I’ve written previously that people with defined benefit pensions who have the option to purchase service credit should seriously consider doing so now. I first wrote about it back in December of 2021, added some more context in April of 2022, and then reiterated in January of this year. Well, stop me if you’ve heard this before, but now would be an excellent time to do this (if you haven’t already).
Why is this a great time to consider this? Pretty much for the same reasons I mentioned previously, but even more so. The returns for the U.S. Total Stock Market (VTSAX) over the last 15 years (November 11, 2010 through yesterday, November 10, 2025) have a compound annual growth rate (CAGR) of 13.91%. The cumulative return is 600.34% ($10,000 would have grown to just over $70,000). That’s an incredible run in the stock market. (And, in fact, VTSAX is up 13.52% since I wrote that post in January.) While no one can predict future returns, and it’s certainly possible this run will continue for a while, we would expect based on history that returns will be much more muted for a while.
If you are eligible to purchase service credit using those accumulated gains, you are effectively locking in those gains and shifting future risk (for this portion of your portfolio) from yourself to the plan sponsor. For most folks reading this, your plan sponsor is your state (e.g., for Colorado PERA, the state of Colorado is the plan sponsor). This is both de-risking your portfolio and effectively diversifying your portfolio. You can think of it as diversification because you are shifting a certain portion of your investments from stocks (or whatever your asset mix is), which can be volatile and can lose money, to your pension, which is guaranteed, so is pretty close to risk-free.
As an example, the assumed rate of return for Colorado PERA is 7.25%, and that’s part of what determines the cost to purchase service credit. So you are effectively locking that in for perpetuity when you purchase service credit.
Since this increases the guaranteed portion of your retirement it gives you the option (if you have the risk tolerance) to stay more fully invested in the rest of your portfolio. This should, given enough time, result in increased returns there as well.
Normally when talking about diversifying their investments, people talk about diversifying among U.S. stocks and international stocks, bonds, real estate, and perhaps some other asset classes. And you definitely want to do that. But for folks with defined benefit pensions, the option to purchase service credit (if you qualify) is a diversification option that most people can only dream of. So if you have a defined benefit pension, please take the time to learn whether your plan offers the ability to purchase service credit and, if so, if you qualify.
While you should be able to easily find that on your pension website, there are also some books that could help :-).
As always, personal finance is personal, and purchasing service credit is not always the right decision for every situation. But for the majority of folks it is likely to be a very good choice. While not exhaustive, here’s a list of pros and cons.
Fisch Financial 