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Defined Benefit Pension Purchase Option

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  • Defined Benefit Pension Purchase Option

    I was looking at retirement planning and I know that some pension plans allow for a pension purchase option. For example, some pension plans allow military veterans to "buy" their military time into the pension. At any rate, to me it seems pretty much like a "no brainer", meaning if you have that opportunity you would by all means take advantage of it. Has anybody here done that? Or has anybody here had the opportunity, but missed it and regretted it? Again, maybe I am missing something, but it would seem like a better investment than most things right now
    Last edited by Jim1648; 09-16-2011, 06:17 PM. Reason: Details

  • #2
    A lot will depend on how much they charge and where the money comes from.

    My retirement system allowed us to buy up to five years of extra service credit in addition to military service. At the time (2004) rates were low and funding could be rolled over from 401K and 457 investments without tax consequences. I bought all five years and then retired five months later. The net result was to enhance my pension by 15%. In the six years I have been retired, I have been paid back roughly 70% of my investment.

    Since then the economy has tanked and the cost of buying time in my system has risen so much that I am told it now takes 15 to 18 years to break even on your investment. I don't know if that is true or not. If you are buying those extra years with money you have already paid tax on, find out if you will be paying tax on it again when it is paid out as retirement.
    Going too far is half the pleasure of not getting anywhere

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    • #3
      You can buy previous time here too - but there's an algorithm used to calculate how expensive each year is to purchase, based on where in your career you buy it and how old you are - ie: projected lifespan of the participant. It's a bell curve.

      Seems to me as if it's a good deal, no matter how you look at it. It's even better if you can roll over pre-tax contributions to another previous plan, instead of using post-tax savings, but if you just can't stand the idea of another 4 years .... buying a few and cashing out at 16 years service is attractive. I know that if you put in 30 on the job, and retired at 60 years old, you might have to do a little cost-benefit analysis since you'd already be in pension territory, and the payback of an extra 2-3% a year might not be worth it.

      It seems to run about 20 grand a year in my neck of the woods, for a 30 something guy with 10 years on. Not many guys I know can come up with 80 large in the first few years of their career, unless it's a direct 'roll-over' from another state plan.

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