Don, a California state worker, asks if he should buy a pension service credit or invest his money somewhere else for a higher return. Pat is overjoyed with this caller’s question.

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Scott: Let's talk to Don. Don, you're with Hanson McClain.

Don: Hi, guys.

Scott: Hi, Don.

Don: Hey, so I've got a simple question. I've asked a couple of investment advisors this question, and I get the deer in the headlights look or the two-step sidestep, but it seems like a really simple question. I work for the State of California...

Scott: Okay.

Don: And I have the opportunity to buy back service credit.

Scott: You still do?

Pat: Are you sure?

Don: Yeah, I'm sure. It's a one-time thing. I've got to either, I've got to commit to an amount, and the amount of money I can put in and the amount of service credit I want to buy back...

Pat: Oh, so let me ask you a question. So you signed up for this thing about nine months ago when it was still allowed, and you've been waiting in line for the numbers, is that correct?

Don: That's correct.

Pat: Okay. All right, that makes sense.

Scott: No deer in the headlights from Pat.

Pat: So what's your question for me?

Don: My question is...

Scott: You should do it. Go ahead.

Pat: What's the question? What's the question? What's the question?

Don: I'm a little suspicious, but how do I compare this to if I took the same $100,000 and invested it in...

Scott: Whatever.

Don: An IRA, a Roth, something like that? I've got A or B, how do I compare this to an investment I might make?

Pat: Okay, so what we can do is we can do a net present value calculation on this.

Scott: But you're going to know what the number is. It's about 7%.

Pat: It's about...it's between 7% and 7.5%. And it is...

Scott: Guaranteed.

Pat: Don, Don, the mere fact that you've really asked an investment advisor and they couldn't answer your question is astonishing to me. It is an IQ test, Don.

Scott: When you said you asked him, was this like in passing, like at a cocktail party or something, or is this like you actually met with an advisor?

Don: I met with two advisors.

Scott: Well, they weren't advisors. They weren't advisors. I don't know what they were.

Pat: Don, Don, you're going to buy as much as they're going to sell you.

Scott: Yup.

Pat: As much, assuming you have a normal life expectancy.

Scott: Don, we have had millions of dollars we've taken from Hanson McClain and had...this was years ago when you could still buy it, there's not many options like you have, literally...

Pat: Yeah, because it closed. It closed for everyone else.

Scott: ...millions of dollars. We said, "Look, the buy in the pension in the State of California is the best investment, at least one of the best investments you could make. The guarantees in place are phenomenal."

Pat: Cost of living adjustment, the hurdle rate on the return. Assuming you have a normal life expectancy, Don, this...

Don: As far as I know.

Pat: ...is an IQ test and you have passed.

Don: Okay.

Pat: Your advisors that you spoke to...

Scott: They weren't advisors. I don't know what they were. What were they?

Pat: There is not a single person...

Scott: Were either one of them Certified Financial Planners?

Don: Yes, they were.

Pat: All right, there isn't a single person that I haven't recommended this to.

Scott: Well, so much for that designation.

Pat: Now, let's go to the next step. And if you go to MoneyMatters.com... You could go to our website, MoneyMatters.com, and there's a workshop on the 401(k). Do you have after-tax dollars that you could fund this with or do you have money in your 457 or 401(k) that you will be using?

Don: Most of these are after-tax dollars.

Pat: Even better.

Scott: Because it's a way you can get tax-deferred growth on money.

Pat: It's a way you can get tax-deferred growth on it. Now, you can use the combination of the two, but if I had a choice, I would use the after-tax dollars to do it, not the 401(k) or the 457, and the reason behind that is, when you put that money in, all that growth is now being tax-deferred. When you get the payments out, what you're going to see is a part of those payments, when you take your distributions from the retirement plan, are going to be a return of principle in which that portion is not taxed and any of the gain will be taxed at that point in time. So, use as much after-tax dollars as you can and buy every penny of it you can.

And, it was a good deal. If you've listened to this radio show for any length of time, you know that we've encouraged this. Now, everyone else, this is no longer available to you if you're working for the State of California. They have stopped this program. The reason it's available to Don is because he inquired while it was still available and there was such a rush there that you were on the waiting list.