# OMERS Pension Buy Back Question



## kerik68 (Jul 1, 2011)

I have the opportunity to buy back 69.3 months of my OMERS pension at a cost of $31,500.00 which will increase my pension by $3711 per year at age 65. I can also make Additional Voluntary Contributions in the new year.

Up until this week, I thought I would only work another 5 years but have decided to stay until age 55 in 12 years. The defined benefit pension plan is just too good to pass up.

I have an RRSP and a RPP from the last time I worked for the municipality so buying back the pension will only cost me approx. $4000 out of pocket. 

Should I be contacting an independent certified financial planner or actuary before I make this decision? 

At this point, I think I would regret NOT buying it back but I just don't know where to start with crunching the numbers as I know I will not work until age 65.

Can anyone see any problems that may arise if I do buy it back?

Thanks


----------



## MoneyGal (Apr 24, 2009)

The basic question (in my view) is the break-even point. If you get $3711 per year in additional future benefits, and the present value of that $3711 is $31.5K, what is the number of months over which you would need to receive the $3711/12 in order to break even on your "investment"? (Does that make sense?)

Using a financial calculator, I can tell that the present value of an annuity that pays $265/month (=$3711/12) is $31.5K if the annuity pays out for somewhere between 12 and 13 years, discounted at 4%. (The last time I priced inflation-adjusted annuities, which was in October 2010, 4% was an appropriate rate, and long-term rates haven't moved significantly enough to adjust that rate.)

So the very short quick answer is that you will receive your money back if you live about 12.5 years after starting to receive the pension - in present-value terms. 

Your chance of living to age 68 at your age 55 (I am assuming you are male) is just under 90%. 

I am rushing through this argument (it's late, I am winding down for the day) but all things considered this is a pretty safe bet to make. That is, it is likely that you will "get your money's worth" out of the pension. 

You could hire a consulting actuary to help you make the decision. I don't know what that would cost. I do know lots of people would like to be in your shoes, and have the chance to add to a DB pension plan.


----------



## kerik68 (Jul 1, 2011)

Thanks for the input Moneygal.

I am female.


----------



## MoneyGal (Apr 24, 2009)

Even better for you, then - OMERS uses unisex mortality tables which (on average) "underpay" men and "overpay" women. Your chance of outliving the unisex average is greater if you are female.


----------



## sags (May 15, 2010)

Would cost of living indexing and spousal benefits also lower the years required to reach the break even point?


----------



## MoneyGal (Apr 24, 2009)

I need to think about the indexing a little more carefully...I will respond more on this point tomorrow. 

It's hard to build a model that takes the survivor pension into account - you start approximating different dates of death of the pensioner and the survivor...The general answer is not so much that it moves the break-even point but that it provides an extra guarantee of "hitting" the break-even point (if that makes sense).


----------

