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I have the opportunity to repurchase four years of service credit in a state government defined benefit plan. My plan is to rollover $21K in funds from a taxable IRA account invested in stock into the DB plan, which provides for a 2.3% payment per years of service times the highest average three years of earnings. My simple calculation is that my annuity receipts would increase 9.2% over the annuity term. The service repurchase would increase my years of service to 18. My plan is to work an additional seven years to accumulate 25 years of service with a total annuity payment rate of 57.5%. I will also be eligible for SS at that time when I reach age 67. I plan to continue working part-time after retirement from full-time work.

By my calculations, I would receive an additional $6,800 per year based on my current highest average three years of earnings. Assuming a 10% rate of return, my estimate is that it would take four years to break even, as compared to leaving the $21K in the IRA plan. In essence, I am purchasing a long-term annuity with the IRA funds.

Please advise as to the rationality and viability of my financial plan.

Hi Kenny.

I wish I had such an investment opportunity, I would certainly take it.

However I think your analysis of the numbers is incorrect.  Using your figures, with that 10% rate of return, it looks like a 16 year break even.  If you don't retire for another seven years, the IRA money would grow from 21K to 40,923.  In the first year of retirement (year 8), you would earn $4092, and withdraw $6800, leaving $38215 in the IRA option.

The biggest thing affecting this analysis is the outsized rate of return you are figuring in.  I know that a 10% rate of return can be had for a time, but definitely not risk free.  The investment you would be buying is state government guaranteed. 

I also had not heard about rolling IRA money into an employers defined benefit plan.  Are you sure that this will be tax free?

Bryan

Bryan,

Thanks for your response. I used 10% as an admittedly high estimate. At 6%, the $21K would grow to $31.8 by year 7 if left in the IRA. I agree with your breakeven analysis of 16 years based on annuity receipts beginning in year 8.

The purchase of prior service credit is a taxfree event if the rollover is done directly from a qualified IRA plan into the retirement system plan. I purchased prior service credit last year using the same approach. An additional benefit is medical coverage beginning at age 65 with a minimum of 10 years of service.

Kenny G

Kenny,

 Bryan has it right about needing to do an apples-to-apples comparison by estimating what that $21k would accumulate to. That said, it's still a slam dunk to buy the years of service at such a low price for a secure lifetime income in the future.

What you are doing is very similar to the many discussions about delaying taking Social Security benefits. As a life annuity offer, giving up Social Security benefits for a period is a good "investment" in a higher future benefit.

Scott

after I decided to take early retirement at 55 from teaching, I used money I had saved into a 403b account to buy 3 additional years of teaching credit--which brought my total years of teaching credit to 20--that made a significant increase in the monthly amount of pension I would qualify for...

it was not cheap--and I know the way I did the math to justify the decision was flawed probably...

I just looked at the difference between what I was getting at the pension w/o the added years and the 20 yr pension--and added up how long it would take to pay back the money needed to make the purchase...it took just 3 years of the higher pension payout to recoup the money diverted from the 403b. One of the TRS counselors I talked to about the retirement process pointed that possibility out to me. There was a truly significant increase from the 17 yr to the 20 yr pension amoun--almost 50% the way I remember it correctly--although that does seem high. 20 yrs is apparently a significant milestone in the way TRS calculates pension payouts.

I did not attempt to calculate what that amount of money might have gained in the 403b---I consider the Texas Teacher Retirement System to be a quality pension plan, even if I do not have the flexibility and oversight that a 403b would offer. I opted for the equal annuity for each spouse which did lower the monthly payout.  We have our health insurance through the TRS and I wanted to make sure that my pension would be high enough to continue to pay for the top tier coverage we have for a long time.  That is one important part of our safety net in planning for the future.

I am trying to accomplish the same thing.  How did you initiate the transfer from the IRA?  I know the amount I need to buy back and to whom the check should be made out, but I'm not sure how to get the funds out of the IRA.