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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75781  
Subject: Re: Buy years or buy stocks Date: 9/12/2013 6:42 PM
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akck:

<<<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 do not recall whether there are survivor benefits to you after she dies, but the IRR calculation assumed that you wife would live for another 27 years.

According to the SS Actuarial Life Table:
http://www.ssa.gov/oact/STATS/table4c6.html

Average life epxectancy for a is 26.87 years, less than the 27 years assumed, and IIRC the table correctly, means that there is roughly 50% chance that se will not live than long.

You know her health, and her gene pool, but I am certain that the IRR would decrease if the assumption was "retirement in 7 years and payout for 10 years".

Unless you get 100% survivor benefits, without a reduction in her initial payment amount, her death would end the income stream and leave you without the assets used to purchase the years.

In addition, unless you get 100% survivor benefits were without a reduction in her initial payment amount, it is possible that the IRR calculations above are off. And I even never seen a pension that pays 100% survivor benefits without reducing the amount that would be paid if paid only to the pensioner for his or her life.

Regards, JAFO
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