Putting A Price On Retirement

Is buying into a pension a good idea for Donna?

QUESTION: Donna is a teacher and has an opportunity to purchase retirement through the state. It will cost her about $27,000. She wonders if this is a good idea. “Almost never,” Dave explains.

ANSWER: This is a pension that you’re buying into, and you are playing catch-up by giving them a lump sum. When you back out what additional money you will get vs. the money you put in, vs. the time it takes it to grow, the pension calculations are usually done at about 7% or so. You can do better than that in a good growth stock mutual fund. If you are talking about putting $40,000 into this, that would grow to $167,000 in 12 years in a mutual fund. You wouldn’t get that kind of return in this program.