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rated:
I work at a school, falls under pension system of the state Nevada PERS
I can buy up to 5 years of service credits by paying upfront, which makes me eligible to retire 5 years earlier. I can buy 1 year at a time.
I am trying to analyze how good or bad is the idea of buying service credits. I can buy up to 5 years of service credits, wich makes me eligible to retire 5 years earlier.

Age - 33
Current Pay $111,000/year, pay raises by ~1-2%/yr on an average.
Service - 8 yrs in the system already
Current price of 1 year - $19,000/year, increases with age and pay raises.
I can roll-over from deferred comp balance. I have enough balance to do it.


Benefit: Service Credits (yrs) X Average Compensation X 2.5%
Regular Retirement:
5 yrs, age 65
10 yrs, age 62
30 yrs, any age
Retirement benefits have ~2% COLA after 3 yrs of retirement.

Disability Retirement:
Benefit: Service Credits (yrs) X Average Compensation X 2.5%
Paid from the day you are disabled, age factor does not exists, when actively employed in a Nevada PERS job.
So essentially, its sort of a disability insurance too.

Family history:
Maternal side, live up to 90s, Paternal side in 70s

Example: Buying 5 yrs (would spend about ~$120k now)

Will be eligible to retire at 50, start collecting pension from then on. It will be year 2034!

Pros:
1. Retire at 50 and have a guaranteed income afterwards.
2. Get better returns on the $120k invested as pay goes up and (comparatively stock market yields are 4% avg.)
3. Freedom to work part-time, freelance etc and make additional income.
4. Retire 5 years early and need not be treated bad as a older worker (I see that happen a lot at workplace)
5. Potentially make $450,000 as retirement income in those 5 years from a investment of $120k

Cons:
1. Not able to asses how retirement systems will work (even exist) in year 2034 and beyond.
2. The same amount invested in index funds can potentially yeild higher returns, (Vanguard's Jack says, its going to be 4% average in future)
3. Risk of Nevada PERS system folding or reducing benefits
4. Have to stick around in a some government job until I hit 30 years of credits (another 17 yrs)
5. Risk of (layoff) not able to work in the retirement system to complete all 30 yrs

Please help me make a decision. I can buy 1 year at a time and stagger the 120k into 3-4 yrs. Is it better to buy 5 or invest the money in index funds?

Member Summary
Most Recent Posts
Where TF is the thought out response I wasted time writing thanking you for the information, and clarifying some things ... (more)

cows123 (Jul. 27, 2017 @ 10:33a) |

1. The money is coming from a deferred Comp account (pre-tax). My account balance is in the $200k range and all 5 years ... (more)

Opal123 (Jul. 27, 2017 @ 12:45p) |

Yes.

However I think the individual opinions you get here are likely just reflecting whether people are pessimistic about... (more)

jerosen (Jul. 27, 2017 @ 1:00p) |

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rated:
I think you're looking at 4-8% guaranteed return on that money depending on how long you end up working. The longer you work the more its worth.

Lets say you contribute nothing and work another 22 years. You retire at age 55. You'd have 30 year service. With 1.5% annual increases your pay would be ~$154k. Your pension would be $115.5k.
If you pay $19k today you can retire a year early and effectively pay $19k for $115k in 22 years. Thats ~8.5% return on the $19k over those 22 years.
OTOH if you quit tomorrow you'd be due a pension of ~22k at age 65. If you pay in $19k you'd up that to ~25k. This is about $3k extra from age 65 onwwards with cola. Thats worth about $72k. This equates to around 4% return on your $19k today.


Most of your cons are worried about the future of your retirement plan. You're benefits are vested so they're legally owed to you. Nevada can't just decide to take them away, change your plan or cut your benefit. If they did that they'd be sued and they would lose. They'd be in breach of contract, no question. Now worst case Nevada goes bankrupt and they simply can't pay. In that case its quite likely/possible that the federal government would come to the states aid.

rated:
wait until your 45. More risk of the pension going wrong than index funds.
. Nevada can't just decide to take them away, change your plan or cut your benefit. If they did that they'd be sued and they would lose. They'd be in breach of contract, no question.
heh

rated:
You might want to check this thread when California was still selling "airtime": https://www.fatwallet.com/forums/arcmessageview.php?catid=52&thr...

