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Author: TheAnswer3 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76388  
Subject: Re: What analysis do I use? Date: 3/8/2002 9:55 AM
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First of all, you must realize that the ability to retire at age 56 
with an unreduced benefit is of enourmous value.  Most plans in the 
private sector take an actuarial reduction of upwards of 50% to retire
at age 56.  If your benefit is 1.7 * x 24 x pay, then you would
be sacrificing 20% of your benefit.  Now...

When you purchase service, the value of that service is the actuarial 
equivalent value of the difference between your benefit with and 
without the service added.

Without the 4 years,

Benefit(58) = 1.7% x (22) x (pay at 58) = 37.4% of your pay at 58
PVBenefit(58) = 37.4% x pay x (Life annuity beginning at age 58)

My standard table shows that annuity factor to be 11.31 (this is based
on a number of assumptions.  I would have to begin charging my
consulting fees if I were to go into more detail than this).

This makes PVBenefit(58) = 4.23 x pay at 58

With the 4 years,

Benefit(56) = 1.7% x (24) x (pay at 56)
PVBenefit(56) = 40.8% x (Life annuity beginning at age 56)

My standard tables shows this annuity factor to be 11.647.  Mind you 
that you are getting 2 additional years of benefits with greater 
service with no reduction).

This makes PVBenefit(56) = 4.75 x pay at 56

Last adjustment:

Assume that you get a 4% increase in pay (I don't really know - you can 
adjust this as you like).

(Pay at 58) = (Pay at 56) x (1.04)^(2)

PVBenefit(58) now equals 4.58 x pay at 56

Difference:

PVBenefit(56) - PVBenefit(58) =

4.75 x (pay at 56) - 4.58 x (pay at 56) = 0.17 x (pay at 56)

Therefore, I estimate that the cost of 4 years of service is
17% of your pay at age 56.  Note what the definition of pay is in your
Plan.  It may be Final 3 year average, Final 5 year average, etc.
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