Introduction
For Massachusetts state employees, one of the most effective strategies to increase your pension benefit is to maximize your creditable service. While your years of employment with the state automatically count toward your pension, you may be eligible to purchase additional creditable service for certain periods of your career. This guide explains the types of service you can purchase, the process for doing so, and how to determine if a service purchase is a good financial decision.
What is Creditable Service?
Creditable service refers to the total amount of time that counts toward your pension calculation. Your pension benefit is determined by a formula that multiplies your years of creditable service by a percentage factor and your highest average salary. Therefore, increasing your creditable service directly increases your pension benefit.
Types of Purchasable Service
Massachusetts state employees may be eligible to purchase creditable service for several types of prior employment or service:
1. Prior Public Service in Massachusetts
- Previous work for a Massachusetts public employer where you were not a member of a contributory retirement system
- Temporary, provisional, or intermittent employment with the state or a municipality
- Service as an elected official where you were paid less than $5,000 annually
2. Military Service
- Active duty military service (up to 4 years)
- Must have received an honorable discharge
- Cannot be using this service for another pension benefit
3. Out-of-State Public Teaching Service
- For members of the Massachusetts Teachers' Retirement System
- Up to 10 years of public school teaching in other states
- Cannot be receiving or entitled to receive a pension for this service
4. Peace Corps or AmeriCorps Service
- Up to 3 years of service in the Peace Corps
- Up to 5 years of service in AmeriCorps
5. Approved Unpaid Leaves of Absence
- Maternity/paternity leave
- Medical leave
- Educational leave
- Generally limited to a maximum of one year
6. Forfeited Service
- Previous service in a Massachusetts public retirement system for which you took a refund
- Must repay the refund amount plus interest
The Process of Purchasing Service
Purchasing creditable service involves several steps:
1. Determine Eligibility
- Contact the Massachusetts State Retirement Board (MSRB) to determine if you're eligible to purchase specific types of service
- Provide documentation of the service (e.g., military discharge papers, employment records)
2. Request a Cost Estimate
- The MSRB will calculate the cost of purchasing the service
- Costs are typically based on your current contribution rate and salary
- The longer you wait to purchase service, the more expensive it becomes
3. Decide on Payment Method
- Lump sum payment
- Installment payments (typically up to 5 years)
- Direct rollover from a qualified retirement plan (e.g., 457(b), 403(b), IRA)
4. Complete the Purchase
- Submit the required forms and payment to the MSRB
- The service will be added to your creditable service total once payment is complete
Evaluating the Financial Benefit
Purchasing creditable service is an investment in your future pension. To determine if it's financially beneficial:
Calculate the Return on Investment
- Determine how much the service purchase will increase your annual pension
- Calculate how long it will take to recoup the cost of the purchase through increased pension payments
- Consider your life expectancy and expected retirement duration
Example Calculation:
Let's say you're considering purchasing 2 years of creditable service for $20,000:
- Current projected annual pension without purchase: $40,000
- Projected annual pension with additional 2 years: $43,000
- Annual increase: $3,000
- Years to break even: $20,000 ÷ $3,000 = 6.67 years
In this example, if you expect to live more than 6.67 years after retirement, the service purchase would be financially beneficial.
Strategic Considerations
When deciding whether to purchase creditable service, consider these strategic factors:
1. Timing of Purchase
- Purchase service as early in your career as possible to minimize cost
- The cost increases as your salary increases and as interest accrues
- There may be tax advantages to purchasing service in certain years
2. Impact on Retirement Eligibility
- Additional service may allow you to retire earlier
- May help you reach service milestones that increase your benefit percentage
- Could affect your eligibility for retiree health insurance
3. Funding Sources
- Using pre-tax retirement funds (e.g., 457(b) plan) may be more tax-efficient than using after-tax savings
- Consider the opportunity cost of using funds that could otherwise be invested
- Weigh the guaranteed return of a service purchase against potential market returns
4. Coordination with Social Security
- With the elimination of the Windfall Elimination Provision (WEP) through the Social Security Fairness Act, purchasing additional creditable service is now even more valuable
- You'll receive both your increased pension and your full Social Security benefit
Common Questions and Misconceptions
Can I purchase partial years of service?
Yes, you can purchase service in increments as small as one month.
Is there a deadline for purchasing service?
While there's no absolute deadline, you must complete any service purchase before you retire. Additionally, the cost increases over time, so earlier purchases are more cost-effective.
Will purchasing service affect my Social Security benefits?
With the passage of the Social Security Fairness Act, the Windfall Elimination Provision (WEP) has been eliminated. This means your state pension will no longer reduce your Social Security benefits, making service purchases even more valuable.
Can I finance my service purchase?
The MSRB offers installment payment plans, typically up to 5 years. Interest will be charged on the unpaid balance.
Conclusion
Purchasing creditable service can be one of the most financially advantageous retirement planning strategies available to Massachusetts state employees. By increasing your years of service, you directly increase your lifetime pension benefit, potentially by tens or even hundreds of thousands of dollars over the course of your retirement.
To make the most of this opportunity, start by identifying any eligible service periods in your career history. Then, contact the Massachusetts State Retirement Board to verify your eligibility and request cost estimates. Finally, carefully analyze the financial implications to determine if purchasing service makes sense for your specific situation.
Remember that our pension calculator can help you model different scenarios and see how additional creditable service would affect your retirement benefit. For personalized advice, consider consulting with a financial advisor who specializes in public employee retirement planning.