Surprised Nevada would still allow it, as they are a more conservative state than CA. Check to make sure that employee contributions are refundable upon death or termination. Since Nevada has weak public employee unions, as a right to work state, you want to make sure that if you get laid off or fired you don't lose what you paid in. 

rated:
jerosen said:   [...]
Most of your cons are worried about the future of your retirement plan. You're benefits are vested so they're legally owed to you. Nevada can't just decide to take them away, change your plan or cut your benefit. If they did that they'd be sued and they would lose. They'd be in breach of contract, no question. Now worst case Nevada goes bankrupt and they simply can't pay. In that case its quite likely/possible that the federal government would come to the states aid.

  
I wouldn't be so sure.  A lot of retirement benefits are by law/statute. not by contract, so contract law does not enter this.  The legislator is sovereign, and as such difficult to sue.  There may be political issues that may make changes difficult, but that cuts both ways even the populace at large clamors for limiting expenses that drive the tax burden.

rated:
Every retirement plan has its own risks. Unfortunately, I've been seeing more and more of these risks in the last 10 years. I'm no longer confident that any of retirement plans are sustainable and, personally, could not count on them.

rated:
Rubl said:   Every retirement plan has its own risks. Unfortunately, I've been seeing more and more of these risks in the last 10 years. I'm no longer confident that any of retirement plans are sustainable and, personally, could not count on them.
  a 401k (unless all Sears stock) is no different than owning the individual funds?

rated:
rufflesinc said:   
Rubl said:   Every retirement plan has its own risks. Unfortunately, I've been seeing more and more of these risks in the last 10 years. I'm no longer confident that any of retirement plans are sustainable and, personally, could not count on them.
  a 401k (unless all Sears stock) is no different than owning the individual funds?

  I assume he is referring to defined benefit plans/pensions.

rated:
Perhaps some diversification would be good? Take that 19k and stick it into a vanguard 401k. Their return is 2x over the 4% you would otherwise get, and if the SHTF causing the pension to disappear you have something else to fall back on.

(FWIW this is what we are doing, 401k and a pension plan)

rated:
shyboi said:   Perhaps some diversification would be good? Take that 19k and stick it into a vanguard 401k. Their return is 2x over the 4% you would otherwise get, and if the SHTF causing the pension to disappear you have something else to fall back on.

(FWIW this is what we are doing, 401k and a pension plan)


1. The 19k is in a def comp and it does not have vanguard funds.
2. All my other balance (200k) is invested in stock and bond funds, so doing this might not be diversification??
3. Jack Bogle believes the stocks will return 4% on average over next few decades.

rated:
Opal123 said:   
 
3. Jack Bogle believes the stocks will return 4% on average over next few decades.

  oh really??  is that before taking inflation into account

rated:
At what level are you getting 111k? Tenured College professor?

rated:
zapjb said:   At what level are you getting 111k? Tenured College professor?
LVMPD officer with overtime.

rated:
I also work for the state of Nevada. I don't know if this happened to you, but everyone in the hospital took a pay cut due to budget or some garbage some years back. I don't know if that was a state wide thing or just the hospital system, but raises aren't 100%.That said, it's an average of our top 3 years pay right? So if you pay for your 5 years now, but are able to increase your salary 25%-50% through promotions, isn't the annuity a better deal?

And you can pay for your years with pre tax money. 

I'm interested in why I shouldn't have bought my 5 years (going to continue to follow this thread).

rated:
rufflesinc said:   
Opal123 said:   
 
3. Jack Bogle believes the stocks will return 4% on average over next few decades.

  oh really??  is that before taking inflation into account

  
Yes.   He's expecting nominal returns of 4%.

http://www.cnbc.com/2017/03/22/jack-bogle-believes-the-stock-mar...


