Retiring soon. Should I buy back service?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
D. C. Pline
Posts: 59
Joined: Fri Dec 25, 2020 3:07 pm

Retiring soon. Should I buy back service?

Post by D. C. Pline »

I am getting ready to retire soon. I am single and will be 57.

I will be getting a state pension of $25k per year. Savings and investments total $600k, distributed among pre-tax, taxable, Roth, and cash. I have a paid off house worth about $430K. I have no debt.

I can stay on my employer’s health insurance plan and have credits to pay for the first few years.

I examined my spending for the last few years. I usually spend between $25k and $35k per year. That surprised me, because that doesn’t sound like much. That does not include income tax or much in lumpy costs, such as the occasional large dental bill or a new furnace. Taxes should be low with that level of income and 0% LTCG. Of course with the pandemic I have trouble finding anything to spend money on, but I think I will set a target in retirement of no more than $45k (including taxes) and carefully track my spending for a year then attempt a more precise budget.

I have no heirs to consider.

SS is estimated to be about $34k if I defer to age 70.

I am expecting an inheritance within the next 10 years or so that will be large. Large enough that I could retire on that alone.

A long time ago, I cashed out a few years of service when I left earlier employment from the same retirement system. I just found out that I can buy those years back. It will get me an extra $4k per year on the pension and only cost $16k to buy it back. That sounded like a good deal, but even better is that I can pay up to 90% of that from the pre-tax account.

My primary question is, should I go ahead and buy back the forfeited service? It seems like a no-brainer, breaking even in about 4 years. I have long thought that cashing out was the dumbest financial mistake I ever made, but maybe it’s not going to end up hurting me much in the end.

Meanwhile, here is the rest of my plan. A fair amount of my money is in cash, so I will use cash to supplement the pension. As mentioned, I will do a detailed tracking for a year. After a year, I will replace the cash spent from the taxable account. I am considering Roth conversions to the top of the 12% bracket.
Silk McCue
Posts: 8954
Joined: Thu Feb 25, 2016 6:11 pm

Re: Retiring soon. Should I buy back service?

Post by Silk McCue »

It is an amazing opportunity and an absolute no-brainer!

Cheers
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Retiring soon. Should I buy back service?

Post by Grt2bOutdoors »

Do it! Buy back the service.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
User avatar
Kenkat
Posts: 9549
Joined: Thu Mar 01, 2007 10:18 am
Location: Cincinnati, OH

Re: Retiring soon. Should I buy back service?

Post by Kenkat »

Absolutely do it, in a little over 4 years you will be ahead with the pension buyback.
tibbitts
Posts: 23726
Joined: Tue Feb 27, 2007 5:50 pm

Re: Retiring soon. Should I buy back service?

Post by tibbitts »

Wow. I purchased pension credits at age 60 with about a 12 year payback (and no cola) but this would have been a much easier decision.
Topic Author
D. C. Pline
Posts: 59
Joined: Fri Dec 25, 2020 3:07 pm

Re: Retiring soon. Should I buy back service?

Post by D. C. Pline »

tibbitts wrote: Fri Sep 17, 2021 9:06 am Wow. I purchased pension credits at age 60 with about a 12 year payback (and no cola) but this would have been a much easier decision.
That was more of what I expected, so when I saw the numbers I had to call and have someone go over it with me to make sure I didn't misunderstand what it said. Maybe I happen to cross some threshold with the extra years. The formula is rather complicated.
Topic Author
D. C. Pline
Posts: 59
Joined: Fri Dec 25, 2020 3:07 pm

Re: Retiring soon. Should I buy back service?

Post by D. C. Pline »

Thanks for the feedback, guys. Any comments on the rest of my retirement "plan"? I think I've got reasonable money and good flexibility built in, with the potential for a big lifestyle upgrade possible in the future if all works out.
JPM
Posts: 586
Joined: Sun Aug 19, 2018 2:29 pm

Re: Retiring soon. Should I buy back service?

Post by JPM »

Teacher buybacks are generally advantageous from what I have seen. With a four year break even and retiring at age 57, unless your health is very poor this is an obvious choice.

In regard to the rest of OP's plan, it's suggested that spending down the $600,000 savings to allow maxing SS at 70 is part of the plan. That would be in line with buying back the pension time so as to maximize the beneficial annuity characteristics of public pensions and SS. The description of the inheritance as large is too vague a description in this context to comment upon.
tibbitts
Posts: 23726
Joined: Tue Feb 27, 2007 5:50 pm

Re: Retiring soon. Should I buy back service?

