# Pension buy-back option. Thoughts?



## $$$amy$$$ (Feb 20, 2011)

Hello. Just wondering what others think of this:

I have the option to buy back 5.21 months of service (from when I worked for my current employer as a student) into my pension. It would move my early retirement -with full pension- date to Jan 1 of the year I turn 55, which is 21.5 yrs from now. It would also mean an extra $429/yr in pension payout.

The cost is $4100 (incl $200 admin fee). No employer match.

At this point, cost seems kind of high vs. the gain....unless there's something I'm missing?


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## DanFo (Apr 9, 2011)

Doesn't seem worth it to me but down the road you may think otherwise...Though 5 1/2 months isn't really a long period of time and You will more then likely be making more money at your highest salary during that extra period of time. i think it comes down more to will the extra months working have a negative effect on your overall retirement plan...not too mention you'll start your retirement in the summer time without buying it back


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## DanFo (Apr 9, 2011)

Hopefully some of the older and already retired people will be able to give you a more valued opinion though as they will have been through it or are working through their decisions already


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## MoneyGal (Apr 24, 2009)

Are you male or female, and is this a public service plan?


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## $$$amy$$$ (Feb 20, 2011)

Moneygal - I am female. It is a public DB plan.


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## the-royal-mail (Dec 11, 2009)

Who's to say you will be with that employer for 21.5 yrs?

How is the rest of your financial house? RRSPs? Savings?


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## betsu63 (Mar 4, 2011)

I would say Yes. Your income will be more down the road so you will get more than 429.20 years ago I was a RPN making around 18 an hour paying into my pension plan. Now I am an RN making close to 42. That is what my pension payout will be based on. The money will be tax free. Down the road you may be very glad to be able to retire 5 months earlier. If I had the option 20 years ago I would have gladly taken it!!!


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## $$$amy$$$ (Feb 20, 2011)

betsu63 - thank you for the response. At this point, the possibiliity of future regret is about the only thing motivating me to do it.

royal-mail - I intend to stay with this employer as long as I can. My financial house: Myself & husband are 33yrs. Our annual income is $150k. We have $57k in rrsps, and $30k in other savings. We still have unused rrsp & tfsa room that totals approx $40k. Our only debt is $35k left on our mortgage. We both have DB pensions into which we have contributed $56k (incl. growth). His is private. We have a 2.5yr old son and we contribute enough to his resp to max grant.


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## Plugging Along (Jan 3, 2011)

I've just been through this same decision. After running the numbers, and having my FAs go through the scenarios, the advice is that a DB will pretty much always perform whatever investment you come up with, so it's a good idea, in general.

The area where it becomes riskier, is that it depends if you plan on staying with your company until retirement or not, and when you think you'll die. 

I was pretty much told, that if I was sure that I would retire with them, then it was worth the $XXX,XXX dollars, and this assumes that I don't die right after I retire. 

Even though your benefit now is $429/year, most pensions take your highest 7 (or whatever number it is), years of service. So right now it's $4100 to pay, so you're thinking it's just under 10 Breakeven period. If you plan to live longer than 10 years after early retirement, then the benefit is definately. However, you will get that money much sooner for earlier retirement. If you try and pay this when you're salary goes us, then it's will be much higher.

I have been trying to make this decision since I just started with a new company last year. I've gotten one small raise since then, and now my buy back is an additional $9K because of the raise. 

My thoughts are that it would probably be worth it if you buy it back if you're pretty sure that you'll be there. Don't forget you do get to leave the money in the pension if you go to another organization.


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## m3s (Apr 3, 2010)

When I went full time I had the option to buy back 2 years of part time service, which amounted to about 6 months as well. I didn't question it like I would today, I just paid it over a long period. Ask how slow you can pay it back? I think I took years

Let's say the day you retire doesn't change. If every year is 2% then 6 months is worth 1%/year of your best years of service? In 20 years from now, I would imagine that will be more than $500/year. I would say if you're retired for 10+ years it would be hard to beat by investing that $4300 yourself. If you do leave this employer I believe you get the contributions back anyways

$200 admin fee? Crooks!


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## Daniel A. (Mar 20, 2011)

Anytime you have an opportunity to enhance your DB take it.

At some point in the future 10 or 15 years from now the employer may come along and offer a buyout based on some formula that is strictly a numbers game and that 5 months could make or break you from being a part of it.

I have seen this happen.


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## Financial Cents (Jul 22, 2010)

Buy back now, no question. Guaranteed money/future income in the bank.


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## I'm Howard (Oct 13, 2010)

The larger you can make the guaranteed Income, the better, even more so if it is Indexed.

This is a cornerstone of retirement, alonmg with RRSP, TFSA, and Mortgae Free home.

The steady stream of income will make Retirement Planning much easier and much less to worry about in your twilight years.

You should be able to use RRSP money transfer with no taxes to do the Buy Back.


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## sprocket1200 (Aug 21, 2009)

my wife was able to leave or take funds in a DB plan. we calculated it, looked at how long we would have to wait for the cash, and said forget it.
21.5 years until retirement? that is more like jail for life!

now if you were older and your numbers added up faster, that is a different story...

this table shows you may be paying a high price (about double) for a 'guarantee'...

