Time to Buy! Buy! Buy! (Service Credit, 2025 Edition)

Just a little over 3 years ago I wrote a post encouraging folks to purchase service credit in their pension system if they were eligible and could afford to do it. While the entire post is worth reading for the full context, I wanted to pull out this quote,

The second reason I think purchasing service credit might be the right choice for you is specific to this particular point in time (the end of 2021). If you’ve been teaching for at least a little while, you have hopefully also been saving and investing in your 401k/403b/457/IRA. As you might be aware, the last decade or so of investment returns have been exceptional. Using the Vanguard Total Stock Market Index as our proxy, returns over the last 10 years have been 15.95% annualized (or an astounding 339% cumulative gain, meaning you more than quadrupled your money in the last decade). While no one knows for sure what investment returns will be like in the next ten years, based on historical returns it is very unlikely to see such high returns for an entire decade (and we’re likely to see some “mean reversion”, which could mean not only lower returns, but lower than “average” returns).

I don’t think anyone should try to “time the market” (or that anyone can consistently do that well), but there is plenty of evidence for “de-risking” your investments through various means including rebalancing and, for those who are able, purchasing service credit. I wrote that previous post in late December of 2021 and, as luck would have it, the S&P 500 was down 15.5% in 2022, and the Total U.S. Bond Market was down 14.7%. (Again, this wasn’t me “calling the top”, it was just luck, but I’ll take it.)

Well, since 2022 we’ve now had two fantastic years in the market (partially negating my impressive timing in December 2021), which make me want to reemphasize the point in my previous post: this is an excellent time to purchase service credit for those who are able. We have now had 15 years of incredible market returns (particularly in the U.S.). For the 15 years from January 1, 2010 through December 31, 2024, the S&P 500 is up at an annualized rate of 13.1% (VFIAX) and the broader U.S. stock market at an annualized rate of 12.5% (VTSAX). While that’s a bit lower than the trailing 10 year returns when I wrote the previous post in December 2021, it’s also over a longer time period (5 more years) and is historically exceptional. (That’s a cumulative gain of 534% in the S&P 500 over those 15 years!)

No one can predict what the market will do going forward and it’s certainly possible that these stellar returns will continue for a while. So, again, let me quote that previous post,

So, if you choose to use some of your investments to purchase years, what you are effectively doing is locking in your gains and shifting the risk to the pension plan (in PERA’s case, that’s shifting it to the state of Colorado). By selling now, you’re guaranteed the gains you’ve earned over the last decade and remove the risk that the upcoming decade’s investment returns might be below average (or, like the 2000’s, be somewhat of a “lost decade”).

Once you’ve purchased years with PERA, your defined benefit is guaranteed by the state of Colorado. Built into your cost to purchase service credit are a variety of factors, including demographic factors like life expectancy, economic factors like employment and wage growth, and market factors like investment returns. Because all of those are in the future, they are projected factors and reality won’t necessarily match up to the projection. For example, PERA currently assumes a 7.25% annualized return over the next 30 years. While they have handily beaten that lately, there is certainly no guarantees going forward. In some respects, you are “locking in” 7.25% returns on the money you use to purchase that service credit. And, no matter whether the projections are accurate or not, your benefit is guaranteed for as long as you live – you no longer bear any of the risk.

While that quote focuses on Colorado’s pension system, it applies to all pension systems (with whatever their assumed rate of return is). To be clear, purchasing service credit isn’t right for everyone, but I do think it’s a great option for the majority of folks. It is locking in the recent stellar gains, “selling high”, and de-risking your portfolio tremendously by essentially removing market risk from this portion of your portfolio.

So if your pension system allows you to purchase service credit, you meet the qualifications to purchase that service credit, and you are looking at some amazing gains in your tax-deferred retirement accounts, I would highly recommend you at least consider purchasing that service credit now.