Is it worth $20,000 to buy a year of CalSTRS service credit?
The most important factors for consideration are your current salary, your age and the age at which you plan to retire. The cost of CalSTRS service credit will vary depending on the number of years of service, how much credit you already have and how much you want to purchase. You can estimate the cost using the CalSTRS calculator. To decide whether the purchase is worthwhile, you would need to first estimate the cost, then estimate what the increase in your retirement benefit would be by using the Retirement Benefits Calculator. (There are also calculators for Redeposit Cost and Permissive Service Credit.) Finally, you would need to estimate how long it would take to recover the cost of the purchase by dividing the cost of the purchase by the estimated annual benefit increase (see below for example).
Generally, it is less expensive to purchase service credit earlier in your career rather than later. Here is an example of someone purchasing credit from CalSTRS "Purchase Service Credit Now, Have More Money for Retirement Later."*
Assumption: Rick retires at age 60 with 29 years of service credit and $60,000 in annual earnable compensation. If he purchased one year of service credit, he would receive an extra $100 per month.
|Years of service credit: 29 (with purchase) x 2% age factor x $60,000 = $2,900 monthly benefit
|Years of service credit: 28 (without purchase) x 2% age factor x $60,000 = $2,800 monthly benefit
Here's how purchasing one year of service credit early in his career rather than waiting can save him money, since the contribution rates are based on age and are adjusted annually:
|Cost to Buy 1 Year of Service Credit (rates effective July 1, 2010)
|Age 32 Compensation $35,000 x Contribution Rate 17.9% = $6,265
|Age 59 Compensation $60,000 x Contribution Rate 26.2% = $15,720
If the service credit gives him an extra $100 a month, it would take a little over five years to recoup his costs at age 32 ($6,265/$1,200 = 5.22). But if he waits until age 59, it would take 13.1 years to recoup his costs ($15,720/$1,200 = 13.1).
* For example only. Your cost to purchase service credit will depend on your age, compensation and when you plan to retire. Contribution rates are subject to change.
It's important to note that there are three types of service credit: 1) nonqualified service credit, also known as "air time." Nonqualified service credit is not connected to prior employment, and members with at least five years of CalSTRS service credit may purchase up to five years of air time. 2) Redeposit credit, available to eligible CalSTRS members who previously had CalSTRS credit, terminated employment and withdrew their retirement contributions and interest. 3) Permissive service credit, which you may be able to purchase for performing certain non-CalSTRS related activities. To obtain more information please contact CalSTRS at 800-228-5453.
Back to FAQs