Q. I would like your opinion of a decision I made a few years ago. Is it a good investment to purchase 'permissive time' in a government pension plan?
In 2008, I retired at age 60 with a government pension. My agency offered the option of buying extra years of service. After weighing the advantages, I shifted about $116,000 from a tax-deferred account to buy five extra years of service credit toward retirement. The 'multiplier' for retirement (at that time, but it may change) was three percent, which gave me an immediate additional income of around $10,900, guaranteed for life.
The pension plan is indexed, but they are not able to offer increases every year. And, of course, none of the overall investment will be left after I die (I do not have a survivor's benefit on the pension). I made the investment during a small window of time in 2008 when the stock market was still high, so I do feel good about that part.
What's your thought on such investments? Some agencies use a lower multiplier than others, and it is generally based on the individual's average income during employment. So, was this a good investment? Can you talk a bit about when it might be a good choice to purchase extra service time, and when it is not a good choice? —M.G., Austin, Texas
A. Unless you have no other savings, decisions like this are good decisions. It provides you with a 9.4 percent income rate from your $116,000 investment. In the current market a single life annuity from a private company purchased with $116,000 would provide $619 a month or $7,428 a year. The figure would have been slightly different in 2008 due to higher interest rate assumptions, but the benefit would not have been wildly greater. So, even if the pension benefit is never increased, you made good use of your money.
Your multiplier of 3 percent per year of service is one of the reasons public sector jobs are attractive, even if their direct pay is lower than private sector jobs, which it often isn’t. Let me give you an example. Suppose a public employee earns $50,000 a year and works for 33 years, retiring at 65 with a pension of $50,000. How much is the pension worth? Answer, according to www.immediateannuities.com, about $666,000. That’s much more than most people with higher incomes save. It’s a stunning benefit that can’t be considered “fringe.”
You made a sound financial decision and maximized your benefits. Your gain, however, depends on future pension funding. That, in turn, depends on future tax collections. Austin is more likely to have the tax base growth to make it work than most cities, but it is far from a slam dunk.
Q. Will the limit on fees that banks can charge merchants for debit card transactions in the Dodd-Frank bill mean the end of the high interest rates some community banks are now paying on checking accounts? Typically these accounts require a certain number of debit card purchases per month to be eligible for the high rates. My understanding is that the debit card fees are what enable them to pay the high rates and still make money.
I am thinking of moving my bank account from a mega-bank to a nearby community bank offering this type of account, and if the high rates will be discontinued it wouldn't be worth the hassle to change banks. —C.G., by email
A. All we know at this moment is that the new regulations will put pressure on bank earning sources and debit fees to merchants are one of those sources. Another possible solution for your transaction account is to explore the accounts offered at credit unions. Many offer attractive interest rates.
Regardless of what happens, it is a good bet that you will get a somewhat better deal at a community bank or at a credit union than at one of the mega-banks. So I suggest searching for the best deal, then moving your money.
Finally, while it is a hassle to change banks, there is another reason to move your money to a (much) smaller institution. It may be the only way we can protect ourselves from the risk-seeking behaviors of the mega-banks— there isn’t much in the reform bill to change mega-bank behavior.