Post by tibbitts »

Not that it would matter but does this pension have a cola?
Topic Author
D. C. Pline
Posts: 59
Joined: Fri Dec 25, 2020 3:07 pm

Re: Retiring soon. Should I buy back service?

Post by D. C. Pline »

JPM wrote: Fri Sep 17, 2021 12:41 pm Teacher buybacks are generally advantageous from what I have seen. With a four year break even and retiring at age 57, unless your health is very poor this is an obvious choice.

In regard to the rest of OP's plan, it's suggested that spending down the $600,000 savings to allow maxing SS at 70 is part of the plan. That would be in line with buying back the pension time so as to maximize the beneficial annuity characteristics of public pensions and SS. The description of the inheritance as large is too vague a description in this context to comment upon.
I think of SS as old age insurance, so if I am able, I will defer to 70 to get the max. Spending down doesn't seem necessary, as 3% of $600k is $18k and $29k + $18k = $47k. With 4% it comes to $53k. The biggest risk I have is the pension not keeping up with inflation. Or perhaps health insurance costs going through the roof. The inheritance should be more than my current net worth (which I calculate to include the house).
User avatar
BL
Posts: 9874
Joined: Sun Mar 01, 2009 1:28 pm

Re: Retiring soon. Should I buy back service?

Post by BL »

I bought back some that had a much longer pay-back, but it seemed like a good deal both then and now. Be sure not to miss any deadlines on doing this; I had a limited time to do it and it was before I started drawing retirement.

Agree to selling the stocks and buy your own index funds. It is possible that former owner didn't sell because of high capital gains rather than really wanting to keep them. Since you would normally get the step-up in capital gains at date of death, there would be no income tax on the gains in a taxable fund before the date of death.

I did want you to think about using some of this money for things that have special meaning to you. Travel is much easier when you are younger, so now is the time to do that. Finding groups, activities, and charities to volunteer and contribute to could add a lot of satisfaction to your retired life.
SnowBog
Posts: 4700
Joined: Fri Dec 21, 2018 10:21 pm

Re: Retiring soon. Should I buy back service?

Post by SnowBog »

Personally, I consider inheritance to be $0 unless/until it shows up in my bank account. So much can happen, and making plans on something out of your control is problematic. Luckily, it didn't sound like you are basing your decision on this, just noting a possibility.

If you haven't yet, may want to look at opensocialsecurity.com for input on SS. I think the decision is a little harder since you are single. Although if you don't "need" social security, and would be fine getting $0 if you were to unfortunately die before 70, obviously delaying is your best "old age insurance".
invest4
Posts: 1905
Joined: Wed Apr 24, 2019 2:19 am

Re: Retiring soon. Should I buy back service?

Post by invest4 »

SnowBog wrote: Sat Sep 18, 2021 1:53 am Personally, I consider inheritance to be $0 unless/until it shows up in my bank account. So much can happen, and making plans on something out of your control is problematic. Luckily, it didn't sound like you are basing your decision on this, just noting a possibility.

If you haven't yet, may want to look at opensocialsecurity.com for input on SS. I think the decision is a little harder since you are single. Although if you don't "need" social security, and would be fine getting $0 if you were to unfortunately die before 70, obviously delaying is your best "old age insurance".
+1
Mr. Rumples
Posts: 2979
Joined: Sun Aug 25, 2019 7:16 am

Re: Retiring soon. Should I buy back service?

Post by Mr. Rumples »

Does the buyback include any other benefits? For example, in ND, for every year of service, there is a health care credit of $5. In VA, for state employees that's $4. For teachers, it use to be $1.50 and then the locality could add to it. Other states and local school systems might do something similar.

So for example, for a person retiring with 30 years of service, the Commonwealth gives a health insurance credit of $120 each month towards the Medicare supplement premium. If a person purchases four more years of service that's $4x4 = an extra $16 the Commonwealth pays towards the Medicare supplement each month; at 34 years of service that is $136 a month. That's $192 a year and over the course of a 30 year retirement that's $5750, offsetting part of the up front cost.
"History is the memory of time, the life of the dead and the happiness of the living." Captain John Smith 1580-1631
retire2022
Posts: 3286
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Retiring soon. Should I buy back service?

Post by retire2022 »

D. C. Pline wrote: Fri Sep 17, 2021 8:16 pm
You should consult with Human Resources to see if the option to buy back your pension time from 457b/403b or pretax IRA is allowed.

In my state program, 457b proceeds are allowed to buy back earlier service credits.

