| Retirent Question: Which option to choose... |
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mopowers
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Location: CA
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| Retirent Question: Which option to choose... |
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I have the choice of what to do with the first two years of tax-deferred retirement savings (401a) collected by my government employer, which amounts to $3,800. Here are my choices:
1) Cash it out. This sounds like a horrible option because it would likely be highly taxed. That and I don’t need the money right now.
2) Roll the $3,800 into my 401(k).
3) Purchase 2 years of PERS service credit. Since my retirement pension is based off of a 2% @ 55 formula, this will give me an extra 4% of my retiring salary in pension benefits.
Here is some more info. I have 27 years until I retire at 55. So, would it be better for me to put the $3,800 in my 401(k) and give it 27 years to grow, or have an extra 4% of my retirement income.
Assuming my salary at retirement is $10,000, 2 years or service credit would give me $400 more a month, whereas $3,800 in a 401k for 27 years would amount to $19,000 w/ an assumed 6% annual increase.
What do you folks think is the best option? Right now, I’m leaning towards purchasing the 2 years of service credit.
Thanks for the help!!!
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Wed Feb 17, 2010 6:01 pm |
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oldguy
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The wild card is the return on the $3800 - if you invest in low risk 6% products, then the extra $400/m is your answer. The $4800/yr would be a 25% return on $19,000, that won't happen. Conversely if you invest in 12% products, you would have about $81,000. And $4800/yr is a 6% return on $81,000 - typical for a retiree portfolio, but not a sure thing.
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Wed Feb 17, 2010 8:15 pm |
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coaster
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Your six percent return is probably too conservative. But even doubling that return still won't match $400 per month. I don't know a thing about the retirment plan you're referring to. Is buying the extra benefit a sure thing? Anything else it depends on that could change in the meantime? Read the fine print. Based on the info presented, buying the extra PERS income sounds like a better deal, but there's insufficient data to know for sure.
~Tim~
Eye Candy : Why Whimsy
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Wed Feb 17, 2010 10:49 pm |
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mopowers
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Location: CA
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quote:
Originally posted by coaster
Is buying the extra benefit a sure thing?
Yes. The first two years of employment, we are placed in an "alternative retirement program" in which our automatic 5% contribution goes into a 401a account instead of the PERS retirement. We also don't accrue 'service credit' for these two years. After this two year stretch, that is when we begin accruing service credit (which coincides with the 2% at 55 pension formula). That is also when we are given the option of either buying those two years of service credit back with the 401a funds, rolling them into a 401k, or cashing it out. I hope this all makes sense to you.
I understand that 6% was conservative, but so was projecting my ending salary at $10,000 a month. In 27 years, it'll likely be higher than that.
I think at this point, instead of assuming a % gain if placed in a 401k, I'd rather go with the certain 0.04% every month from when I retire until when I die.
Thanks for the input!
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Thu Feb 18, 2010 6:18 pm |
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coaster
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Cash: $ 1318.80
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Location: Wisconsin
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Let us know how it works out!! I'll probably still be here. 
~Tim~
Eye Candy : Why Whimsy
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Fri Feb 19, 2010 1:13 am |
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