Most public pension plans let you add years of service you would not otherwise have, in exchange for a payment. Each year you buy goes straight into the pension formula, and often counts toward the age-and-service rules that decide when you can retire without a reduction. Done at the right price, it is one of the best deals a public worker can get.
What you can usually buy
- Out-of-state public service. Years teaching or working for a government in another state.
- Military service. Active duty before or during your career, often at a lower price.
- Leaves of absence. Approved unpaid leave, such as parental or medical leave.
- Refunded service. Years you cashed out when you left a job earlier. Buying these back usually means repaying the refund plus interest.
- Private school or federal service. Allowed in some plans, with limits.
- Part-time or substitute service. Some plans let you buy the gap up to a full year.
California’s PEPRA ended the purchase of “air time”, meaning years not tied to any real service, for most CalPERS and CalSTRS members in 2013. Most plans now require the service to be real and documented.
How plans set the price
There are two common methods. The first is a contribution-based price: your current contribution rate, sometimes plus the employer’s, times your salary, for each year you buy. This is often a bargain. The second is the full actuarial cost: what the extra pension is worth based on your age, salary and expected lifespan. It can be several times higher, and it is now the norm for most types of service.
Prices rise every year because they track your salary and age. If the numbers work, buying sooner is cheaper.
Is it worth it?
Two tests answer most cases.
Payback period. Divide the price by the extra yearly pension. With a 2.2% multiplier and a $72,000 final average, each year adds $1,584 a year. Two years for $24,000 pay back in a little over seven and a half years of retirement. A payback under ten years is usually good for someone retiring in their early sixties.
Invested instead. Compare the extra pension with what the same money would pay if you invested it and drew it down over retirement. When the pension is higher, buying wins, and you also avoid market risk.
The service credit buyback calculator runs both tests.
The bonus most people miss
Purchased years often count toward retirement eligibility. If two purchased years get you to a Rule of 80, a 30-year mark or a higher age factor sooner, the value can be far more than the formula for those two years alone. A Texas TRS member who reaches the Rule of 80 two years earlier, or a CalSTRS member who crosses the 30-year longevity mark, gains much more than the extra 4% or so of salary. Run your pension estimate with and without the extra years to see the full change.
Ways to pay
- Lump sum from savings.
- Direct rollover from a 403(b), 457(b) or IRA. A trustee-to-trustee transfer avoids tax on the money moved.
- Payroll deduction over several years, often before tax. Interest may be charged on the balance.
Ask your plan for a written quote, which usually lasts for a set period, and confirm that the purchased years count toward eligibility as well as the formula.