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whyme

Cost/benefit calculator for purchase of service credit?

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Turns out that I am "qualified" to purchase about a third of a year of additional service credit (the number of working years calculated for my eventual pension) at CALSTRS.  The money can be paid with pre-tax dollars (from my 403b or 457 account).  Does anyone know of a calculator online where I might plug in variables to see whether the expected value of the additional pension is greater or less than the expected value of simply holding the pre-tax funds in a 403b or IRA account?

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That's an interesting question. If you use the CalSTRS retirement calculator, you could find the added monthly increase due to the additional service credit. https://resources.calstrs.com/CalSTRSComResourcesWebUI/Calculators/Pages/RetirementBenefit.aspx 

If you assumed a "safe withdrawal rate" of 4% on the amount of 403b dollars needed to buy the extra credit, it would give you an idea of the retirement income those 403b dollars could generate. 

There's lots of unknowables in the comparison isn't there? Does the pension have a COLA? If it does, will the COLA be dropped in the future? My teacher's pension's COLA has been dropped. Will the market returns of the future be similar to those of the past?  

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Thank you for the reply.   Yes, I think the Calstrs formula compared to some scenarios about the value of the invested money over time will get me into the ballpark.  As you say, there are unknowables, including lifespan and market conditions.  I have yet to learn exactly how much this will cost, but it looks as though at my (over 60) age 1 year credit = 30% of my current annual salary.  If that's right, I'd probably do better by the numbers to keep the money invested, but I may go for the extra buy anyway if the value gap isn't egregious , as I'd like to up the percentage of my retirement income that is predictable and the absolute amount I'd be consigning to this is fairly small.  (I'll probably retire with a pension replacing about 35-40% of my income, the rest will have to come from investments, plus a tiny soc sec payment.)

RE: COLA, Calstrs has a really strange agreement.  One gets a fixed COLA of 2% annually, but it is forever based on your initial pension amount.  In other words, if the pension is $1000 per month, you get a COLA of $20/month, which remains a COLA of $240/year forever, whether in year two or year thirty-two of the pension.  So the purchasing power of the pension is virtually guaranteed to erode over time.  But they have a provision to issue a supplementary payment (based on a formula I don't know) that supposedly guarantees that the pension will retain at least 85% of the purchasing power of the original pension amount.  Sheesh.  My mother has received a Calstrs pension for more than 30 years, and that quarterly supplement has become a substantial fraction of her total pension (at least a third).   But the resulting pension would make for a meager living... in her case, fortunately, she also has Soc Sec (secured before the "windfall elimination provision") and some dividend income, so she's in better shape than most retirees.

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I see that CalSTRS calls the 2% a "benefit", not a COLA, and says it doesn't track changes in the cost of living, as you say. That 85% floor in purchasing power is sure a lot better than no inflation protection at all though! My WA teacher's pension had a COLA for a few years, but the legislature dropped it some years ago. After 26 years, I think I've lost about 50% of the initial purchasing power. 403b (now IRA) to the rescue! 

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Indeed, the 85% support level is far better than nothing!  Very glad to hear that you've been rescued by supplemental savings.  

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