01 Dec Should state worker buy pension credits?

Q. There is an option to buy back some time in the New Jersey pension. Is this usually worth the price the state requires an individual to pay? Is the state charging a premium to retire a couple of years early if a person purchases this time?
— Considering options

A. Sounds like you’re getting ready for retirement and you’re trying to maximize your state pension.

Many pension providers, including the state of New Jersey, allow pension participants to purchase service credits in order to enhance their retirement benefits or to qualify for certain types of retirement benefits.

Only pension participants who have active accounts in one of the state-administered pension systems are eligible to purchase service credits, said Bryan Smalley, a certified financial planner with RegentAtlantic in Morristown.

There are several reasons why someone would consider purchasing service credits, Smalley said.

Perhaps they had to take a leave of absence to care for a loved one or to start a family and are looking to make up for lost time. Or perhaps they had to move mid-career from a state job in another state and are now in a position to participate in a state pension plan. There are plenty of other reasons.

Whether it is worth it or not to purchase these service credits depends on a few factors such as age, length of employment, employer contributions and affordability, Smalley said.

“When it comes to age, the younger you are, the less it will cost to purchase those credits,” he said. “If you have been with the same employer for a long period of time, a few extra service credits may be beneficial because it may put you at a certain milestone in terms of years worked or when you may be eligible to retire.”

Employer contributions is something to consider, he said.

If your employer is willing to contribute toward the purchase of your credits, it may significantly reduce the amount that has to come out of your own pocket.

And lastly, is it even affordable?

In terms of affordability, Smalley said there are two important factors to ponder.

First, you must make sure you even have the ability to afford the service credits.

“You will have to purchase them by either rolling over funds from another retirement account or have the purchase deducted from your paycheck on a regular basis,” Smalley said. “Do you have the funds in another retirement account and/or can you handle having less cash in your pocket each paycheck and still handle your monthly expenses?”

Another aspect of affordability has more to do with opportunity cost, he said.

Ask yourself if the dollars that you are using to purchase service credits would be better used by investing in a diversified allocation of stocks and bonds.

“This decision also brings into question whether the fixed benefit of a pension is more valued than more upside potential with investing in stocks and bonds — but at a greater level of risk,” he said.

The answers to all those questions will be personal to you, but we hope this discussion will help start you on the path of deciding whether or not purchasing service credits is the right move for you and your financial situation.

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This post was first published in December 2017.