Pension Question-ARC Additional Retirement Credit vs. Investing independently?
I work for a local county government with a pension system. I am 36 years old with no dependents or spouse. Our county offers the option of purchasing ARC additional retirement credit. I have the opportunity to buy 5 additional years of credit toward my pension now for $ 62,000. If I were to purchase this credit now and retired at 55 1/2 years old, I would receive 4 a month extra as if I had worked until 60 years old (on top of my monthly pension) as a lifetime benefit when I retire. It was explained to me that after 8 years of receiving 4 a month in additional retirement money, I will break even with having paid a lump sum of ,000. Hence, all additional 4 a month after 8 years will be return on my investment for the rest of my lifetime. I want to know whether it would be better to invest ,000 on my own vs investing in the purchase of 5 years ARC credit. I am not sure if this is correct but I did a calculation based on the assumption that I live until 75 years old and retired at 55. I multiplied 4 x 12 months x 20 years = 4,200 I would receive from the 62,000 initial investment. Then I used an investment calculator to assume I invested ,000 now and earned 6% return for 19 years until I am 55 =3,309.66. This calculation is just an assumption that I could earn a steady 6% and is not taking into account that I will continue to earn interest on the portion that I am not drawing from when I retire at 55 years old. Basically I am trying to determine which is the better investment and whether it is advantageous for me to purchase 5 years ARC with my employers pension plan.
Filed under: Retirement Planning
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Generally it is better to buy in if the market interest rate is low an d not if the interest rate is high. You also have to consider that investing allows the unspent investment to go to your heirs and the ARC only returns money you put in less additional you got out and after about 7 years there is noting to go to your heirs.
Generally over a period of 10 years investments earn a return of 5% for conservative and 7% on risky investments, mid tern bond funds depending on the risk are in the 4-7% range. In retirement you can expect to spend 4% per year and it should keep up wit inflation and last 30 years from when you start taking retirement.
Buying the ARC is not very risky and is always better if you would lose sleep if an investment were to temporarily drop 10% in value. To many investors buy stocks that have been rising and sell after a big loss to get out. A good stock should have more bought on a big drop and take some profit out and diversify when it is going up/