Value of Pension in Salary Negotiations
Value of Pension in Salary Negotiations
I've read a lot of posts on this forum related to determining the value of a pension but I'm still not sure I'm making the right considerations. I'm considering moving from a private sector job that has a pension and 5% 401K matching to another job that doesn't have a pension. I'm trying to estimate the value of my pension in terms of current salary. I ran estimates of my pension payout if I leave today and if I stay at my current company until retirement (63 years old).
Based on the inputs, my pension is worth 1,300,000 (monthly annuity x 22 yrs of retirement) if I remain in my current job or 300,000 if I leave now. Is it as simple as taking the difference in value divided by my remaining working years (19) to estimate the pension value in terms of salary that I need to make up? I feel like I must be missing an input/consideration. Maybe it's that I need to consider this value in terms of today's dollars?
The pension is well funded and the company is financially stable and in a stable industry. Also, I was conservative with the inputs in the pension calculator (I didn't include any future promotions and used 22 years as the time in retirement). Any guidance would be greatly appreciated.
Based on the inputs, my pension is worth 1,300,000 (monthly annuity x 22 yrs of retirement) if I remain in my current job or 300,000 if I leave now. Is it as simple as taking the difference in value divided by my remaining working years (19) to estimate the pension value in terms of salary that I need to make up? I feel like I must be missing an input/consideration. Maybe it's that I need to consider this value in terms of today's dollars?
The pension is well funded and the company is financially stable and in a stable industry. Also, I was conservative with the inputs in the pension calculator (I didn't include any future promotions and used 22 years as the time in retirement). Any guidance would be greatly appreciated.
Re: Value of Pension in Salary Negotiations
Do I understand it correctly: if you leave now, your pension is worth 300k (calculated how ? Do you begin receiving your pension now, or do you have to wait ?). If instead you stay in your job for another 19 years, in 2040 your pension will be worth 1.3M (calculated how ? Has inflation been taken into account ? What about the probability that, God forbid, you don't live that long ?)
Anyway, assuming the calculations have been made properly, it is not as simple as saying that your new job has to pay the same salary, plus an extra million over the next 19 years for you to break even.
Consider this example:
Job A pays you no salary, but you accumulate 100k for every year of work and they are paid to you when you leave.
Job B pays you 100k in cash every year.
You would, of course, pick Job B over Job A.
So, your new Job doesn't have to pay you an extra 1M/19 per year in order to be equally attractive; it can pay you less. How much less, depends on the discount rate you use and that is not a straightforward choice.
One could say the additional 1M in pension in 2040 is guaranteed money, so the discount rate would be a rate typical of very safe investments. Let's say the 1.77% 20-year treasuries are paying now.
But one can also say that the money you receive from your new employer could be invested in a "safe" stock/bonds portfolio that over 19 years may be expected to yield 4%, instead of just 1.77%, therefore your new employer could pay you even less.
Anyway, assuming the calculations have been made properly, it is not as simple as saying that your new job has to pay the same salary, plus an extra million over the next 19 years for you to break even.
Consider this example:
Job A pays you no salary, but you accumulate 100k for every year of work and they are paid to you when you leave.
Job B pays you 100k in cash every year.
You would, of course, pick Job B over Job A.
So, your new Job doesn't have to pay you an extra 1M/19 per year in order to be equally attractive; it can pay you less. How much less, depends on the discount rate you use and that is not a straightforward choice.
One could say the additional 1M in pension in 2040 is guaranteed money, so the discount rate would be a rate typical of very safe investments. Let's say the 1.77% 20-year treasuries are paying now.
But one can also say that the money you receive from your new employer could be invested in a "safe" stock/bonds portfolio that over 19 years may be expected to yield 4%, instead of just 1.77%, therefore your new employer could pay you even less.
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Re: Value of Pension in Salary Negotiations
In the immediate short term, what is the % contribution of your salary to your pension fund? That and the 401k match are what you need to replace. In the long run, what are the chances of staying in this pension system long enough to collect? Are you vested? Eligible? Never plan to switch jobs?
In our pension plan, there is a monthly contribution as a % of salary (but it's not refundable to me), a real future value after vesting, a larger real future value after becoming eligible for early retirement and the largest real value after reaching full eligibility. Specific terms depend on the date hired and years of service and while it is still a valuable pension system for new hires, they don't get as much value out of it as the employees who have been here longer.