This way your earlier 457b principal has compounded and is a smaller cost than if you were to buy from cash/taxable accounts.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: Retiring soon. Should I buy back service?

Post by hudson »

D. C. Pline wrote: Fri Sep 17, 2021 8:25 am My primary question is, should I go ahead and buy back the forfeited service?
Yes, if the math works out.
Topic Author
D. C. Pline
Posts: 59
Joined: Fri Dec 25, 2020 3:07 pm

Re: Retiring soon. Should I buy back service?

Post by D. C. Pline »

SnowBog wrote: Sat Sep 18, 2021 1:53 am Personally, I consider inheritance to be $0 unless/until it shows up in my bank account. So much can happen, and making plans on something out of your control is problematic. Luckily, it didn't sound like you are basing your decision on this, just noting a possibility.

If you haven't yet, may want to look at opensocialsecurity.com for input on SS. I think the decision is a little harder since you are single. Although if you don't "need" social security, and would be fine getting $0 if you were to unfortunately die before 70, obviously delaying is your best "old age insurance".
I understand what you mean about the inheritance. This is why I am keeping my standard of living the same as it is for now. I can just go on dreaming about building my dream house. The funny thing is, because I want to build a house, I am reluctant to consider moving now. Also, I hesitate to buy things, especially large things like furniture, because I want to wait until I can build that house and move. So what if my couch is 30 years old? So, ironically I actually spend less than I otherwise would. Kind of a new twist on the "have money, can't spend" problem.

What is the issue with Social Security? I know if things go unexpected poorly, I could claim earlier.
Topic Author
D. C. Pline
Posts: 59
Joined: Fri Dec 25, 2020 3:07 pm

Re: Retiring soon. Should I buy back service?

Post by D. C. Pline »

Mr. Rumples wrote: Sat Sep 18, 2021 9:22 am Does the buyback include any other benefits? For example, in ND, for every year of service, there is a health care credit of $5. In VA, for state employees that's $4. For teachers, it use to be $1.50 and then the locality could add to it. Other states and local school systems might do something similar.

So for example, for a person retiring with 30 years of service, the Commonwealth gives a health insurance credit of $120 each month towards the Medicare supplement premium. If a person purchases four more years of service that's $4x4 = an extra $16 the Commonwealth pays towards the Medicare supplement each month; at 34 years of service that is $136 a month. That's $192 a year and over the course of a 30 year retirement that's $5750, offsetting part of the up front cost.
I don't know. The formula is more complex than that, I believe, and HR is of no help. They basically say wait until after I am retired, then they will tell me the numbers.
Topic Author
D. C. Pline
Posts: 59
Joined: Fri Dec 25, 2020 3:07 pm

Re: Retiring soon. Should I buy back service?

Post by D. C. Pline »

retire2022 wrote: Sat Sep 18, 2021 10:32 am
D. C. Pline wrote: Fri Sep 17, 2021 8:16 pm
You should consult with Human Resources to see if the option to buy back your pension time from 457b/403b or pretax IRA is allowed.

In my state program, 457b proceeds are allowed to buy back earlier service credits.

This way your earlier 457b principal has compounded and is a smaller cost than if you were to buy from cash/taxable accounts.
I have verified with the plan that I can use the funds from the 403b. Human Resources won't answer questions like that.
SnowBog
Posts: 4700
Joined: Fri Dec 21, 2018 10:21 pm

Re: Retiring soon. Should I buy back service?

Post by SnowBog »

D. C. Pline wrote: Mon Sep 20, 2021 9:25 pm
SnowBog wrote: Sat Sep 18, 2021 1:53 am Personally, I consider inheritance to be $0 unless/until it shows up in my bank account. So much can happen, and making plans on something out of your control is problematic. Luckily, it didn't sound like you are basing your decision on this, just noting a possibility.

If you haven't yet, may want to look at opensocialsecurity.com for input on SS. I think the decision is a little harder since you are single. Although if you don't "need" social security, and would be fine getting $0 if you were to unfortunately die before 70, obviously delaying is your best "old age insurance".
I understand what you mean about the inheritance. This is why I am keeping my standard of living the same as it is for now. I can just go on dreaming about building my dream house. The funny thing is, because I want to build a house, I am reluctant to consider moving now. Also, I hesitate to buy things, especially large things like furniture, because I want to wait until I can build that house and move. So what if my couch is 30 years old? So, ironically I actually spend less than I otherwise would. Kind of a new twist on the "have money, can't spend" problem.