 

rated:
zapjb said:   At what level are you getting 111k? Tenured College professor?
I am not a tenured professor, but a at a career wise mid-high level position.

@moves
Yes, I hear about those pay cuts in other state employers, thats why I conservatively said the raises would be 1% to 2% over a period of next several yrs as an average... in reality it could be 5% for few years and 0% for some if the economy and budgets are tight...

rated:
rufflesinc said:   zapjb said:   At what level are you getting 111k? Tenured College professor?
LVMPD officer with overtime.

I wish, I was one, they make on an average $200k/yr with OT.
They also get to retire at 20yrs of service!

I am a civilian worker.

rated:
jerosen said:   
rufflesinc said:   
Opal123 said:   
 
3. Jack Bogle believes the stocks will return 4% on average over next few decades.

  oh really??  is that before taking inflation into account

  
Yes.   He's expecting nominal returns of 4%.

http://www.cnbc.com/2017/03/22/jack-bogle-believes-the-stock-mar... 


 

  he doesn't say why he thinks the growth will go back up after a decade or two

rated:
Re:  Con; 4. Have to stick around in a some government job until I hit 30 years of credits (another 17 yrs) and
5. Risk of (layoff) not able to work in the retirement system to complete all 30 yrs:
Do you need 30 years to collect, or are you vested sooner?  Even if you choose to leave or are laid off, will you still be able to collect a reduced benefit at some age (62?  65?), and won't the increased service credited by your buying back time provide a correspondingly increased benefit?
If you choose to not elect the option of purchasing the service credit, will you still have the right to do so in the future?  Do you have a time limit to buy it back, and if there is none, can the pension plan be changed to take away this right, which might happen without your knowledge?  Or, if you can only buy 1 year at a time, is it risky  to wait and possibly have the right end before you are able to buy all 5 years of service credit?
It sounds like a good idea to do it, but future risk of, in this case, Nevada reducing pension benefits and the federal government using the fact that you're getting a pension as an excuse to reduce your Social Security benefits, could change that.
Regarding the pension being protected, how is it protected and can that change?  If it is protected in the state's constitution, how can the constitution be changed?  And, while states can't file bankruptcy (people thought Puerto Rico couldn't file bankruptcy also), federal bankruptcy laws can change, especially if people who want to change them are elected.  Cities can file bankruptcy.  Public pensions, including Detroit's  are protected by the constitution of the state of Michigan.  The federal bankruptcy judge in Detroit's bankruptcy ruled that the bankruptcy laws superseded Michigan's constitutional protection of Detroit workers pensions, and that Detroit pension beneficiaries and future beneficiaries are, basically, unsecured creditors.  Nevada is not Detroit, but there are other potential bumps than those you mentioned.

 

rated:
cows123 said:   Re:  Con; 4. Have to stick around in a some government job until I hit 30 years of credits (another 17 yrs) and
5. Risk of (layoff) not able to work in the retirement system to complete all 30 yrs:
Do you need 30 years to collect, or are you vested sooner?  Even if you choose to leave or are laid off, will you still be able to collect a reduced benefit at some age (62?  65?), and won't the increased service credited by your buying back time provide a correspondingly increased benefit?
If you choose to not elect the option of purchasing the service credit, will you still have the right to do so in the future?  Do you have a time limit to buy it back, and if there is none, can the pension plan be changed to take away this right, which might happen without your knowledge?  Or, if you can only buy 1 year at a time, is it risky  to wait and possibly have the right end before you are able to buy all 5 years of service credit?
It sounds like a good idea to do it, but future risk of, in this case, Nevada reducing pension benefits and the federal government using the fact that you're getting a pension as an excuse to reduce your Social Security benefits, could change that.
Regarding the pension being protected, how is it protected and can that change?  If it is protected in the state's constitution, how can the constitution be changed?  And, while states can't file bankruptcy (people thought Puerto Rico couldn't file bankruptcy also), federal bankruptcy laws can change, especially if people who want to change them are elected.  Cities can file bankruptcy.  Public pensions, including Detroit's  are protected by the constitution of the state of Michigan.  The federal bankruptcy judge in Detroit's bankruptcy ruled that the bankruptcy laws superseded Michigan's constitutional protection of Detroit workers pensions, and that Detroit pension beneficiaries and future beneficiaries are, basically, unsecured creditors.  Nevada is not Detroit, but there are other potential bumps than those you mentioned.

