Jump to content
Sign in to follow this  
dreamer58

Early Retirment Buy In

Recommended Posts

Greetings:

 

How does one calculate the benefit of purchasing a service credit improvement with 457 money?

 

In this case, a purchase of 75,000 dollars would increase monthly permanent retirement pay out about 1000 dollars per month.

 

I am concerned that using the lump sum money is not a good way to get increased monthly income.

 

If I were a pig farmer and traded my 200 pound pig for monthly bacon deliveries, would I be making a good deal?------

 

Any help appreciated on how to calculate this appreciated..suppose it impacts 403b people given the teachers retirement buy in programs

 

 

Share this post


Link to post
Share on other sites

Greetings:

 

Thank you for your response.....I'm pushing on becoming 54 and assume this buy-in would look really good if I begin collecting in about 4 years.

 

I considered the ratio of payout to buy-in and assume it is a good ratio...but I hate to be like the pig farmer who trades in their pig for packages of bacon...only to realize later they would like a ham everey once in a while!

I am somewhat concerned about trading lump sum money for income money....but

I guess as long as the contract is iron-clad and the rate of return makes the payoff of the original lumpsum come home fairly quick....it seems it might be worth buying-in.

 

I have looked around other sites and it seems that several governmental pensions systems have begun to adopt this kind of self funded early retirement....and suppose that others are wondering about their particular situation and the "deal".

 

 

 

 

Share this post


Link to post
Share on other sites

Someone help me out here. By my calculations, your $1,000 per month in extra income is worth roughly a lump sum of $300,000. In other words, you would need $300,000 today to draw $12,000 per year in income (@ 4% withdrawal rate per year) and have a reasonable chance of not running out of money too soon. If you were to grow $75,000 @ 5% (I just plucked a conservative number out of the air) per year for the next 4 years, you would have about $90,000. You could only draw about $300 per month on that. The buy back looks like a pretty good deal to me. I would think you would be better off buying the service credits and trying to save the maximum you can in your 457 for the next 4 or so years. You will get back your $75,000 in about 6 or 7 years payout. State pension plans are pretty rock solid. I am interested in hearing other opinions on dreamer58's question.

 

Regarding your pig analogy- What if you turned down the monthly bacon deliveries and your pig died the next year? :-)

Share this post


Link to post
Share on other sites

Thanks...but I hoped I wouldn't "kill the pig" :).........

 

 

And I do get to pay the employers cost for this benefit....which is why the buy-in is pretty big numbers.

 

I wonder what others in variouis governmental programs have done in their situations?...I know at least one program in Michigan has a similar buy-in...and believe they are spreading in this era of public agencies suffering from payroll creep and look for ways to get older and more expensive staff out the door.

 

 

Share this post


Link to post
Share on other sites

So you are saying your share and the employer's share that you must pay adds up to $75,000? And that this $75,000 (today at age 54) will buy you $12,000 per year for life starting at age 58?

 

9.4 percent is the annuity income rate at age 58. So it takes about $128,000 to guarantee one age 58 $12,000 per year for life. (12,000 divided by .094). Even when we factor in the time value of money your figures seem to be faulty. Please go back and check on this.

Share this post


Link to post
Share on other sites

Dreamer,

 

Here’s some more food for thought on the comparison. Let’s say that you choose not to pay the $75,000 now for $1,000 per month more in a gov’t pension 4 years from now, but instead wait 4 years and then buy an immediate fixed annuity (or Single Premium Immediate annuity) from an insurance company.

 

You can go to http://www.immediateannuity.com to get quotes for a 58 year old (your age 4 years from now) to get $1000 per month with various payout options. You can also go to http://www.vanguard.com, and get immediate annuity quotes from Vanguard’s Lifetime Income program.

 

As an example, I used age 58 for you and spouse, SPIA of $1,000/month, and 0% & 100% survivor benefits to see what lump sum investment would have to be given to an insurance company.

 

The Single Life annuity (w/ no survivor option) would cost around $165,000.

 

The 100% survivor option would cost around $185,000.

 

I highly doubt that you could make the $75,000 now grow to either of the above numbers in 4 years.

 

If your gov’t pension plan is only charging you $75,000 (which is less than half of both above quotes!!), that’s an extremely sweet deal. Talk about a subsidized early retirement offer. If your pension is COLA’d at all, the offer is even sweeter.

 

There are also questions like, “Do you want to annuitize this money?”.

 

- Alec

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

×
×
  • Create New...