State/PERA

Evaluation of PERA Service Credit Purchases
Personal Benefit Services of Colorado, Inc.

Steps in Evaluating PERA Service Credit Purchases
Plan your retirement date.

Determine your eligibility for service credit purchase. (Contact PERA)
Locate your position on the grid.

Compare the cost to the benefit. (See Highest Average Salary Percentages chart at bottom of page).
Determine the best time to purchase.

EXAMPLE:

Mary Principal
Age: 55
Years in PERA: 21
Eligible to purchase: 4 Years
Highest Average Salary: $40,000

(Average of highest 3 consecutive 12 Month periods)
Current cost: 18.1% x 40,000 x 4 = $28,960
Benefit: 62.5 – 49.4 = 13.1%
Benefit Increase 13.1% x 40,000 = $5,240 Per Year

To get your investment back:
$28,960 / 5240 = 5.52 years to recover investment

Return on Investment:
$5,240 / 28,960 = 18.09% Per Year

Example A

Evaluating purchases without using dollar amounts.
Determine total costs 4 x 18.1 = 72.4
Determine total benefit 62.5 – 49.4 = 13.1
13.1 / 72.4 = 18.09% Return on investment
72.4 / 13.1 = 5.53 Years to recover investment

If you keep the proper relationship between the numbers, you can quickly evaluate purchase scenarios.

Examine an individual year
Example B

Unreduced Benefit:
2.5 / 18.1 = 13.8% return on investment
18.1 / 2.5 = 7.24 years to recover investment

Examine an individual year
Example C

Best Purchase Value:
6.8 / 18.1 = 37.6% return on investment
18.1 / 6.8 = 2.66 years to recover investment

Examine an individual year
Example D

Additional Considerations

Cost of living adjustments
Mortality
Reinstating withdrawn service credit
Borrowing to purchase service credit
Term life insurance could guarantee the investment
Survivor benefits

RED LETTERING: Better than an unreduced benefit. Purchasing this year is usually recommended.

BLACK LETTERING: benefit - can be a close call - consult considerations above .

GREEN LETTERING: Purchasing this year us usually not recommended unless you need it to get to the next level.

RECOMMENDATIONS

For Maximizing PERA Retirement Benefits

Rules change frequently. Always consult with a PERA Service Representative before implementing any plan. The Representative can validate your plan. He/She will not confirm that it is the best plan for your financial situation.

Plan your PERA retirement date. Always consider unforeseen termination or interruption of employment. If you will receive an unreduced retirement benefit from PERA (see chart), go directly to C. If not, or you are uncertain, you may need to develop a service credit plan considering all the following information in no particular order.

Get PERA’s pamphlet Purchasing Service Credit and familiarize yourself with parts applying to you.

Use the Salary Percentages on the following chart for evaluating a service credit purchase. Weigh the merit of a potential service credit purchase or reinstatement by determining the number of years it takes to recover your cost. Example:

Cost = $20,000 = 5 years to recover cost of purchase

Annual Retirement Income Increase $4,000

Establish with PERA your eligibility for purchase of service credit as soon as possible. To be eligible to purchase service credit, you must have withdrawn money from PERA or you must provide proof of previous non-PERA-covered employment as a basis for purchase. This could involve detailed Social Security information and require several months to complete.

If there is a possibility that you can or will need to purchase service credit, consider PERA’s 401(k) plan with its tax advantage as a means of saving for that purchase.

Don’t buy service credit before you need it. There are rare exceptions.

Keep all pension rollovers from other employers in a “conduit” IRA.

Six to ten years prior to retirement decide which survivor option is appropriate for you. (Consider life insurance to increase income.)

Five years before retirement, make sure you explore all options for raising your High Average Salary.

Evaluate these choices when confronting an unplanned separation from PERA-covered employment prior to unreduced retirement. Social Security Windfall and Spousal Pension Offset could reduce your Social Security benefit and might be a factor in the four choices below. Choose and/or implement the best option before separation.

Take your deposits, and pay taxes and penalty.

Roll deposits to an IRA.

Leave all credits with PERA for future retirement income.

Purchase additional service credits before separation. After separation, it is too late.

Material discussed, front and back, is meant for general illustration and/or informational purposes only and is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.

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