or suggestions? Thanks!


Dave in NJ

 

[BNTRS]

Hi Dave,

It might just be semantics at play, but it shouldn't be a case of borrowing, but rather an in-service transfer. Borrowing would require the money be repaid when she leaves.

In any event this is a somewhat common practice when the option is available (transferring funds to buy back missed pension contributions).

So the question is do the two of you think you can beat the extra $8k in income the $31k buys you in retirement.

Let's say you got 5% on the next 22 years on that $31k. It would be worth ~$90,600. Taking that amount and looking at a Single Premium Immediate Annuity (SPIA) you'd be able to generate an additional $5.5k in income per year (I'm assuming she's 60 when she does it, which is probably off, but seems like a safer bet since I don't know how old she will be). Now, SPIA income is based on current interest rates which are extremely low right now. If we see an increase in interest rates over the next 22 years, we'd likely see more income from the SPIA, this is also admittedly an over-simplification.

Pensions are nice, but they also force the pensioner to give up a lot of control over assets. And with loads of stories creeping out at the moment to highlight the funding problems of pensions, it's getting more and more difficult to comfortably recommend things like buying back missed years.

 

[debshelp44]

Have you talked with the advisor on the 403b? If he/she specializes in the education market they will be your best resource because they keep up with the laws etc and know her pension system. I know because this is the market I work with in Ohio. If you don't have a relationship with that advisor, ask for a list of approved providers for her district and talk to some of the independent advisors on that list. If I were you I'd want a face to face meeting rather than quickie advice given from people you don't know anything about on an online forum.

 

[Norwayguy]

Hi Dave,

It might just be semantics at play, but it shouldn't be a case of borrowing, but rather an in-service transfer. Borrowing would require the money be repaid when she leaves.

In any event this is a somewhat common practice when the option is available (transferring funds to buy back missed pension contributions).

So the question is do the two of you think you can beat the extra $8k in income the $31k buys you in retirement.

Let's say you got 5% on the next 22 years on that $31k. It would be worth ~$90,600. Taking that amount and looking at a Single Premium Immediate Annuity (SPIA) you'd be able to generate an additional $5.5k in income per year (I'm assuming she's 60 when she does it, which is probably off, but seems like a safer bet since I don't know how old she will be). Now, SPIA income is based on current interest rates which are extremely low right now. If we see an increase in interest rates over the next 22 years, we'd likely see more income from the SPIA, this is also admittedly an over-simplification.

Pensions are nice, but they also force the pensioner to give up a lot of control over assets. And with loads of stories creeping out at the moment to highlight the funding problems of pensions, it's getting more and more difficult to comfortably recommend things like buying back missed years.

I deal with a lot of teachers in my state. Your post hits a lot of the highlights but unless I missed it your not accounting for COLAs on the pension.

To the original poster you mentioned the 401K matches 5% which is a nonconsideration as they will be matching contributions from her salary and will not add anything to the rollover if you move the 403(b) account balance to the 401K over transfering $31k to buy back the pension years.

What I always tell my clients in this situation is this. The pension payout is locked in based on the formula which is a good thing. What every other advisor is talking about creating greater income with that $31K is NOt guaranteed and most of thier calculations are designed to provide you better income in year 1 of retirement but they really are showing you an increasing income that the COLA in most pensions will provide. I have in 10 years of dealing specifically with teachers only recommended not buying back pension years on 2 occations and in both instances the person was mid to late 30s in age and was leaving teaching and the pension formula essentially locked in the benefit amount until they retired which would be a little less than 30 years later and COLAs don't come into play until the pension is taken. Which is my long winded way of saying if your wife is close in age to when she can retire it would be hard to beat the added pension values if she is many years away from retirement then post which teachers pension it is her average of the last 3 years of income and years of services and her age and I'll give you an idea of whats your best bet.
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Have you talked with the advisor on the 403b? If he/she specializes in the education market they will be your best resource because they keep up with the laws etc and know her pension system. I know because this is the market I work with in Ohio. If you don't have a relationship with that advisor, ask for a list of approved providers for her district and talk to some of the independent advisors on that list. If I were you I'd want a face to face meeting rather than quickie advice given from people you don't know anything about on an online forum.

I do not disagree with you on the value of advice specific to the situation. But lets not forget when he is in front of a local 403(b) agent that agent has a possible commission sitting in front of them and can (not saying will) affect the advice given. I can't tell you how many times I've seen an advisor recommend investing the say 31K to provide more income and they show a projection all based on acheiving 8-10% returns to provide slightly more income than the pension totally overlooking the value of the Guaranteed COLAs built into most teachers Pensions not to mention the income from the Pension is guaranteed while his projections are based on a whim and a prayer.