In our pension plan, there is a monthly contribution as a % of salary (but it's not refundable to me), a real future value after vesting, a larger real future value after becoming eligible for early retirement and the largest real value after reaching full eligibility. Specific terms depend on the date hired and years of service and while it is still a valuable pension system for new hires, they don't get as much value out of it as the employees who have been here longer.
Re: Value of Pension in Salary Negotiations
I'm unclear, are trying to use this estimate to know what salary to request (or accept) or are you planning to use the lack of a pension as a negotiating tactic to get a higher salary offer at the new employer?
Re: Value of Pension in Salary Negotiations
I would use something like firecalc to compare the two scenarios - one where you stay & receive the estimated future pension, and one where you leave & only receive the pension you've already earned - and determine how much extra you need to contribute to retirement savings to make up the difference. It's not as simple as $1 million divided by 19 (which would be roughly $53K per year) unless you're keeping your retirement savings in cash.
You should also consider the possibility that your current employer will modify your pension plan sometime in the next 19 years & you won't actually receive the higher pension payment. That happened to me - my pension basically got frozen at the end of 2015 and I retired a little over a year later. I can't say it was the deciding factor but it certainly eliminated an incentive to stay on the job longer.
Re: Value of Pension in Salary Negotiations
You may want to do the math in real dollars instead of inflated dollars. That will make the math easier.
The new company will need to pay you "X" more per year .
That "X" invested each year over the duration should make up the difference.
Use whatever rate of return you want to use. I might have used 3% real.
The new company will need to pay you "X" more per year .
That "X" invested each year over the duration should make up the difference.
Use whatever rate of return you want to use. I might have used 3% real.
Ram
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Re: Value of Pension in Salary Negotiations
+1. The risk of pension be frozen is significant, I'd say very likely well before the 19-year mark is hit. It has been happening across many industries for years now. Not sure how to factor that in but it is a valid consideration. Mine too froze at end of 2015.Gryphon wrote: ↑Sat Dec 04, 2021 6:25 pmI would use something like firecalc to compare the two scenarios - one where you stay & receive the estimated future pension, and one where you leave & only receive the pension you've already earned - and determine how much extra you need to contribute to retirement savings to make up the difference. It's not as simple as $1 million divided by 19 (which would be roughly $53K per year) unless you're keeping your retirement savings in cash.
You should also consider the possibility that your current employer will modify your pension plan sometime in the next 19 years & you won't actually receive the higher pension payment. That happened to me - my pension basically got frozen at the end of 2015 and I retired a little over a year later. I can't say it was the deciding factor but it certainly eliminated an incentive to stay on the job longer.
An important key to investing is having a well-calibrated sense of your future regret.
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Re: Value of Pension in Salary Negotiations
And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
Re: Value of Pension in Salary Negotiations
Welcome!Ashdog wrote: ↑Sat Dec 04, 2021 12:56 pm I've read a lot of posts on this forum related to determining the value of a pension but I'm still not sure I'm making the right considerations. I'm considering moving from a private sector job that has a pension and 5% 401K matching to another job that doesn't have a pension. I'm trying to estimate the value of my pension in terms of current salary. I ran estimates of my pension payout if I leave today and if I stay at my current company until retirement (63 years old).
Based on the inputs, my pension is worth 1,300,000 (monthly annuity x 22 yrs of retirement) if I remain in my current job or 300,000 if I leave now. Is it as simple as taking the difference in value divided by my remaining working years (19) to estimate the pension value in terms of salary that I need to make up? I feel like I must be missing an input/consideration. Maybe it's that I need to consider this value in terms of today's dollars?
The pension is well funded and the company is financially stable and in a stable industry. Also, I was conservative with the inputs in the pension calculator (I didn't include any future promotions and used 22 years as the time in retirement). Any guidance would be greatly appreciated.
The value (or future value, or hoped for value) of your pension in your current job is not going to be relevant to a new employer. Put simply, they don't care. Just because you say to them "I'm giving up $50,000 per year for 22 years to work here" doesn't mean they will pay you that because they're wonderful people. They will pay you what you are worth/what the market demands, based on what they can afford, presumably with some premium over current salary. You can certainly ASK for any amount you want. But you could do that anyway even if you didn't have a pension.