Retirement Estimations
Your Inputs

Required Income (Current Dollars)	$ 225
Required Income (Future Dollars)	$ 424.80
Number of Years Until Retiring 21.5
Number of Years After Retiring 25
Annual Inflation (on Required Income) 3 %
Annual Yield Until Retiring	6 %
Annual Yield After Retiring 5 %


You will need $ 8,512.71 to retire

($ 2,432.16 invested today at your 6 % rate)

Year	Beg Balance	Withdrawn	Interest	End Balance
1 8,512.71 424.80 404.40 8,492.30
2 8,492.30 437.54 402.74 8,457.50
3 8,457.50 450.67 400.34 8,407.17
4 8,407.17 464.19 397.15 8,340.13
5 8,340.13 478.12 393.10 8,255.11
6 8,255.11 492.46 388.13 8,150.78
7 8,150.78 507.23 382.18 8,025.73
8 8,025.73 522.45 375.16 7,878.44
9 7,878.44 538.12 367.02 7,707.33
10 7,707.33 554.27 357.65 7,510.72
11 7,510.72 570.90 346.99 7,286.82
12 7,286.82 588.02 334.94 7,033.73
13 7,033.73 605.66 321.40 6,749.47
14 6,749.47 623.83 306.28 6,431.92
15 6,431.92 642.55 289.47 6,078.84
16 6,078.84 661.82 270.85 5,687.87
17 5,687.87 681.68 250.31 5,256.50
18 5,256.50 702.13 227.72 4,782.09
19 4,782.09 723.19 202.94 4,261.84
20 4,261.84 744.89 175.85 3,692.80
21 3,692.80 767.24 146.28 3,071.84
22 3,071.84 790.25 114.08 2,395.67
23 2,395.67 813.96 79.09 1,660.79
24 1,660.79 838.38 41.12 863.53
25 863.53 863.53 -0.00 -0.00
For more looking at what current monthly deposits and balances you need, see the annuity calculator. 
Back to my Calculator Listing Page


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## OhGreatGuru (May 24, 2009)

$$$amy$$$ said:


> ... It would also mean an extra $429/yr in pension payout.
> 
> The cost is $4100 (incl $200 admin fee). No employer match.


It is usually worthwhile buying back prior service in a DB plan.

Your estimate of $429/yr is presumably based on current salary. But I expect your DB pension is based on average of best 4-6 years. Your salary in 20 years will be 50% higher even at 2% annual increases. If you get promotions or better increases it will be more.

"No employer match" This doesn't seem right. If you are buying back prior service from a public service employer in DB pension, the employer is usually "contributing". You just don't see it on your pay slips. But they are picking up the liability for over 50% of your pension annuity. If you are in fact paying both your and employers contributions, then it may not be such a good deal.

Your prior service payments are partially or wholly tax deductible. Was your 5.5 months in one calendar year, or for two summers? Do you have the option of buying it back over time?


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## $$$amy$$$ (Feb 20, 2011)

Thanks everyone for the responses. I've arranged to buy it back.


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## Guest (May 29, 2011)

*Makes sense ...*



$$$amy$$$ said:


> Thanks everyone for the responses. I've arranged to buy it back.


And fwiw, I convinced my son to get his butt back to college, he did, he's in a co-op program ... that's 8 months employed as a co-op which he's currently doing ... I've suggested he buy back that 8 months when he's taken on full time which is very likely ... he too sees having his DB paid up that much sooner as a good thing


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## Eclectic12 (Oct 20, 2010)

mode3sour said:


> [ ... ]
> 
> Let's say the day you retire doesn't change. If every year is 2% then 6 months is worth 1%/year of your best years of service? In 20 years from now, I would imagine that will be more than $500/year. I would say if you're retired for 10+ years it would be hard to beat by investing that $4300 yourself. If you do leave this employer I believe you get the contributions back anyways
> 
> $200 admin fee? Crooks!


Usually when leaving a company, one is forced to make a choice - stay with the pension plan with capped benefits or leave the pension plan [DB, DC or hybrid].

My understanding is that when you leave a company *and* choose to leave the DB pension plan, one of two situations come into play. Note that usually on leaving the company, 

If prior to vesting (after being in the db plan a year or two), your contributions plus any gains come back. After vesting, your contribution plus the employers plus any gains come back.


+1 on the admin fee. For the private employers DB plans I've had the option to buyback time, there was no fee. Everything I put in went into buying service.



Cheers


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## Eclectic12 (Oct 20, 2010)

Plugging Along said:


> ...the advice is that a DB will pretty much always perform whatever investment you come up with, so it's a good idea, in general.
> 
> [ ... ]
> 
> ...


What is on the DB's side is that if the fund growth isn't up to what is needed, the employer has to make up the difference - unless they go bankrupt.

So one of the other risk factors is how healthy the company is as well as whether they have stayed current for the funds growth versus benefits to be paid.


I get the part about staying with the employer but I'm not so sure about "dying just after retirement". Most plans I've been in have a guaranteed payout. If it is a 10 year guarantee, you can drop dead in the first month of retirement and the payout has to be a minimum of 10 years of what you would have collected if you'd lived. 

The bigger risk is if you drop dead *before* retiring. I can't remember off the top of my head what happens then but I recall it being a lot less than the 10 year guarantee.


I'm also not so sure about the early retirement means getting the money sooner - a lot depends on what you mean. Most DB plans I've been in, early retirement is defined in terms of how much your pension will be *reduced* for not retiring at or after the minimum retirement age.


Good point about the cost going up if you salary goes up.

It is also good to be aware that one can leave the pension where it is when one leaves. However, a factor to consider is the growth of your payout. It won't grow based on years of service (no more will be added) and if the DB plan isn't indexed, inflation will take it's toll.


Cheers


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## sprocket1200 (Aug 21, 2009)

eclectic, great point about the death 'benefit'. one is forced to work over 20 yrs, then poof, your next egg and family 'savings' are gone.


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