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Buying extra time for your pension

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With that as a basis, the actuaries figure out how much it costs to "buy a year of extra service." Fong says that for CalPERS, "it is, very roughly, about 20 percent of your current annual salary."

"It's not cheap," Fong says. "But you don't know what the money in your 401(k) is going to do or what it will be worth when you start needing it. Stock values go up and stock values go down. No one knows what the market will do to the value of your retirement account. Your CalPERS check is guaranteed."

So let's say you make $50,000 a year and you want to buy two years of service. When the actuaries finish crunching their numbers they tell you it will be 20 percent, or $10,000, for each year for a total of $20,000.

Calculating your pension
Let's look at the math.

At CalPERS, which, Fong says, is fairly typical of defined benefit operations, your pension is based on a percentage of your salary combined with the number of years served. To keep the math simple, let's say that you retire at age 55 while making $50,000 a year, and that you have been there for 20 years. You will collect 2 percent of your salary for each year served. That works out to 40 percent of your pay, or $20,000 a year.

But let's say you wanted to buy two additional years. At a fee of 20 percent per year, those two years would cost you $20,000. You would then have 22 years of service, and at 2 percent per year, you would collect 44 percent of your salary, or $22,000 per year. That's an extra $2,000 a year.

Those two years cost $20,000, so you'll make your money back if you live for 10 years after you retire. Anything after that is a bonus. However, if you die before 10 years, that extra money stays in the pension plan.

There are other factors to consider. With some plans, the longer you work there the more each year is worth. So let's say you get 2 percent per year for the first 25 years, but once you pass 25 years you get 2.75 per year in pension payments for each year worked. Or, perhaps you work for a company or agency that offers people with more than 25 years a better health program than those with less than 25 years.

CPA Stephen Getzoff, of Clumeck, Stern, Schenkelberg and Getzoff, in Encino, Calif., says that, "Every plan is different, but there are some common aspects to them -- general policies that many, if not most of them, follow."

Fong says that there is, generally, a limit on how much you can buy. At CalPERS it's five years. Some plans, like CalPERS', will also let you buy any part-time work you did before you became a full-time employee. So if you worked part-time for a few years before going full-time, and were not in the pension program at the time, you could buy that part-time time on top of the five years. Many plans also let you buy your years in the military on top of the standard limit.

Next: "Should you do it? Should you buy extra time?"
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