How to calculate pension value?

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Ecorp
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How to calculate pension value?

Post by Ecorp »

I see alot of people posting "I have 1.1m saved how am I doing or can I afford this?"

Since I have a pension, after 30 years it pays 60% of my highest 3 years. Is there a way for me to figure out the equivalent of how much I saved? I will be eligible in 13 years(53yrs old). Thanks
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ResearchMed
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Re: How to calculate pension value?

Post by ResearchMed »

Ecorp wrote: Fri Oct 15, 2021 2:25 pm I see alot of people posting "I have 1.1m saved how am I doing or can I afford this?"

Since I have a pension, after 30 years it pays 60% of my highest 3 years. Is there a way for me to figure out the equivalent of how much I saved? I will be eligible in 13 years(53yrs old). Thanks
Look at www.immediateannuities.com

Play with that calculator a bit, to get an approximation of the total that would generate what you'll be getting in X years, using your age and state, etc.

RM
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SnowBog
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Re: How to calculate pension value?

Post by SnowBog »

Personally, I'd be less worried about the "value".

The way I think of things is your retirement savings need to cover your expenses.

Your pension may cover a large portion of your expenses, meaning you have less of a "gap" to cover.

For "normal" retirement age/planning the recommendation is to have saved 25X, where X is your residual expenses after accounting for pensions and social security.

So let's say you have annual expenses of $50k/year, with a pension and social security that cover $60k/year. Congratulations, you are set - even if you have $0 saved you have over 25X as you don't have any "residual" expenses (since they are all covered).

Conversely, let's say you annual expenses are $100k, and your pension/social security still cover $60k, that leaves you a gap of $40k/year. Your 25X target would be to save $1M (not counting your pensions/social security).

If it's not obvious, the biggest factor for retirement planning is your expenses. Everything else is based off that.
LittleMaggieMae
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Re: How to calculate pension value?

Post by LittleMaggieMae »

I tend to "value" my pension which I will be able to take at 65 based on what the pay out might be if I quit today.

I have access to a website for the pension plan I am in - and I can get various estimates of the benefit based on when I quit, how much my pay increases, and when I opt to take the pension (at 62? or 65?)

Thankfully, I have been consistently saving/investing in tax advantaged accounts - If I was relying on my pension and SS I would have to work my high paying stressful job until 65 and would not have quite as nice a retirement as I will - with my 401K/Roth/HSA money available. Social Security will be the icing on the cake.

I will also second - that it's all about what your expenses will be - including taxes and healthcare costs. If you don't know or have a guesstimate of that number - you don't know if you need 1m or 10m in retirement accounts.

Just for fun - I value my anticipated 50K per year pension (with no cola) starting at 65 as being worth 1,250,000 in "investments" I didn't have to save/grow on my own. Basically the 4% rule. :)

Oddly, I am finding that I need a lot more in retirement income than I expected once I got serious about determining what my "expenses" might actually be. My home, cost of healthcare (for the years before 65) and income taxes will be my biggest expenses.
Thesaints
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Re: How to calculate pension value?

Post by Thesaints »

Ecorp wrote: Fri Oct 15, 2021 2:25 pm I see alot of people posting "I have 1.1m saved how am I doing or can I afford this?"

Since I have a pension, after 30 years it pays 60% of my highest 3 years. Is there a way for me to figure out the equivalent of how much I saved? I will be eligible in 13 years(53yrs old). Thanks
It is straightforward, in principle, but it is based on assumptions.

Let's say the pension would begin paying in X years from present an amount P.

First thing, you have to check what is your residual life expectancy at the age you will be in X years. Easy: just check the SSA tables; let's call that number R.

The expected total payout of your pension is T = P x R. Here I'm neglecting inflation and inflation adjustments in the pension to make math easy. It is possible to include those, but it means yet another assumption to be made.

Next step is calculate the probability that you live X years, i.e. the probability you begin to receive your pension. Let's call it L, your expected payoff value becomes P x R x L.

Now the question is how much an amount L , X years in the future, is worth today.
You have to apply a discount rate and there's where the assumption come in.
One can use the interest rate on safe securities, for instance a treasury maturing in X years, or one can use an expected return of a certain asset allocation.
If you use a smaller discount rate, the present value of you pension will be larger. There really is no rule to say one approach is more valid than the other.
tigermilk
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Re: How to calculate pension value?

