Service Purchase for Retirement
January 4, 2012 3:08 PM   Subscribe

I work for a public library and have 18 years of service. I can retire with full benefits at 30 years. I have the option of paying the state a lump sum of $10,000 to service purchase my four years in the Marines. This means I can retire earlier. I have to think this has to be worth it. It will put a dent in my 401k but to retire at 51 rather than 55 seems like a hell of a good deal for $10,000. Thoughts?
posted by zzazazz to Work & Money (19 answers total) 2 users marked this as a favorite
One way to imagine it is to look at dollars rather than years. Set a retirement date of X, and consider what effects buying 4 years of service has. But I'm not sure what your retirement benefits are -- do you get a pension? Does that pension have a higher payout for more service? Do they cash out sick leave?
posted by pwnguin at 3:17 PM on January 4, 2012

This depends entirely on what "full benefits" means. If "full benefits" is enough to live on, then yes, it seems obviously worth it, especially since you're presumably allowed to continue working in some other field after you retire if you like. Say you're getting $20k/year in benefits. You make up the difference in 6 months. You could go out and get another job for the remaining four years and collect your benefits and salary at the same time, if you wanted.
posted by tylerkaraszewski at 3:18 PM on January 4, 2012 [1 favorite]

I mean, from an economics standpoint, it depends on how much value you assign to being out of work, and how much money you stand to lose by quitting.

For one, you're passing up 4 years of your salary at the library, in favor of collecting some retirement benefits. Presumably this amount is less that your salary. What effect does that have your your retirement plans?

It also depends on what you're going to do with that time. If you go out and get another job while collecting retirement, then you actually may recoup the 10k very quickly. (of course, library jobs aren't exactly easy to find these days...)

Really, though, it all depends on the details, of which you give scant few.
posted by chrisamiller at 3:20 PM on January 4, 2012 [1 favorite]

I also work for a public agency, and from what I've seen here about buying years of service, x% at age 50 versus x% at some other age, and this and that, there are a some details you are not giving.

You really need to sit down with all the details in hand and work out the math for what you think you want to do.
posted by Seboshin at 3:24 PM on January 4, 2012

FYI $10,000 now will be worth ~$16k in 12 years at 4% interest, ~$28k at 9%. (I chose those interest rates arbitrarily).
posted by blargerz at 3:26 PM on January 4, 2012 [1 favorite]

but to retire at 51 rather than 55 seems like a hell of a good deal

My thought is that you should consider very carefully what you are planning for your retirement, whether your friends will still be working, and most of all exactly how you plan to fill the hours.

Retirement can be awesome in the right environment, but it can be toxically boring if you're just going to end up sitting in an armchair watching TV all day.

Don't get me wrong, it would probably be great. I would just give it some thought.
posted by Tell Me No Lies at 3:38 PM on January 4, 2012

I don't know exactly how a thing like this would work, but when do you have to do this? What if, for some reason you don't make it to 30 years - are you out 10K?
posted by blaneyphoto at 3:43 PM on January 4, 2012

One advantage I didn't mention is that if I decide to work for thirty here I can retire with credit for working 34 which will increase my retirement benefits.
posted by zzazazz at 3:49 PM on January 4, 2012

How soon do you have to exercise this option? Is there a limited time window for this? Because borrowing against your 401k to do it makes it significantly less attractive.

I agree with the consensus: you need to sit down and crunch the numbers. To answer this question, you will need to compare what your income will be in the future if you exercise the option versus what it will be if you don't. You haven't provided the financial information necessary to make any reasonable calculations.

If what you're asking instead is, "Is it worth borrowing $10k against my 401k so I can stop punching a timeclock 4 years earlier and do something else with that time?" then the only response is, "I don't know, is it worth it to you?"
posted by MoonOrb at 3:52 PM on January 4, 2012

> One advantage I didn't mention is that if I decide to work for thirty here I can retire with credit for working 34 which will increase my retirement benefits.

By how much?
That would make it a pretty simple financial calculation, especially if you're sure you'll keep working for at least 8 years.
posted by Elysum at 3:54 PM on January 4, 2012 [1 favorite]

I have an email out to the retirement plan staff to get some answers on the numbers.
posted by zzazazz at 3:55 PM on January 4, 2012

If your retirement benefits will increase with a few more years, I would absolutely keep working and take the increased benefits - particularly staring down a grim economy, as we are. My grandparents took a slightly similar deal in the 70s, during a much better economic time. They had a few wonderful years with that retirement, but I think as they aged they may have regretted taking the half benefits as opposed to the full benefits - long-term vs. short-term perspective, I believe.
posted by AthenaPolias at 4:07 PM on January 4, 2012

I would stay . Remember you wont get social security till 62 and your health insurance alone can go up a lot.
posted by majortom1981 at 4:20 PM on January 4, 2012

Depending on how the figures work out ($10,000 + interest, versus how many years in retirement to equal out?), I'd probably buy it, and keep working.

You've got decent chances of living to 80, which is nearly 30 years in retirement, and having a reliable income in that time is important (although, what is the chances of the pension eventually being pulled?).

On the other hand, once you've got it, if you have health problems crop up between 8 and 12 years from now, you'll be really glad you've got the option to retire, instead of missing out on your full benefits. It's kind of like added insurance.
posted by Elysum at 4:36 PM on January 4, 2012 [1 favorite]

Unless you have other plans for meaningful work/intense activity and/or your job is soul-killing, people who retire tend to die sooner. So, I'd put it off...
posted by Maias at 5:04 PM on January 4, 2012 [1 favorite]

It sounds like a win to me. You are buying four years of pension payments for $10,000. Unless your pension income is going to be less than $208 a month (10000/4 years/12 months), you win.

Here is the question: some pensions don't kick in until you are a certain age, no matter how many vested years you have. So while you might be able to retire at 50, you won't start getting your pension until you are 60. Or whatever. So if you have to work anyway, why buy more years? On the other hand, you could retire from your job at 50, and then work some other job for 10-20 years and save up even more cash.
posted by gjc at 5:33 PM on January 4, 2012

We have a similar system for California public employees and $10,000 for four years of service credits is a screaming deal. Also, keep in mind that this doesn't necessarily mean you retire four years earlier but that you can retire at 55 with four more years of service credits.
posted by eleslie at 5:54 PM on January 4, 2012 [1 favorite]

people who retire tend to die sooner

Says one study, but there is at least one other study that says the opposite.
posted by soelo at 7:08 PM on January 4, 2012

is this all about finances, and only finances? cause having 4 extra years of leisure time, at a point in your life before your body goes completely down the tubes, has a bit of a "no price can be put on this" ring to it.
posted by messiahwannabe at 10:25 PM on January 4, 2012 [3 favorites]

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