Decision to buy extra years of service toward retirement is a sound move
Q: In 2008, I retired at age 60 with a government pension. My agency offered the option of buying extra years of service. After weighing the advantages, I shifted about $116,000 from a tax-deferred account to buy five extra years of service credit toward retirement. The “multiplier’’ for retirement was 3 percent, which gave me an immediate additional income of around $10,900, guaranteed for life.
What’s your thought on such investments?
Austin, Texas
A: Unless you have no other savings, decisions like this are good ones. It provides you with a 9.4 percent income rate from your $116,000 investment. In the current market, a single-life annuity from a private company purchased with $116,000 would provide $619 a month, or $7,428 a year. The figure would have been slightly different in 2008, due to higher interest rate assumptions, but the benefit would not have been wildly greater. So, even if the pension benefit is never increased, you made good use of your money.
Your multiplier of 3 percent per year of service is one of the reasons public sector jobs are attractive, even if their direct pay is lower than in private sector jobs.
You made a sound financial decision and maximized your benefits. Your gain, however, depends on future pension funding. That, in turn, depends on future tax collections. Austin is more likely to have the tax base growth to make it work than most cities, but it is far from a slam-dunk.
Q: Will the limit on fees that banks can charge merchants for debit card transactions in the Dodd-Frank bill mean the end of the high interest rates some community banks are now paying on checking accounts? Typically these accounts require a certain number of debit card purchases per month to be eligible for the high rates. My understanding is that the debit card fees are what enable them to pay the high rates and still make money.
I am thinking of moving my bank account from a megabank to a nearby community bank offering this type of account, and if the high rates will be discontinued it wouldn’t be worth the hassle to change banks.
C.G., by e-mail
A: All we know at this moment is that the new regulations will put pressure on bank earning sources, and debit fees to merchants are one of those sources. Another possible solution for your transaction account is to explore the accounts offered at credit unions. Many offer attractive interest rates.
Regardless of what happens, it is a good bet that you will get a somewhat better deal at a community bank or at a credit union than at one of the megabanks. So I suggest searching for the best deal, then moving your money.
Finally, while it is a hassle to change banks, there is another reason to move your money to a smaller institution. It may be the only way we can protect ourselves from the risk-seeking behaviors of the megabanks — there isn’t much in the reform bill to change that.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com. 