Post by tigermilk »

Unless there is a cash out option, technically you could say the value is zero. Likewise, if there are no survivor benefits you could say that the value on death is zero. Now for myself I have a FERS pension coming when I retire. I expect to retire at the end of the year of my MRA, at which my pension would be X in today's dollars. I count it as an income stream, but if I were to stretch things and give it a cash value, I would just go with 25X under the assumption I would pull 4% from a fixed COLAed nest egg. But also for planning purposes, the survivor benefit is 50%, so the value of it to my wife is only12.5X.
tonyclifton
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Re: How to calculate pension value?

Post by tonyclifton »

SnowBog wrote: Fri Oct 15, 2021 2:38 pm Personally, I'd be less worried about the "value".
I agree. I suggest focusing on the monthly payment, if there is a cost of living adjustment, and the long term viability/health of the pension.

As previously suggested, you can use the immediate annuities website to convert your monthly payout into the lump sum you would have to pay to buy an annuity that paid out the same amount.
Thesaints
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Re: How to calculate pension value?

Post by Thesaints »

If you have a bond in your portfolio, do you count its market value, or do you focus on coupon and eventual principal payment ?
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calmaniac
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Re: How to calculate pension value?

Post by calmaniac »

My response to same question asked previously: viewtopic.php?f=2&t=281269&p=4547984&hi ... w#p4547984
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
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ruralavalon
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Re: How to calculate pension value?

Post by ruralavalon »

Ecorp wrote: Fri Oct 15, 2021 2:25 pm I see alot of people posting "I have 1.1m saved how am I doing or can I afford this?"

Since I have a pension, after 30 years it pays 60% of my highest 3 years. Is there a way for me to figure out the equivalent of how much I saved? I will be eligible in 13 years(53yrs old). Thanks
How to calculate pension value?

My suggestion is to value a pension (for asset allocation purposes) as the amount of cash you could receive today if you left that employer today.

This avoids the hassle of a present cash value calculation, with all of the guesses which that type of calculation requires.

A lot can happen to your pension in 13 years. The plan could terminate, be modified, benefits be frozen, COLA dropped, the plan could go broke, and the employer could cease to exist.

You might not stay with this employer for 13 years. The average worker tenure at an employer is just 4-5 years, and employees on average have 12 employers during their working life. Employee Benefit Research Institute (EBRI), "The Good Old Days", link; and Bureau of Labor Statistics, FAQ.

For asset allocation purposes you would value your stock funds at what you could sell them for today, not what they might be worth 30 years from now.

So (for asset allocation purposes) likewise value your pension at how much you could "sell" it for today, not what it might be worth in 30 years.

Otherwise immediateannuities.com is a good resource for valuing an income stream for retirement planning purposes.
Last edited by ruralavalon on Fri Oct 15, 2021 5:44 pm, edited 1 time in total.
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Mr. Rumples
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Re: How to calculate pension value?

Post by Mr. Rumples »

Perhaps this helps. Scroll down to the charts:

https://andrewmarshallfinancial.com/wha ... ion-worth/
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Atretes1
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Re: How to calculate pension value?

Post by Atretes1 »

I'll have a pension I can collect at 55. (KPERS 1). I have unlimited OT, so that will double my pension essentially. I plan on living on my pension and savings will be icing on the cake.
stan1
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Re: How to calculate pension value?

Post by stan1 »

OP, I would view your pension as future annual income that offsets your expenses during retirement unless you plan to cash it out. I do not try to place a value my pension as a personal finance asset as there are no choices I can make about it. Likewise I do not place a value on social security as an asset. If you expect your pension will cover most if not all of your expenses during retirement you might choose a more aggressive asset allocation for the benefit of your heirs or you might choose to be very conservative since you won't need the money.
MHA556
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Re: How to calculate pension value?

Post by MHA556 »

I have a similar pension, went at 25yrs. Will give a quick summary of what I learned along the way as it seems like you are where I was before I retired- trying to figure it all out:

Basically everyone is correct, it is an income stream for planning purposes, and if it is substantial enough alone, or with added SS pension, it allows your savings to possibly just fill in any gaps. In my case savings is entirely extra as my expenses will be far reduced compared to when I was working, and the income streams easily exceed expenses. This is why you need to figure out your expected expenses.

