2 Replies Latest reply on Dec 22, 2011 8:12 PM by jkom51

    Purchase Airtime for Earlier Retirement?

    Ret.Teacher
      I can purchase 5 years of "Airtime" with CalSTRS for $115,000 which would allow me to retire two years earlier (at 61 rather than 63) with the same monthly amount. Is it worth doing? Would the $115,000 which is currently in TIAA-Cref serve me better where it is? Those extra two years sure look good! Am I missing something? Tax ramifications?
        • Re: Purchase Airtime for Earlier Retirement?
          Carlos
          eshorer said...
          I can purchase 5 years of \"Airtime\" with CalSTRS for $115,000which would allow me to retire two years earlier (at 61 rather than 63)with the same monthly amount. Is it worth doing? Would the $115,000which is currently in TIAA-Cref serve me better where it is? Those extratwo years sure look good! Am I missing something? Tax ramifications?
          This is something that I had to consider back a while back. It was not an easy decision, but I decided to by the five years. I thought about the fact that my monthly pension was going to increase from 74% to 86% of my salary. My monthly pension check was going to increase by almost $2000. That was nothing to sneeze at.  I was going to make the money back within 6 years if I had no increase. Well I had a big increase and now my pay pay back is 4 and a half years.  I was in my early forties when I bought it so it was cheaper along with the fact that I did not have that many years in Calstrs.
           
          If your TIAA-CREF account is a 403B account then it will be taxed when you withdraw it also your pension will be taxed as well. You will have to think about your personal situation. If you will have a lot of money monthly and few deductions, you could be taxed at perhaps a higher income tax bracket in retirement if you income is is higher. I will say that when I bought my 5 years, which I bought with payroll deductions over 5 years, that I was in a very favorable tax poisition because the deductions from my paycheck were pre tax withdrawals so Uncle Sam and I were friends those years.
           
          Your TIAA-CREFF account is good in that you will have control over that money. However, with your money in that account given to your pension, you no longer have control over it and your pension would die with you if you choose the unmodified monthly benefit. If you choose a pre-retirement option for your spouse to receive a benefit then he/she will receive a portion of you pension for the rest of their lives.
           
          It all depends on what you want as far as flexibility. Some people would not put all of their eggs in one basket. I have some friends who does not trust the government with their money because the government may change the pension plans. However, it's guaranteed by the Constitution and unlike your 403B you will not see and stock market decreases.
           
          It has been a good deal for me.
          • Re: Purchase Airtime for Earlier Retirement?
            jkom51
            We did it for DH's CalPERS account after figuring out it was a 15-year amortization - e.g., if DH lived for 15 yrs after retirement any increased pension monies thereafter were 'profit'. Similar to doing a SocSec calculation.
             
            Your biggest risk is how well/poorly CalSTRS is funded. I don't recall what the exact figures were, as published recently in the ANG newspaper editorial about pension shortfalls, but of the three state pension funds (UC Regents, PERS, and STRS) STRS is the least well-funded. I believe the figure was somewhere under 60% funded, with the UC Regents fund at 78% funded and PERS in-between the two.
             
            What you might want to do is compare what the $115K buys you in pension amount vs what it would cost (include fees!) for an annuity. Annuities are complex products, so you'll have to do some research to compare 'apples to apples'. A good independent insurance broker can probably help.