 

I don't know how to quote you better or I'd break it up- 
5- He's already vested. As soon as you can buy credits, you are vested at some percent of your salary. So as I understand it, even if fired once vested one will be able to draw on their pension (though not until they are 60yrs of age unless they have 30 years of service).

And people that pay in to Nevada PERS don't pay Social Security, so there may be some reduced benefit there. They call it a "perk."

Right now we can buy credits any time after we are vested (as I understand it), but that can change in the future like CALPERS stopped that practice. Biggest negative to waiting to buy credits is a higher cost per credit because I think it uses your highest year as it's price.

And I wouldn't worry too much about reduced benefits from your pension. Your 75% pay after 30 years of service is already a reduced benefit from the older system. Some people I've worked with had 99% pay after 30 years of service. They reduced that benefit many years ago. I think if 75% becomes too expensive, they would just tweak the formula for new hires.

And I don't know how "protected" the Nevada PERS is compared to any state pension. I know I'd rather have a state pension than most any other pension aside from maybe a federal one. I do feel I am paying for the privilege of being a part of the Nevada PERS program. I would make 20-25% more base salary if I worked at a local hospital that was not state run. Every health care professional I have spoken to says the same thing here. When I occasionally read up on the PERS financials, it seems well funded. Maybe I just tell myself all this to reinforce some sunk cost fallacy. 

 

rated:
Nevada PERS funding ratio is 74.1%, which is not great, but based on the chart in this report it seems to be in a range, so at least it is not increasing or decreasing significantly. Generally I like to see 80% funding or higher for a sound retirement system. https://www.nvpers.org/public/publications/FY16PAFR.pdf (page 14) During the financial crisis they dropped to 70%, while CalPERS was at 61% in 2009.

Very few, if any, agencies have pensionable overtime. Many times bonuses are also not pensionable. There are two risks - one of leaving early / getting laid off/fired, where your pension benefit is capped at a percentage of your final few years' salary while your colleagues who are still in public service get their cost of living raises. This leads to a slow but steady erosion of your final benefit. The second is 70's style higher inflation. Nevada uses a weird COLA system (https://www.nvpers.org/public/help/faqs/) that basically caps inflation adjustments between 2-5% depending on number of years after retirement, starting at 0% for the first three years after retirement and then going up in three year increments. My pension plan caps COLA at 2% but we get it from day one; in fact many people retire in March so they can get up to a 2% bump in the following April. But if you have a few years of 8 or 9% inflation, that will devalue your pension by 15-20%. 

rated:
Probably a good deal generally, depending on where the cash comes from. So really, since you will continue to have this option for the foreseeable future - that's the question - better to do this with your money now or better to do something else with plan to do this later...

Hard to give advice on that since you don't really say where the money is coming from, other assets, expenses, etc.