You cannot directly compare a DB pension plan to a DC plan. The new company may give you a more generous 401k benefit, but it comes with market risk: You're not going to match the pension value by investing in fixed income. Also, who knows if you'd even stay at current company for another 19 years even if you don't accept the new offer.
If you like the new job and it seems interesting, AND you're getting a reasonable premium over current salary, then take it. Or, if you're unhappy in current job, then leave. There's no reason to stay in a job you don't like for another two decades just to get a bigger pension. If you had say, 5 years left before retiring, I think staying just for the pension might be wise (assuming you are not miserable). But that's not the situation here.
Re: Value of Pension in Salary Negotiations
Personally. like many things, I don't think a pension should only be valued by the numbers. Pensions can be good or bad. In some cases people feel stuck in a dead end job because they don't want to risk losing the pension, and it can be costly. The extreme example was the government's old CSRS where I think if you left early you lost all of it (may get some kind of cash back but I was never under it) which kept around a lot of unhappy people in the old "golden handcuffs" situation.
A pension, especially if with a COLA, provides a great steady stream of income that you really can't mess up. And since you can't easily find a COLA based annuity on your own, it isn't easy to replicate. I will have two, one at 60 (COLA) and another at 65 (smaller and non-COLA). Won't cover all my expenses but whenever I start collecting social security, they may allow me to drop my withdrawal rate to near 0%.
I've changed jobs a number of times (to me, probably too many times although often for good reasons) and rarely was money the main consideration. Usually it is happiness from either job satisfaction (anything from coworkers to challenge) or location. I can't imagine I would be happier simply because I was making more money.
And if you have a long time to go until you retire, the calculations are even tougher to consider.
A pension, especially if with a COLA, provides a great steady stream of income that you really can't mess up. And since you can't easily find a COLA based annuity on your own, it isn't easy to replicate. I will have two, one at 60 (COLA) and another at 65 (smaller and non-COLA). Won't cover all my expenses but whenever I start collecting social security, they may allow me to drop my withdrawal rate to near 0%.
I've changed jobs a number of times (to me, probably too many times although often for good reasons) and rarely was money the main consideration. Usually it is happiness from either job satisfaction (anything from coworkers to challenge) or location. I can't imagine I would be happier simply because I was making more money.
And if you have a long time to go until you retire, the calculations are even tougher to consider.
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Re: Value of Pension in Salary Negotiations
Some plans are pretty easy. Mine has a cash balance that one could roll into an IRA if I left the company. I use that.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
Re: Value of Pension in Salary Negotiations
Why do you want to know this? Will it change anything for you (assuming you are not yet collecting the pension)? There are approximately one million threads on whether to include a future pension in your bond allocation.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
A pension is a future income stream, like social security. There's no reason to include it in your net worth, which requires converting it to some sort of fixed-income asset.
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Re: Value of Pension in Salary Negotiations
My reason for wanting to know it is that I want my net worth number to be accurate and I only include the usual assets minus liabilities but arguably the pension and ss could be considered significant, if contingent, assets (currently not collecting).Admiral wrote: ↑Sun Dec 05, 2021 7:52 amWhy do you want to know this? Will it change anything for you (assuming you are not yet collecting the pension)? There are approximately one million threads on whether to include a future pension in your bond allocation.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
A pension is a future income stream, like social security. There's no reason to include it in your net worth, which requires converting it to some sort of fixed-income asset.
Sounds like I should not include the pension in net worth but should include it in my bond allocation?
Re: Value of Pension in Salary Negotiations
I don't want to derail this thread but no, you should not include it in either, in my opinion. If everyone included SS in their bond allocation, nobody would hold bonds. You can't rebalance your portfolio with a future income stream.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 8:10 amMy reason for wanting to know it is that I want my net worth number to be accurate and I only include the usual assets minus liabilities but arguably the pension and ss could be considered significant, if contingent, assets (currently not collecting).Admiral wrote: ↑Sun Dec 05, 2021 7:52 amWhy do you want to know this? Will it change anything for you (assuming you are not yet collecting the pension)? There are approximately one million threads on whether to include a future pension in your bond allocation.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
A pension is a future income stream, like social security. There's no reason to include it in your net worth, which requires converting it to some sort of fixed-income asset.
