Evaluate a pension service-credit buyback by calculating present value, net value, nominal benefits, and discounted break-even period using your assumptions.
Pension Buyback Formula
A service-credit purchase is evaluated by comparing its cost with the present value of the added pension.
Value at retirement:
PV_{retirement}=P*(1-((1+g)/(1+r))^n)/(r-g)
Discount through the waiting period:
PV_{today}=PV_{retirement}/(1+r)^w
Net present value:
NPV=PV_{today}-BuybackCost
Variables:
- P is first annual added pension
- g is COLA
- r is discount or alternative return
- n is payment years
- w is years until payments begin
Value mode calculates present value and NPV. Break-even mode accumulates discounted payments until they recover the purchase cost.
The discount rate represents the alternative use of the money committed to the purchase.
Eligibility dates, retiree health benefits, and survivor effects are excluded unless reflected in the entered pension increase.
Simple Added Pension Needed
Ignoring COLA and discounting, monthly benefit needed to recover selected costs.
| Cost | 20 years | 25 years | 30 years |
|---|---|---|---|
| $25,000 | $104/month | $83/month | $69/month |
| $50,000 | $208/month | $167/month | $139/month |
| $75,000 | $313/month | $250/month | $208/month |
| $100,000 | $417/month | $333/month | $278/month |
Example Problems
Example 1: Calculate value.
A $50,000 purchase adds $400 per month beginning in five years for 25 years with a 2 percent COLA.
Example 2: Find break-even.
Discount each added annual payment and identify the first year cumulative value reaches $50,000.
Frequently Asked Questions
What discount rate should I use?
Use a conservative alternative return and test several rates.
How does longevity matter?
Longer receipt increases value; an earlier death reduces realized payments unless survivor benefits continue.
Should taxes be included?
The calculator compares pre-tax cash flows, so a tax-adjusted analysis may be appropriate.