rated:
moves said:   
cows123 said:   Re:  Con; 4. Have to stick around in a some government job until I hit 30 years of credits (another 17 yrs) and
5. Risk of (layoff) not able to work in the retirement system to complete all 30 yrs:
Do you need 30 years to collect, or are you vested sooner?  Even if you choose to leave or are laid off, will you still be able to collect a reduced benefit at some age (62?  65?), and won't the increased service credited by your buying back time provide a correspondingly increased benefit?
If you choose to not elect the option of purchasing the service credit, will you still have the right to do so in the future?  Do you have a time limit to buy it back, and if there is none, can the pension plan be changed to take away this right, which might happen without your knowledge?  Or, if you can only buy 1 year at a time, is it risky  to wait and possibly have the right end before you are able to buy all 5 years of service credit?
It sounds like a good idea to do it, but future risk of, in this case, Nevada reducing pension benefits and the federal government using the fact that you're getting a pension as an excuse to reduce your Social Security benefits, could change that.
Regarding the pension being protected, how is it protected and can that change?  If it is protected in the state's constitution, how can the constitution be changed?  And, while states can't file bankruptcy (people thought Puerto Rico couldn't file bankruptcy also), federal bankruptcy laws can change, especially if people who want to change them are elected.  Cities can file bankruptcy.  Public pensions, including Detroit's  are protected by the constitution of the state of Michigan.  The federal bankruptcy judge in Detroit's bankruptcy ruled that the bankruptcy laws superseded Michigan's constitutional protection of Detroit workers pensions, and that Detroit pension beneficiaries and future beneficiaries are, basically, unsecured creditors.  Nevada is not Detroit, but there are other potential bumps than those you mentioned.

 

I don't know how to quote you better or I'd break it up- 
5- He's already vested. As soon as you can buy credits, you are vested at some percent of your salary. So as I understand it, even if fired once vested one will be able to draw on their pension (though not until they are 60yrs of age unless they have 30 years of service).

And people that pay in to Nevada PERS don't pay Social Security, so there may be some reduced benefit there. They call it a "perk."

Right now we can buy credits any time after we are vested (as I understand it), but that can change in the future like CALPERS stopped that practice. Biggest negative to waiting to buy credits is a higher cost per credit because I think it uses your highest year as it's price.

And I wouldn't worry too much about reduced benefits from your pension. Your 75% pay after 30 years of service is already a reduced benefit from the older system. Some people I've worked with had 99% pay after 30 years of service. They reduced that benefit many years ago. I think if 75% becomes too expensive, they would just tweak the formula for new hires.

And I don't know how "protected" the Nevada PERS is compared to any state pension. I know I'd rather have a state pension than most any other pension aside from maybe a federal one. I do feel I am paying for the privilege of being a part of the Nevada PERS program. I would make 20-25% more base salary if I worked at a local hospital that was not state run. Every health care professional I have spoken to says the same thing here. When I occasionally read up on the PERS financials, it seems well funded. Maybe I just tell myself all this to reinforce some sunk cost fallacy. 

 

  Where TF is the thought out response I wasted time writing thanking you for the information, and clarifying some things I wrote earlier?

rated:
dk240t said:   Probably a good deal generally, depending on where the cash comes from. So really, since you will continue to have this option for the foreseeable future - that's the question - better to do this with your money now or better to do something else with plan to do this later...

Hard to give advice on that since you don't really say where the money is coming from, other assets, expenses, etc.

  1. The money is coming from a deferred Comp account (pre-tax). My account balance is in the $200k range and all 5 years will cost me at max $100k!, so essentially I can write once check and be done. But I want to stagger it to participate in the raising stock market now until we start hitting some low growth period /correction in near future. At that time, I will take some money and buy few more years.
  2. I can buy these service credits anytime, but as I age and pay goes up, the price of years go up.
  3. I feel Nevada PERS is better than many other retirement system. Here I get 2.5% for every year I work, there are just a handful of systems where you get 2.5% or more
  4. I am not part of Social Security as I work for a Nevada PERS employer. Retiring early can give me a opportunity to get 40 quarters, but I will get a 40% reduction in SS as I will get PERS.
  5. My other assets are on a healthy side as of today. My family net worth would be in the $600k-$650k range, excluding RE gains ($100k-$150k)
  6. Legislative action can change terms, but it usually (in the past 30 years of legislative actions) have always grandfathered existing members.
  
Knowing all these is it still a good decision to buy Nevada PERS years?
 

rated:
Opal123 said:   
...  
Knowing all these is it still a good decision to buy Nevada PERS years?

  
Yes.

However I think the individual opinions you get here are likely just reflecting whether people are pessimistic about state run pensions or not.

 

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