UnThreaded | Threaded | Whole Thread (33) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: akck Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75376  
Subject: Re: Buy years or buy stocks Date: 9/12/2013 12:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 13
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.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (33) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

The Retire Early Home Page
Discussion on accelerating retirement day.
Post of the Day:
Macro Economics

The Future, or What's Left of It
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement