If you’ve got a pension, count yourself as one of the lucky ones. A pension is more valuable than you realize. With a pension, you won’t be forced to lower your safe withdrawal rate in retirement like those of use who don’t have pensions. This post will help you calculate the value of a pension.
Pensions, also known as Defined Benefit plans, have become rarer as companies force their employees to save for themselves mainly through a 401k, 457, 403b, Roth 401(k) or IRA. These savings vehicles are also known as Defined Contribution plans.
But as we all know, the maximum amount you can contribute to a 401(k) or IRA is $22,500 or $6,500, respectively for 2023. Even if you max out your 401(k) for 33 consecutive years starting today, it’s unlikely your 401(k) or IRA’s value will match the value of a pension.
Take a look at my latest 401k savings potential chart. After 33 years of maximum contributions, I estimate you’ll have between $568,000 – $1,800,000 in your 401k, depending on performance.
$1,800,000 sounds like a lot, but in 33 years, $1,800,000 will buy just $678,000 worth of goods and services today using a 3% annual inflation rate. However, inflation is currently running at ~7.5%.
If you live for 20 after your last 401(k) maximum contribution, you’ll only be able to spend $33,900 a year in today’s dollars until the money runs out. $33,900 is not bad, but it’s not like you’re living it up after sacrificing your life for decades at a job you didn’t love.
Given the power of inflation, to neither max out your 401(k) nor invest an additional 20%+ of your after-tax income if you don’t have a pension is risky. When it comes to your money, it’s always better to end up with too much than too little.
How To Calculate The Value Of A Pension
The best way to calculate the value of a pension is through a simple formula I’ve come up with. For background, I worked in finance from 1999 – 2012, got my MBA from UC Berkeley, and have written over 2,500 personal finance articles on Financial Samurai since 2009.
I live what I write and speak as an early retiree since 2012. Money is too important to not take seriously.
The value of a pension = Annual pension amount divided by a reasonable rate of return multiplied by a percentage probability the pension will be paid until death as promised.
For example, here is an example of how to calculate a pension with the following data:
Average income over the last four years: $90,000
Annual pension: $67,500
A reasonable rate of return divisor: 2.55%
Percentage probability of pension being paid until death: 95%
Value of pension = ($67,500 / 0.0255) X 0.95 = $2,514,706
One can argue my formula for calculating the value of a pension is overstated. After all, the pension’s value is dependent on the terminal value, and we all eventually die. Therefore, if you are particularly pessimistic, you can apply a discount to the final calculation.
For example, if you are a pessimistic person in poor health, perhaps you multiply the final value of the pension by 50%. In this case, a $2,514,706 pension goes down to about $1,250,000.
If you have a pension, your goal is to live as long and healthy a life as possible! The longer you live, the greater the value of your pension. This means eating better, exercising, and having a good social network of friends.
How Do Pensions Work?
Most pensions start paying out at a certain age and continue paying out until death. The amount of pension you receive is determined by years of service, age in which you elect to start collecting, and usually the average annual income over your last several years of service.
If you don’t know how to calculate the expected monthly or annual payment of your pension, just ask human resources to provide details.
To calculate the value of your pension involves figuring out your annual pension payment, a reasonable rate of return divisor, and a realistic expected chance of payment until the end. After all, your company could go bankrupt and welch on all its pension promises.
Deciding on a reasonable rate of return divisor is subjective. The safest divisor to use is the 10-year government bond yield, which currently hovers around 4%. In other words, one can reasonably expect to earn 4% each year on his or her investments given the 10-year government bond yield is guaranteed.
One could use a more aggressive reasonable rate of return, such as 10%, to reflect a historical annual return of the stock market. However, the higher your divisor, the lower the value of your pension ironically, because it requires less capital to generate your pension income when things are booming.
Pensions Have Become Much More Valuable
Given interest rates collapsed in 2020, it took more capital to generate the same amount of risk-adjusted returns/income. Therefore, the value of a pension went WAY UP because the value of cash flow has gone way up.
Just take a look at this chart regarding how much more capital is needed to generate $50,000 a year in income. Therefore, the proper safe withdrawal rate should be lower the it was in the past.
Thankfully, interest rates have ticked up from their 2020 lows, making generating passive income easier. However, the higher interest rates go, the more headwind stocks and real estate generally have.
We’re now in a situation where the Fed continues to hike rates aggressively to combat inflation. In fact, patient investors can now earn over 5% in risk-free Treasury bonds. The rates likely won’t last, which reminds us of how fluid economics and investments are.
Let’s calculate the value of various pensions below.
Pension Value Example 1: Police Officer Retiring After 25 Years Of Service
Here is the example again of how to calculate the value of a pension with some commentary after.
Average income over the last four years: $90,000
Annual pension: $67,500
A reasonable rate of return divisor: 2.55%
Percentage probability of pension being paid until death: 95%
Value of pension = ($67,500 / 0.0255) X 0.95 = $2,514,706
Well how about that! After 30 years of service, this police officer will have a pension worth roughly $2,514,706 on top of whatever other assets he has accumulated. Not bad for someone who made a decent, but unspectacular $90,000 year for the last four years of his career.
Let’s say this police officer joined the force at age 20. He’s still young enough to start another career making additional money on top of his $60,000 pension. Talk about the perfect early retirement plan to pursue your passions without fear.
Pension Value Example #2: Foreign Service Officer Retiring After 30 Years Of Service
Let’s say you started in the foreign service before 1986 and finally want to retire. Congrats! You will have a nice pension for life waiting for you.
Average income over the last three years: $120,000
Annual pension: $85,000
A reasonable rate of return divisor: 3%
Percentage probability of pension being paid until death: 100%
Value of pension = ($85,000 / 0.03) X 1 = $2,833,333
I use a 100% probability of the pension being paid until death because the payer is the federal government. This figure is also subjective, but I believe the federal government will honor their promises to older employees. They’re just cutting pension benefits for newer employees.
If I used 2.55% as the reasonable rate of return divisor, the value of this retired foreign service officer’s pension jumps to $3,333,333. The reason is because an investor needs to invest $3,333,333 in capital to generate $85,000 in annual income when the rate of return is only 2.55%.
Let’s say the rate of return was 50%, the value of the pension/capital required is only $170,000. But who on Earth can reliably generate a 50% annual return each year forever? Nobody.
For those of you who start the foreign service after 1986, you receive 1.7 percent of your salary for the first 20 years and 1 percent for each additional year. Therefore, 30 years only gets you 44 percent of your salary equal to a pension. However, at least you can still have 401(k) matching and collect Social Security.
Pension Value Example #3: Public School Teacher Retiring After 30 Years
Average income over the past four years: $72,000
Annual pension: $43,000
A reasonable rate of return divisor: 2.55%
Percentage probability of pension being paid until death: 75%
Value of pension = ($43,000 / 0.0255) X 0.8 = $1,349,019
Although this public school teacher wasn’t earning a huge amount, she gets to retire with a $36,000 annual pension that is worth over $1,000,000. Using an 75% payment probability seems reasonable.
Most pensions also have an inflation adjuster built in order to keep up with inflation. Although sometimes, the inflation adjustments don’t keep up.
Here’s a chart I put together highlighting the values of a $35,000 and $50,000 pension (in the range of the most common pension amounts). As the rate of return goes higher, the value of your pension goes lower. Bond values work in a similar fashion as interest rates go higher and vice versa.
Thanks to the craziness of the pandemic, the 10-year bond yield has declined to under 1%. Therefore, the value of your pension has gone way up. You want to hold onto your cash cows for as long as possible. Your reasonable return of return divisor should be lowered to 1% – 2% in this low interest rate environment.
A Pension’s Value Is Subjective
Obviously, my calculation is simplistic because we all die at some point. My calculation is based on cash flow into perpetuity. To counteract the perpetuity, I assign a Probability of Payout percent. Further, we all won’t have surviving spouses to continue receiving the pension long after we’re gone.
You’re free to lower the Probability of Payout percentage to account for shorter lifespans or a more pessimistic life outlook. You can also call the Probability of Payout the Pension Discount Rate if you wish.
Just remember that value is subjective. Once we’re dead, what does anything really matter? There’s no longer a need to earn any money for ourselves. Given most pensions continue to pay out to a surviving spouse, s/he is covered until death as well.
What this article and my calculation attempts to do is provide an easy way for all pensioners to assign a real value to their pensions. I also want to give pensioners hope that their financial situation isn’t as dire as expected if they are comparing themselves to private sector workers or my average net worth for the above average person chart.
Cherish Your Valuable Pension
All three individuals with pensions above are millionaires due to their long-term dedication and pensions. Even if you were only receiving a $15,000 a year pension, it’s still worth more than $500,000 a year using a 2.55% divisor and 90% payout probability.
Given the median net worth in America is around $100,000, we can conclude that anybody with a pension is considered very well off. Less than 20% of Americans have pensions in the new decade.
Live As Long As Possible To Increase Your Pension’s Value
There’s one key variable that I haven’t discussed, and that’s a pension owner’s lifespan. Unfortunately, the foreign service officer with a pension worth $2,833,333 can’t sell his pension to anybody for that amount. Nor does the pension keep paying out after death.
Although, in some cases, a pension can keep paying out to a surviving spouse. The reality is one’s pension value fades as the owner inches closer towards the end.
Therefore, it behooves every pension owner to live as long and healthy of a life as possible to maintain the value of his/her pension. The same logic goes for anybody with passive income, including social security. The richer you are, the healthier you should try to be!
The value of your pension is subjective. You could even multiply your annual pension amount by the average P/E multiple of the S&P 500 to come up with its value. There are many variables and variable amounts to consider.
Just know that your pension has tremendous value, just like your Social Security, the nation’s pension plan. If your pension plan has a high cost of living adjustment rate, then your pension is worth even more.
If you feel your net worth is lacking based on my charts for the average net worth for above average people, simply calculate the value of your pension using my formula. The results will likely surprise you.
Loading ...Invest In Real Estate For More Income
Given the value of cash flow has gone way up, it is wise to invest in assets that generate income. The best type of income-generating asset regular people can invest in is real estate.
Investing in real estate is like getting a pension because real estate tends to produce a steady income stream that gets more valuable over time. Inflation helps left the value of real estate and rents.
Take a look at Fundrise, my favorite real estate crowdfunding platform available for all investors. You can invest in a diversified real estate fund that primary investments in the heartland where valuations are cheaper and rental yields are higher.
My other favorite real estate platform for accredited investors is CrowdStreet. CrowdStreet focuses on individual commercial real estate projects in 18-hour cities such as Charleston and Memphis. With higher cap rates and potentially higher growth rates due to demographic shifts to lower-cost areas of the country, CrowdStreet is very interesting.
I’ve personally invested $810,000 in real estate crowdfunding to generate more diversified passive income. So far so good as my passive income hits roughly $300,000 a year. Real estate is the ultimate inflation.
Stay On Top Of Your Finances
The best way to grow your net worth is to track your net worth. I’ve been using Empower’s free financial tools and app to optimize my wealth since 2012. It is the best free money management tool on the web.
Link up all your financial accounts to analyze your wealth. Start by measuring your cash flow. Then x-ray your portfolio for excessive fees. The best feature is the retirement planner.
There’s no rewind button in life. Even if you have a valuable pension, it’s important to continue staying on top of your finances. Do your best to optimize the wealth you have now.
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Note: Pensions are most common in the following fields: military, government, education, gas and electric, insurance, and health services. Having a pension is likely winning the lottery. Enjoy it for the rest of your life! Most people are not so lucky. In a low-interest rate environment, a pension’s value has increased significantly. Calculate the value of your pension and make the best career decision possible. Don’t underestimate public service jobs and other jobs with pensions!
For more nuanced personal finance content, join 55,000+ and sign up for my free weekly newsletter. I’ve been helping people achieve financial freedom since 2009. How To Calculate The Value Of A Pension is a FS original post. Your pension is worth more than you think in this low interest rate environment.
Financial Samurai, to continue the feel-good factor of placing a value on a pension into retirement, would you run your calculation each year, say, following an indexed increase in the monthly pension, or would you suggest keeping the pension value as it was on the day the pension commenced? Thanks
Since I’m retired military (enlisted), I didn’t have a 401K or TSP to contribute to. I’ve been receiving a military pension for 15 years (avg $30K/yr). To catch up, I’ve invested every pension dollar in stock index funds. I’ve also contributed to my company’s 401K and a taxable account. This approach has worked wonders. My financial situation is great. I’m 56 and hopefully can continue to collect my pension for 30+ years. Fingers crossed.
“… but in 33 years, $1,800,000 will buy just $678,000 worth of goods and services today using a 3% annual inflation rate.”
Can you explain how you got this? (1,800,000/678,000)^(1/20)=1.05, or 5%.
I’m doing a quick annuity factor calculation, and at 4% interest and 7% inflation it looks like a present value of $1,800,000 will fund a benefit of $65,878 for 20 years. Did you get $33,900 assuming 0% interest and 7.5% inflation?
I went the other way and inputted $678,000 present value, 33 years, and 3% annual growth to equal $1,800,000. http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Just used this to help answer so real questions from real people who are contemplating retirement. Thanks for sharing the ideas, Sam.
Apologies if you answered somewhere, but I didn’t see it…
How exactly is the “rate of return divisor” calculated? e.g. where does 0.0255 come from?
Cheers!
Jesse
I am 55 years old. I plan on retiring in 18 months. My pension will be $64,500 per year with no COLA. I am very healthy and would project living to 90. How do I figure the value of my pension to include in net worth? I am estimating approximately 33 years of drawing this pension
Thanks
We got 4 pensions in various California pensions (UC, 2 Calpers, county level). Never thought to calculate the true value of these. Mind boggling they would be worth this much. Let me add to this that in public service, we don’t pay for much work expenses at all as it’s extremely low maintenance and don’t need to join the clubs to drum up business – unless you’re a politician of course. I missed calpers pepra deadline by like 2 months and joined public service spring 2013… ugh! Would have been classic member and getting 100k more a year then what’s now permitted re salary/cap limits. If I only knew at age 33 when I joined public service. My only regret.
My husband is 6 yrs older than me, so I’d like to retire at 62 at 2% (in 2042) but 67 at 2.5% final comp cap limit would be much more lucrative for me (earning 3.5k more a month post taxes). We will have plenty in deferred compensation I think by that time (62 and 68) projecting 10 mil in our 4 deferred compensation and Roth IRAs wouldn’t have to ever touch. Debating still on age to retire (62 v. 67)… can’t buy time that’s for sure and afraid I’ll miss golden years w hubby if I don’t retire at 62. What do you think?
I am not a financial guru but am early retired but my wife is not. She really enjoys (maybe even loves) what she does. She plans on working for another 20 to 30 years which she also will be paying off her part of the mortgage. I really wish she would retire earlier than later because I except the cost of travel will increase significantly for us when we get older- ie first class tickets and hotels instead of economy premium currently. The increase will just be to travel more comfortably the older I (we) get.
If I read it right, you will have $10 million you won’t even need to touch by 62 why you retire. I like to golf, ski, travel and hike. I am going to assume every activity gets more difficult the older you are- recovery wise. If your husband likes to watch netflixs and order take out and is a homebody (nothing inherently wrong with that) than you can pull off working late. If you want to travel and do activities, retire earlier. The one regret I have that will not be fulfilled (maybe) is an around the world cruise that we can afford financially but she cannot (or chooses not to) afford is the year to cruise the world. By the time we have the time, I will be 80.
Take the time if you feel you have enough money. But only you can decide. If I had $10 million in the bank, I would definitely try to sway my wife to take a year off from her job to do that travel anytime before 80.
Your foreign service example is only valid for those who started prior to 1986. I started in 1988 and retired in 2014. Under the current system you receive 1.7 percent for the first 20 years and 1 percent for each additional year. So 30 years only gets you 44 percent. Obviously 44 percent of 120k is much less than 85k as in your example. Under the new system one also gets social security and a 401k match but I would have much preferred the older system that your father retired under.
Yep. Still though, not bad either way!
I totally agree! Continuance of govt subsidized health care is another huge perk.
I couldn’t find a way to add a reply other than to reply to just one of your comments. You probably are aware that Forbes has published through one of its columnists a pension valuation spreadsheet. It includes the value of a pension according to existing interest rates as well as the value according to “regulations”. If you can’t find it, I would be happy to send you, Sam, the version i downloaded last year. I am not able to send it to every reader but you may want to post it.
I have a cash balance pension plan. I worked 35 years , average salary 80,000, 4%
I am 55 years old. I am a black male. what is the value of my pension?
Pensions pay a defined payment until your death and may or may not have a death benefit for your spouse. I had a co-worker that died 3 months after retiring, his $4,000 monthly pension was paid for 3 months. Theoretical value of that at your rates would be about $2 million, but it paid him $12,000.
The way to value a pension is what it would cost to buy it. They are available for sale all over the place, so are high commission terrible products, but you can buy no commission Immediate Income annuities with our without death benefits for you or your spouse.
As an example I looked at what income I could generate by purchasing a immediate income annuity with no death benefit and it pays about 5.4% With Minimal death benefit it pays 5.3%. Full benefit pays 4.5%.
Value will depend on age and life expectance, they above are for 63 year old male retiree. Older retirees would get higher rate because of lower life expectancy.
My suggestion would be to value pensions using a 5% rate and could go higher for elder readers.
This is the truest apples to apples comparison of a pension (which most often leaves nothing when you die).
I have a state pension waiting for me that is worth 58.8% in March of 2022. In a year and 3 months(my date is March) my best 3 years at this point will be about $118k. If I wait, my percentage goes up to 63.8% and then to 80% the following year, which will max me out. So, I’m looking at around $70k/year if I retire in March of 2022. I would like to retire. I’ve had enough. From what I’ve read in your article, it looks like I should be ok. The only debt I have is a new truck that is into its third year of a 60 month plan. No credit card debt and just paid my last mortgage payment. Wife has a good 401k as well. I’m burned out and want to retire. My question is this: Is it foolish Not to wait and get to 80%? One other question is in regard to your article. It’s says towards the end of the article that you should hang onto your cash cow as long as you can. What exactly are you talking about in regards to this?
Joe,
When you say if you “wait” you pension goes up by 5% and then jumps to 80% the following year. How long would you have to “wait” which I assume means continue working or are you saying delaying drawing on the pension?
The 80% vs 58.8% is really significant and, depending on how much longer you would have to work, would probably be worth it.
Safe Withdrawal Rate is 4%, based on your investment keeping up with inflation. As Greg Lee says (sept 18, 2019) multiple income by 25 to get principle amount. But without a COLA you miss out on keeping up with inflation. With inflation at 2% and added tax at 2%. The factor is more like 1/6% (16.7x) or 1/8% (12.5X).
So for every $40K passive income (I like $40K as it translates to $1M):
in a brokerage: $40K*25=$1,000,000
in a pension $40k*16.7 = $666,667
in a pension $40k*12.5 = $500,000
Hi Sam what is your view on federal veterans disability payments in terms of value and stability compared to pensions? The payer is the federal government, and if the ratings are static there is no reexaminations, and after 20 years it cannot be taken away under any circumstances. Would it be wise to factor it into any savings calculations? Thanks
Chris – the value of a VA disability payment should be considered the same as a pension, although there is no survivor’s benefit (in most cases). If you’re getting 100% VA disability payment, it is ~$40k/year (depending on number of dependents). It is tax free, so it’s value is even more than a regular employer pension (which are all taxed at the federal rate, and state rate in some states).
I am wondering if a health benefit associated with a pension adds to the value of that pension. IE: Is a health benefit part of a QDRO? I am possibly facing divorce and both of us have pensions. His is bigger than mine by about $700; mine has the health benefit. I am in California – pensions are CalPERS.
I am just trying to put a good finance package/offer together for a divorce that does not involve attorneys or actually having to file a QDRO since we both have our own pensions.
It certainly does!
My family of 4 now pays $2,500/month for unsubsidized healthcare a month!
Thanks for your reply. So, a health plan is calculated into the overall valuation on a QDRO?
In a similar situation. How would you calculate the value of a pension with health plan included?
It would logically be worth even more. Take the premiums you would have paid for the health insurance plan and divide it by a reasonable rate of return.
Here’s a related post: Getting Your Money’s Worth For The Health Care Insurance Premiums You Pay
Great post. Not a lot of posts on this topic because the US has shat on the working class!
All i need is enough to cover all housing and living expenses. I’ll get a “low stress” leadership job for the benefits and pay.
The correct way is to calculate the net present value, but you have to make an assumption of the number of years the pension will pay out.
Yes, but who’s gonna know how to do that? If you still need to make assumptions, then you might as well go my way. It is more intuitive and easy.
The bottom line is that you cannot really know the true value of any pension because you do not know how long you will live. Any method used is, at best, an estimate. I do believe that your method is more accurate for those who live beyond their actuarially determined age of death.
Indeed. Life is one big calculated bet. Make the most of it every day!
Related: No Need To Win A Financial Argument, Just Win!
This formula greatly exaggerates the value of a pension. It only calculates a principal amount needed to generate a monthly interest payment while maintaining principal. For that to be true, the retiree would still have that amount in his estate at death.
A better way to calculate the value of a pension is to use the amount of payments multiplied by the number of payments based on life expectancy. This will be much less than this rosy picture painted here (but still very nice).
What I would really like to see is someone calculate the value of the Federal Employee Health Benefit for retirees after age 55.
This post needs more attention.
1) The value of the pension is actually worth less because you don’t get to keep the principal capital being used to generate your yearly pension – the annual pension payments stop when you die. With money invested in defined contributions for example, you get to keep (or pass on) the principal capital that perpetually generate the yearly income after you die. You have the option and access to the $X million that’s generating your passive yearly returns and YOLO’ing the initial capital on hookers and booze whenever you want.
2) Pension-based jobs are significantly underpaid especially in the public sector. I’ve made six figures with a pension at public sector position (IT related) but my equivalent private sector colleagues average about 20-30% more in salary, and probably double (100%) if I were to move down south. When deciding between a public/private sector job, you could pick the private sector job (which has no pension) and invest the increased amount of salary in the S&P500 which would likely generate a greater return than the pension offered at the public sector. The man difference is the risk of job loss and work/life balance at the private sector job is probably worse
“1) The value of the pension is actually worth less because you don’t get to keep the principal capital”
As you point out, you can pass on capital in a portfolio, however, from your personal perspective, on death, you don’t get to keep the capital wherever it is, i.e. you can’t take it with you!
Also, for most government pensions, you CAN pass the pension on to a beneficiary. This is not being calculated in. As you said, whether you go private or public, you can’t take it with you when you die. However, you do have the option of passing your pension on to a loved one. Some options allow you to pass it on to a beneficiary for the rest of their lives as well (for a reduced monthly pension for the pensioner).
Something worth highlighting in and among those receiving pensions where (and this is the critical point) the retiree did NOT contribute to Social Security during the years they worked toward said pension; yet DOES accumulate either in post-retirement or otherwise, enough Social Security Quarters to obtain Social Security benefits. They will become subject to the dreaded “Windfall Elimination Provision” or WEP for short. This affects many (but not all) teachers, law enforcement officers, State employees and those under the older CSRS Federal retirement system. In other words, if a pension comes from one of the above sources yet no FICA taxes were paid during those earning years…. then sadly, the retiree will most likely be hit with the WEP. Many a person planning for their retirement ASSUMED that the information gleaned from their SS projected benefits review is accurate and cranks those numbers into their overall retirement financial health formula. But does not realize that SS factors those “lost years” i.e. Zero earnings years right along with actual FICA based earnings years. The retiree becomes shocked later when they find out that their actual SS benefit gets cut about 40 to 50 percent! Read ALL the verbiage on your SS projected benefits statement and this fact will reveal itself. HR resources often failed to realize this part of the SS law which began around 1983 and did not educate their employees accordingly. Even today, one can read tales of misery and woe regarding the surprise WEP penalty and its evil twin the GPO (Government Pension Offset) That’s why sites like the Financial Samurai here are so helpful in cutting through the government mumbo-jumbo so that people can make informed decisions regarding their financial future and financial security.
Thank you Sean. Very good point that often not understood.
As a California Teacher for over 33 years, I can NOT collect any Social Security worth mentioning. Also, If my husband dies I cannot receive any of his Social Security even though he has paid in full. I almost feel I have to subtract what I could have received in Social Security and then recalculate the benefits of 84,000 a year. Not complaining. I will be able to retire at 60 as I have planned instead of 67. Also, my health insurance is paid for my husband and myself until 65. it has been a good and meaningful life. No regrets.
Who the hell are you to say “Not bad for someone who made a decent, but unspectacular $90,000 year for the last four years of his career”.
The average salary for someone 55-64 is $51.714 so I think $90,000 a year is a damn good salary.
Would you like me to change the adjective to make you happier? Happy to do so if you can share more about your situation. thanks
There is an easier way of valuing a pension with a COLA. Multiply the annual pension amount by 25. This gives the amount of the pension portfolio which would be required to give this payout according to the 4% rule.
I am in a quandary about what I should do. If I work one more year my pension goes up 500.00/month. Pensions payments are increased each year with a COLA.
I have a company who really would like me to work for them. How much money would they need to give me to make me “whole” as it relates to the lost 500.00 going forward. I expect to live approximately 35 more years.
This might help as a rough metric… If you use 5% Discounted cash flow, each $100 a month is about $18000 of asset value.
Thank you for such an informative article. I just needed some advice concerning my situation. I also am vested into a pension after almost 19 years of service as a public school teacher. I would like to however transition to something else next year. My current salary is $107,000. If I stay and work 30 years, I would earn over $100,000 annually starting at age 55. However if I leave at 2O years, that number becomes $34,000 annually until death. In addition, I have saved almost $166,000 in a voluntary tax deferred annuity plan (403 b) which will remain until I retire from the system. I guess am a bit anxious about what my prospects are re retirement if I decide to leave in a year. Any advice would be helpful. Thank you.
I faced a similar situation over the last 6 or 7 years. I decided to wait until 30 years (fully eligible) to make a change.
If you do the math you’ll likely see that whatever raise you get you’ll have to save it all and perhaps more if you leave to break even.
Part of my decision was based on happiness studies that show people who retire with a substantial pension are happier AND many of my friends who left state service early lament how much they wish they had a stayed.
One thought is to find a different position that is still covered by your current pension system.
That is a no brainer…stay another 11 years and collect the $100K per year pension and continue to contribute to your 403(b). The difference between 34K and 100K is huge and will not be earned anywhere else in 11 years.
Good morning –
Im hoping that someone is moderating this blog and hope to get some insight on a pension topic.
I have a pensions through CALPERS and have contributed to the pension for a period of roughly 21 years. Through the years I have been a part of many different pension formulas, most are
2-3% at 50-55 years old and are based on a single highest annual salary; and recently I was placed into the PEPRA (Public Employees Pension Reform Act) classification with a formula of 2.7%@57 years old based on a 3 year average salary.
My question is this, I am in the midst of making a decision to take a job with a large company at $122k per year including quarterly performance and company bonuses. I would be starting a 401K which is matched at .75 to every dollar pre and post tax up to a max of 8% salary.
My concern is whether I am better off to state on the new pension formula for the next 12.5 years or contribute to the 401K for that period.
Considering Ive already earned close to 43% of my highest annual salary (98k) I estimate my monthly pension payments (if deferred, until 50) to be approximately $4700/month.
Thanks for any insight you can provide
S
I’m in the SDCERS system and have the same question. Did you receive a response?
You are better off staying with the state. Nothing is guaranteed in a 401k, also you have to consider the health care benefits in retirement that are usually part of public sector pensions. For the most part they do not exist in private sector.
I’m a retired Florida pensioner. For every guy that left the pension early (in other words could draw there pension at the earliest) and seem happy I see three more that said wow I should’ve stayed and maxed out before leaving.
Stay
In my opinion Pension should be treated as RMD from 401(k) with 0 balance at the end of average life expectancy.
If I have 1 mil @6% in my 457 and make RMDs after 70, then I will get 1 million-dollar after taxes(28%) inflation adjusted(3%) distributions at the tender age of 103 and my son will get inflation adjusted inheritance about 250 thousand( I did my own math).
If I have a pension of the same amount as a RMD then after my death at the age of 103 my son will get nothing. If I kick the bucket at the age of 83- my son still will get nothing.
Should this be a present value calculation? Simply deciding the t-bill rate by the annual assumes the person will get to keep the full value of the pension at the end his/her life. A PV is the more accepted way to calculate the value of an annuity.
Absolutely right.
Most private pensions are regulated, and backed up, by Pension Benefits Guarantee Corporation. Currently they are protected up to a monthly maximum of about $5,400 (and few pension recipients receive more than that amount). So if you are in a PBGC plan, I don’t see why, in valuing your pension, you would need to factor in the possibility of the company failing – you would still receive your monthly benefit, from PBGC. (Of course, some people worry about PBGC’s own financial health, so that might justify a small cautionary discount, but nothing like 25 or 30 percent.)
If my memory is correct, I don’t believe that your information is wrong. After the last crash, when Detroit was struggling, the Obama administration changed the rules. Companies can claim distress and reduce pension benefits – even to those already retired. On top of that, these companies DO NOT have to bring pension payments back up once their firm has recovered. There are no guarantee’s when the government is involved.
I stand by my statement. No Obama “rule changes” changed the fact that most private sector pensions are backed by PBGC, and companies cannot unilaterally reduce benefits. Only exception is multi-employer pensions, who were given the right to reduce benefits in an act of Congress in, I believe, 2015.