Sounds like I should not include the pension in net worth but should include it in my bond allocation?
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Re: Value of Pension in Salary Negotiations
I don't know how to value the pension, but I certainly would not count on it being there until you plan to retire. I worked for DEC in the 80's and 90's and they ended their pension in the mid 90's, putting the value into a 401k, I believe (I had left) or freezing it for ex employees (like me). They used to be the second biggest computer company in the world (IbM was #1).
My mother in law worked decades for the Worcester VNA as a nurse and I believe it was in 2007 that they ended their pension and put the money into some kind of IRA with thief advisors to guide employees. Although my MIL was near retirement age, the thief put her into all high risk equities. It was great getting gains in 2007. In 2008, that ended. She bailed. I don't know where that money went.
My point is, unless you're working for a government agency, expect the pension to end before you are anywhere near retirement age.
My mother in law worked decades for the Worcester VNA as a nurse and I believe it was in 2007 that they ended their pension and put the money into some kind of IRA with thief advisors to guide employees. Although my MIL was near retirement age, the thief put her into all high risk equities. It was great getting gains in 2007. In 2008, that ended. She bailed. I don't know where that money went.
My point is, unless you're working for a government agency, expect the pension to end before you are anywhere near retirement age.
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Re: Value of Pension in Salary Negotiations
There is no useful purpose to including pensions and SS in either net worth or as a fixed income asset. That said, it is legally possible to sell a pension for a lump sum if you are already receiving the pension and it is not Social Security. Probably one should not call that an asset until it is sold, however.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 8:10 amMy reason for wanting to know it is that I want my net worth number to be accurate and I only include the usual assets minus liabilities but arguably the pension and ss could be considered significant, if contingent, assets (currently not collecting).Admiral wrote: ↑Sun Dec 05, 2021 7:52 amWhy do you want to know this? Will it change anything for you (assuming you are not yet collecting the pension)? There are approximately one million threads on whether to include a future pension in your bond allocation.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
A pension is a future income stream, like social security. There's no reason to include it in your net worth, which requires converting it to some sort of fixed-income asset.
Sounds like I should not include the pension in net worth but should include it in my bond allocation?
In what way are you thinking such a number would be helpful to know?
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Re: Value of Pension in Salary Negotiations
Just wanted to feel better about my sub 400k income, 35 percent home value as a percentage of net worth, 1.8 mil NW and 1.23 mil portfolio. No other reason. People said pension and ss are important for my retirement but I do understand we can’t count their value until we have them in hand.
And I still feel fine no matter how we count things - nice day out and I’m 54 with no joint pain, family alive and well, wonderful memories, a great job and coworkers, in a wonderful amazing country on the best forum on earth!
As for OP, many folks would not leave a job with a defined benefit pension, period, for one without and OP is just considering the other job, hasn’t taken it yet. How to quantify is important.
And I still feel fine no matter how we count things - nice day out and I’m 54 with no joint pain, family alive and well, wonderful memories, a great job and coworkers, in a wonderful amazing country on the best forum on earth!
As for OP, many folks would not leave a job with a defined benefit pension, period, for one without and OP is just considering the other job, hasn’t taken it yet. How to quantify is important.
Last edited by AnnetteLouisan on Sun Dec 05, 2021 9:31 am, edited 2 times in total.
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Re: Value of Pension in Salary Negotiations
Very sage advice. Thank you for providing those concrete examples.Jack FFR1846 wrote: ↑Sun Dec 05, 2021 8:58 am I don't know how to value the pension, but I certainly would not count on it being there until you plan to retire. I worked for DEC in the 80's and 90's and they ended their pension in the mid 90's, putting the value into a 401k, I believe (I had left) or freezing it for ex employees (like me). They used to be the second biggest computer company in the world (IbM was #1).
My mother in law worked decades for the Worcester VNA as a nurse and I believe it was in 2007 that they ended their pension and put the money into some kind of IRA with thief advisors to guide employees. Although my MIL was near retirement age, the thief put her into all high risk equities. It was great getting gains in 2007. In 2008, that ended. She bailed. I don't know where that money went.