What is the issue with Social Security? I know if things go unexpected poorly, I could claim earlier.
On social security, no "issue". Opensocialsecurity.com gives recommendations on claiming strategies, so you can weigh options.

For the house, oddly I understand! We've thought about remodeling (or moving), and I find myself putting off other things as I'd rather do them as part of (or after) that decision is made. For example, recently noticed our driveway is getting cracks, will need to be resurfaced. But if we remodel, would love to add on another garage stall, which means we'd need to redo the driveway anyway (and differently)... First world problems I guess!
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: Retiring soon. Should I buy back service?

Post by hudson »

D. C. Pline wrote: Mon Sep 20, 2021 9:31 pm
retire2022 wrote: Sat Sep 18, 2021 10:32 am
D. C. Pline wrote: Fri Sep 17, 2021 8:16 pm
You should consult with Human Resources to see if the option to buy back your pension time from 457b/403b or pretax IRA is allowed.

In my state program, 457b proceeds are allowed to buy back earlier service credits.

This way your earlier 457b principal has compounded and is a smaller cost than if you were to buy from cash/taxable accounts.
I have verified with the plan that I can use the funds from the 403b. Human Resources won't answer questions like that.
I would find the document that spells out the details of your buy back and read it over and over until it made sense.
I would think that there's some kind of retirement plan booklet or document somewhere. You may already have it.
Ask the HR person where to look...maybe. That document is out there.
When I was doing the same research, I found a few older employees who had done the buyback and asked them. One of them said that the last few working years can get tough, "Do it!"
I would then do the math, and go for it if it made sense.
The payback on these deals goes on for a lifetime.
Debt gives me heartburn, but I'd borrow money to do a buy back...if the deal was OK.
Last edited by hudson on Tue Sep 21, 2021 6:54 am, edited 2 times in total.
Mr. Rumples
Posts: 2979
Joined: Sun Aug 25, 2019 7:16 am

Re: Retiring soon. Should I buy back service?

Post by Mr. Rumples »

D. C. Pline wrote: Mon Sep 20, 2021 9:27 pm
Mr. Rumples wrote: Sat Sep 18, 2021 9:22 am Does the buyback include any other benefits? For example, in ND, for every year of service, there is a health care credit of $5. In VA, for state employees that's $4. For teachers, it use to be $1.50 and then the locality could add to it. Other states and local school systems might do something similar.

So for example, for a person retiring with 30 years of service, the Commonwealth gives a health insurance credit of $120 each month towards the Medicare supplement premium. If a person purchases four more years of service that's $4x4 = an extra $16 the Commonwealth pays towards the Medicare supplement each month; at 34 years of service that is $136 a month. That's $192 a year and over the course of a 30 year retirement that's $5750, offsetting part of the up front cost.
I don't know. The formula is more complex than that, I believe, and HR is of no help. They basically say wait until after I am retired, then they will tell me the numbers.
That makes no sense on their part...they should have a calculator of some sort. If the retirement plan is part of a state administered plan, for example, PERA in CO or VRS in VA, contact them directly.

Keep in mind that as a public entity, this information, is public...perhaps ask to speak to their FOIA officer. In my experience, reaching out to a FOIA officer in cases like this gets results since doing it informally and getting the information is easier than if they get a formal request.
"History is the memory of time, the life of the dead and the happiness of the living." Captain John Smith 1580-1631
Topic Author
D. C. Pline
Posts: 59
Joined: Fri Dec 25, 2020 3:07 pm

Re: Retiring soon. Should I buy back service?

Post by D. C. Pline »

I have an important update to my situation. I found out today that I am actually not eligible for the buy back. Turns out someone made an error, and didn't take into consideration that a recent break in service was just a little longer than the allowed threshold. I would have to continue to work almost two more years to take advantage of this. But I cannot, since my term is ending soon.

I am disappointed. Also a bit sad that they already cashed my check and they said it would take 3 weeks to get a refund.
Silk McCue
Posts: 8954
Joined: Thu Feb 25, 2016 6:11 pm

Re: Retiring soon. Should I buy back service?

Post by Silk McCue »

D. C. Pline wrote: Thu Oct 07, 2021 10:14 pm I have an important update to my situation. I found out today that I am actually not eligible for the buy back. Turns out someone made an error, and didn't take into consideration that a recent break in service was just a little longer than the allowed threshold. I would have to continue to work almost two more years to take advantage of this. But I cannot, since my term is ending soon.

I am disappointed. Also a bit sad that they already cashed my check and they said it would take 3 weeks to get a refund.
Thanks for the update. Sorry to hear the bad news.

Cheers
Post Reply