Help a Reader: Should He Pay Into His Pension?

Here's a question I recently received from a reader:

I'm a public school teacher.  I moved last year after teaching in another state for four years.  I am currently paying into a pension plan and have the option to buy the four years that I worked in the other state.  The price of buying all four years would be about $8000.  I can spread payments out over six years, costing about $110 a month.

If I retire when I'm 60, I have 27 more years to work.  It's hard to say what this would mean for me in retirement, since it depends on what my final salary will be when I retire. By rough calculations, it could increase my retirement benefits between $7-11 thousand per year.

But, if I were to pay that 110 per month into a simple savings account earning 5% for six years and then leave it alone for the next 21 years, I'd end up with 26,000.  In a 403(B) earning 10%, it'd be 88,000.

It seems to me I'd be better off not buying the service credits and just investing that money now, especially since I have a long time until retirement, who knows if I'll retire at 60 or later, and who knows if I'll still be paying into the same pension.  What is your opinion?

So, what's your advice for him?

Comments

[Suzi]

As one who worked for a school district in payroll for 30 years before I retired, I saw many teachers buying time for previous experience when it came time for retirement. Sometimes a person only needed a little time, a few sub days or one summer school to increase their pension. It was not always easy to go back in the records 15+ years to document past experience. And the money they needed to pay now to buy previous experience had increased because of the interest accrued.

[Patrick]

Buying into the pension plan is a great idea if you know for sure you will be receiving that pension later in life. However, if you are not certain, then it is tough to say.

Another consideration: If he does not have a Roth IRA, then fully funding a Roth IRA until he reaches retirement age will give him tax diversification in retirement.

[Livingalmostlarge]

Are you sure you are going to stay with the state? My friend's DH thought he was going to stay with the state but left after 11 years for a new job. Things happen, so it really depends are you committed? If so then buy it, if not then no.

[plonkee]

I think you need to work out what sort of retirement income $88,000 would bring you. Using a 4% return in retirement would give you about half what buying the extra years would. Its often the case that if you assume that everything will remain as it is, that buying extra years is more valuable than saving the money yourself.

For actually making the decision, you need to think about whether you'll be working for them in nearly 30 years time and what would happen if you weren't. I bet that the longer you stay with them the more valuable the extra years will become.

[newsmaker]

Agree with plonkee, 100%

[Andrew]

I have no plans to stay with the state I work for. But sadly, I have to pay into the pension system.

Of course, judging by how state budgets are going these days, I don't really plan on HAVING a state pension in 25 years...