Can someone explain to me the role of interest in a pension calculation? I was with a company for 7 years, and luckily I got in the year before they stopped providing a pension. My benefits website calculates I have a monthly pension of $609 starting at age 65, with a (current) interest rate of 3.46%. Are my monthly payments growing at 3.46% annually? If so, what is the value of my monthly payment at 65? I regularly get contacted by the company to cash out my pension early, but I don’t think this would be the most beneficial for me (Assuming I live long enough to enjoy the monthly payments…). Thank you!
The interest rate is used in calculating the lump sum you’d get if you or your beneficiaries applied for a “return of contributions” instead of getting a monthly check during retirement. It’s not related to your monthly pension amount. Requesting a return of contributions can have serious tax consequences, including penalties for early withdrawal, unless you are very careful about how you handle it.
I am lucky enough to work for a local government agency and will be able to retire around 58 years. I would have worked about 35 years here by the time I retire. The pension is years workedx2xfinal avg salary for last 3 years. I expect to retire with an income of around $225k annually which would give me $157,500 in pension income a year. They give us the option to take a little less in pension payouts in order to cover both me and my spouse for both of our lifetimes. So let’s say I die first, my spouse will continue to receive my pension until he dies. Instead of getting $157,500, we may end up with $140-$145,000 annually. I think it is worth it to get a little less in order to ensure that we are both covered. I’m also 5 years older than my spouse.
Kate, using the information that you provided for a local government agency, something appears awry (or the people that I know made extremely bad life choices in working for the federal government rather than a local government).
Using the federal government’s Civil Service Retirement System (CSRS), the system that does not include any Defined Contribution Plan, a 35-year-serving federal employee — in order to receive $157,500 in annual pension — would need to be making approximately $237,000 in annual salary while actively working for the federal government. The federal government “caps” the active duty pay the most senior executives (akin to a military four-star-general) are able to receive annually at $192,300.
I am not writing to pry into your personal financial planning; but I can say that the formula that you presented [years worked] X 2 X [most-recent-three-years-average salary] looks extremely similar to the federal government’s CSRS calculation, except that the “2” that you state is “.02” in the federal formula. [“Avg. High-3” X 2% X [years served]]. The first ten years of total service actually receive an average multiplier of 1.625%, instead of the 2% as stated (it kicks in at 2% for all service above ten years).
I don’t know her situation but that does sound about right. 2% multiplier times number of years of service in her case is 70%. In Florida the multiplier can be even higher which is why so many people stay especially if you are in “high risk”. Some municipalities have as high as a 3 1/2% multiplier. Many police officers are leaving with 90% their salary.
Great discussion! I have a CAPERS pension after 32 years in the system. I bought 5.7 years of “air time” under a program that no longer exists. I get COLA and health benefits at group rates.
I have rental income and a small amount of savings that’s invested. A small mortgage.
I figure I gross around 60k year, more or less.
While I’m not hurting, I would like to pay a little more attention to plumping up my investments to cover inflation down the road.
So I find the current market volatility an opportunity to do that in the next 10 years.
Since I left at 61, I think I will hold off collecting SSA till I’m 68 to make up for not working till full retirement age.
Thanks, all of you for reminding me how fortunate I really am.
For those of you wondering if sticking it out is worth it, I can say it was totally worth it. Just stop thinking about the years and just let time pass. And use your vacation when you can and have a little fun! Will make the time pass more quickly.
Wish I could say I maxed out my 401k, but I did have a lot of high adventures financed by a so called golden handcuff job.
Life did not pass me by!
Great advise; thank you!!
I need to calculate the value of a pension for divorce, sadly.
How do I go about getting an equitable valuation -does all the above advice apply?
On my 401k record keeper my company has a section for Pension (not part of 401k)…In this section you get a statement like “$ per month paid at 65 ~ $3840.89 / month”.
Any advice is appreciated…just trying to be fair to my spouse.
Using my private sector company’s pension calculator in 20 years I’ll have an annuity of about $5500/month or a lump sum of a little less the $1 million. That’s 20 years away though so won’t that be about $2250/month or $500,000 lump sum in future inflation adjusted dollars?
Using a rough idea of 3% inflation (as the samurai does), that’s about right: $500K in today’s dollars. The purchasing power of the USD would have been approximately cut in half by then.
Thank you for this posting! We struggled with assigning a value to our pension and social security as part of our Networth so we only accounted for the monthly income.
We also have CA muni bonds at 5% tax free not due until late 2020s. Very happy about those so far and can be treated the same way.
Thank you for the message of hope on this one.