Jump to content
Sign in to follow this  
gerryborn

What Do You Think About This?

Recommended Posts

I just learned that someone in my district took out 15 years of retirement to buy a house. This money came from the Teacher Retirement System of Georgia (www.trsga.com); this system is a defined benefit plan that has a factor of 2% for each year of employment. The percentage is then multiplied by the teacher's highest two-year salary average. For example, someone who worked 10 years would be receive 20% of his highest salary (10*2% = 20%). If that person had a two-year salary average of $50,000, then he would receive $10,000 a year in retirement ($50K * 20%).

 

After completing 3 years of service in Georgia this individual can buy back all 15 years of the withdrawn service. I believe that this would definitely be in his best interest because he would receive 30% of his highest two-year salary average upon turning 60 years old. The cost to do this will be somewhere from $25K to $30K; not cheap for sure, but a good long-term retirement pension.

 

Here's the point of interest. His financial advisor has advised him not to pursue the purchase of the withdrawn service years. Instead, he advised that the individual double his contributions to his 403b. Does this seem like bad advice to anyone? Wouldn't it be a smart move to lock in those 15 years as soon as possible? Heck 15 years is half the years needed to retire in Georgia; should this individual just leave them on the table?

 

Does there appear to be a conflict of interest here? The financial advisor suggests that he double his contributions to the 403b and just forget about those 15 years. I will be checking the product this financial advisor is selling, but will anyone here be surprised if he is selling a fee-loaded, surrender-charge-loaded annuity? Does this sound like really bad advice to anyone?

 

Sorry that I cannot provide too many details right now, but give me a week or so.

 

Share this post


Link to post
Share on other sites
Guest Sierra

Gerry,

 

How old is this chap? Here is my analysis based on the information you have furnished: The GeorgiaTRS is a contributory plan which means both the employee and employer contribute. Let's assume that the formula mandates that the 2 percent per year guarantee be funded equally between the employee and employer. This means that if the employee's buy back cost is $30,000 the employer will also contribute $30,000. We can label the employer's contribution of $30,000 as "free money". So if one decides not to buy back the 15 years of prior service credit he/she is forfeiting the employer's $30,000.

 

Assume a retirement age of 60 and a final average salary of $60,000. 15 years .02 $60,000 equals a lifetime pension of $18,000. A Pension Reserve of $180,000 is required to guarantee the $18,000 annually for life. If we assume the employee is 45 the the extra contribution made to the 403b in lieu of buying back the 15 years of prior service credit must grow over the next 15 years to at least $180,000 in order for the "advisor's" advice to be reasonable. Moreover, the analysis must also include other retiree benefits like a COLA which is paid entirely by the employer.

 

As a rule of thumb 15 percent (the employer's portion) is important money and should not be forfeited. But I would need to know his current age in order to render a more definite opinion.

 

Peace and Hope,

Joel

Share this post


Link to post
Share on other sites

Sierra,

He is 45 years old. It is my understanding that when one withdraws TRSGA money, he only gets his contributions (5% of total salary per month). The district's contribution of 9% stays in the pot. By buying back his 15 years he "reclaims" the benefit of this 9%. You are correct: the COLA is a key benefit of this pension.

Share this post


Link to post
Share on other sites
Guest Sierra

gerry,

 

So the 403b salesman is "advising" him to pay into the TRS for 15 years (age 45-60) and retire on a pension based on 15 years of service rather than buying back the service he rendered from age 30-45 and retire at age 60 with a pension based on 30 years.

 

In my view this salesman is simply attempting to close a sale and could care less about the long term financial security needs of this employee.

 

Peace and Hope,

Joel L. Frank

Edited by Sierra

Share this post


Link to post
Share on other sites

Can the withdrawn service be bought back with a tax free transfer form the 403 (b)? If so the best way to accumulate the $ would be in a 403(b) and buying back with untaxed $.

Share this post


Link to post
Share on other sites
Guest Sierra

Yes, money from a 403(b) or 457(b) account may be used to purchase prior service credit from a governmental Defined Benefit plan. Having said that 403bagent, this person's 'advisor" is not "advising" him to "double up" on his 403b contributions only to have him withdraw $35,000 in a lump sum to purchase prior service credit. He is advising the doubling of the 403(b) contributions in order to generate twice as much income for himself as he otherwise would.

 

Peace and Hope,

Joel L. Frank

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...