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Subject:  Re: Buy years or buy stocks Date:  9/12/2013  12:17 PM
Author:  akck Number:  72799 of 88027

Here are the numbers. It currently costs 27k to purchase 1 year. She plans to retire in 7-8 years.
The purchase price is based on current salary, 75K, and the pension benefit is based on highest average salary(HAS). She recently had raise/promo to 115k which should grow modestly over the next 7-8 years by 1-3% per year.

By purchasing years, she increases her pension benefit payout percent as follows
no purchase, pension = 27.5% of HAS
purchase 3 yrs, pension = 37.8% of HAS
purchase 6 yrs, pension = 50% of HAS

Okay, a quick IRR (internal rate of return), shows that the added income stream produces a 14-15% return on your initial investment. This was assuming she'd get an additional 10.3% with 3 years, 22.5% with 6 years, retirement in 7 years and payout for 20 years. It's also based on a HAS of $115,000, so the return will be greater assuming her pay increases.

I think a guaranteed 14% return is worth it. I'd go over the numbers with her and encourage her to stay long enough so her HAS is over $115,000. At some point, the retirement benefit plays a bigger role in career decisions and hopefully she'll stay long enough to lock in a higher HAS.

I know if I had an opportunity to lock in that return on my pension, I'd jump on it.
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