If your pension has a decent COLA attached, then the immediate annuity quotes (with COLA) will be somewhat in line with another method- simply dividing your yearly pension amount by 0.04, this gives you an approximation on how much savings you are not required to have (for a rule of thumb 4% safe withdrawal rate.) So a 75k pension with a COLA is roughly equivalent to having 1.875M in retirement savings (At your time of retirement). The difference is that pensions only go to you and your survivor (if you pick that option). I am assuming you have a typical govt pension for your lifetime. This is only approximate as it doesn’t do great with inflation above your COLA. But it is fairly close to the immediate annuity quotes.

If your pension is substantial, then think about how much you want to spend in retirement, and look at your asset allocation. You may be able to be more stock heavy and avoid conventional bond holding percentages, as pension+ SS offsets the need for the stability bonds provide. You still likely want some bonds for rebalancing purposes regardless. I wish I had realized this long ago when I first started saving up. Then if you are risk averse, or worried about the future, add what percentage you desire. I just figured out our situation, if you compare our equities to fixed income it is 40/60. As a result, we hold very little in the dedicated retirement accounts that is bond/fixed income... This was not explained when I was setting up my initial deferred comp funds, I gradually moved to higher equities holdings as I figured it out. We are a small but substantial slice of the retirement community, and financial advisors need to do a better job accounting for us.

Only other advice I can give is to stack money in your deferred comp plan as well. Then you will have plenty of options later and hopefully an excess in typical situations, and the ability to ride out worse ones.

I am willing to bet that a 60% pension should easily cover most of your expenses- typically you should have paid off your house or are close, college concerns are handled, you are not saving for retirement anymore, etc. It is just a lot less expensive. I believe we are looking at a situation where we could have saved up zero extra savings (deferred comp/etc) and would still have around 40% extra above expenses. If you notice coworkers not doing deferred comp this is why they likely can get away with it (although it is more likely they just fail at planning).

Also- the folks saying don’t count on the pension are somewhat correct as well. These pension plans pay out well- kind of like winning the retirement lottery. However a lot may be asked of you- lower pay, increased danger and injuries, etc. I came close a couple times to cashing in the life insurance, and have some substantial injuries, so make sure your life insurance is good and you have a backup plan in case you have to retire early, get disabled, etc.
Thesaints
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Re: How to calculate pension value?

Post by Thesaints »

calmaniac wrote: Fri Oct 15, 2021 4:51 pm My response to same question asked previously: viewtopic.php?f=2&t=281269&p=4547984&hi ... w#p4547984
You insist in making valuation based on expenses. Expenses are subjective; valuations are objective.
If a bond can be assessed at FMV, so can a pension payment flow and the two values do not depend on how much the owner spends per year.
Topic Author
Ecorp
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Re: How to calculate pension value?

Post by Ecorp »

Thanks everyone for all the info. Really helps!

To answer a few Q's: It is a govt pension. It has COLA. I do contribute to 403b also. Looks like figuring expenses is biggest thing I need to figure out
trueblueky
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Re: How to calculate pension value?

Post by trueblueky »

tigermilk wrote: Fri Oct 15, 2021 4:16 pm Unless there is a cash out option, technically you could say the value is zero. Likewise, if there are no survivor benefits you could say that the value on death is zero. Now for myself I have a FERS pension coming when I retire. I expect to retire at the end of the year of my MRA, at which my pension would be X in today's dollars. I count it as an income stream, but if I were to stretch things and give it a cash value, I would just go with 25X under the assumption I would pull 4% from a fixed COLAed nest egg. But also for planning purposes, the survivor benefit is 50%, so the value of it to my wife is only12.5X.
The math is not that simple. You receive $A as your annuity. You decide to provide your spouse with a 50% survivor annuity. That costs 10% of your check so now you have $0.9A. Your spouse will get half of the unreduced amount, $0.5A.

If yours is 25X, hers is 25(.5/.9) = 13.89X

For CSRS, the max is 55% instead of 50% for FERS. So 25(.55/9) = 15.28X (approximately. There are wrinkles in the 10% reduction).
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ruralavalon
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Re: How to calculate pension value?

Post by ruralavalon »

Ecorp wrote: Sat Oct 16, 2021 6:31 pm Thanks everyone for all the info. Really helps!

To answer a few Q's: It is a govt pension. It has COLA. I do contribute to 403b also. Looks like figuring expenses is biggest thing I need to figure out
Correct. It's very important to have a solid estimate of annual retirement living expenses a the starting point for retirement planning. Look at your actual spending over the last few years, adjust for that will change by then time of retirement (e.g. mortgages off, expenses of raising children over, no contributions to retirement accounts, increase or decrease in health insurance premiums).
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