My point is, unless you're working for a government agency, expect the pension to end before you are anywhere near retirement age.
Re: Value of Pension in Salary Negotiations
The use of accounting for a pension is comparing your position against most others who are in 401k plans. SS not needed as everyone has those in common.dbr wrote: ↑Sun Dec 05, 2021 9:09 amThere is no useful purpose to including pensions and SS in either net worth or as a fixed income asset. That said, it is legally possible to sell a pension for a lump sum if you are already receiving the pension and it is not Social Security. Probably one should not call that an asset until it is sold, however.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 8:10 amMy reason for wanting to know it is that I want my net worth number to be accurate and I only include the usual assets minus liabilities but arguably the pension and ss could be considered significant, if contingent, assets (currently not collecting).Admiral wrote: ↑Sun Dec 05, 2021 7:52 amWhy do you want to know this? Will it change anything for you (assuming you are not yet collecting the pension)? There are approximately one million threads on whether to include a future pension in your bond allocation.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
A pension is a future income stream, like social security. There's no reason to include it in your net worth, which requires converting it to some sort of fixed-income asset.
Sounds like I should not include the pension in net worth but should include it in my bond allocation?
In what way are you thinking such a number would be helpful to know?
My other vehicle is an index fund.
Re: Value of Pension in Salary Negotiations
Of course. But the question is about how to account for an income stream and whether or not you do that by trying to place an asset value on it. No one is suggesting that the pension be treated as non-existent.Sam_957 wrote: ↑Sun Dec 05, 2021 9:59 amThe use of accounting for a pension is comparing your position against most others who are in 401k plans. SS not needed as everyone has those in common.dbr wrote: ↑Sun Dec 05, 2021 9:09 amThere is no useful purpose to including pensions and SS in either net worth or as a fixed income asset. That said, it is legally possible to sell a pension for a lump sum if you are already receiving the pension and it is not Social Security. Probably one should not call that an asset until it is sold, however.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 8:10 amMy reason for wanting to know it is that I want my net worth number to be accurate and I only include the usual assets minus liabilities but arguably the pension and ss could be considered significant, if contingent, assets (currently not collecting).Admiral wrote: ↑Sun Dec 05, 2021 7:52 amWhy do you want to know this? Will it change anything for you (assuming you are not yet collecting the pension)? There are approximately one million threads on whether to include a future pension in your bond allocation.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
A pension is a future income stream, like social security. There's no reason to include it in your net worth, which requires converting it to some sort of fixed-income asset.
Sounds like I should not include the pension in net worth but should include it in my bond allocation?
In what way are you thinking such a number would be helpful to know?
Re: Value of Pension in Salary Negotiations
I wouldn’t count it until you actually receive it. If you’re a young person with years to work, a lot can change. Play it safe - don’t count your chickens til the eggs hatch.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
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Re: Value of Pension in Salary Negotiations
Will do- will continue to not count them. I’m Gen X and fortunately it was beaten into us not to count on social security. So I hadn’t so far but then was told to use both pension and social security estimates when calculating residual income needs for retirement planning purposes, which also makes sense. So, know the numbers but definitely not rely does make sense! Thanks!bradinsky wrote: ↑Sun Dec 05, 2021 10:42 amI wouldn’t count it until you actually receive it. If you’re a young person with years to work, a lot can change. Play it safe - don’t count your chickens til the eggs hatch.AnnetteLouisan wrote: ↑Sun Dec 05, 2021 7:05 am And while we’re on the topic, how does one calculate pension value as part of net worth? Just take the promised amounts and multiply by life expectancy with some cola? Or do you just leave it out until you are eligible to retire and start collecting?
Re: Value of Pension in Salary Negotiations
I used my employer's pension calculator to generate the monthly payment and then multiplied it by an estimate of time in retirement (both are in terms of future dollars). I also looked at the lump sum payment of the pension if I leave today (112K in today's dollars) vs staying until 63 (1,100,000 in future dollars).
Thanks for your comments and examples. You make very good points.
Thanks for your comments and examples. You make very good points.
Thesaints wrote: ↑Sat Dec 04, 2021 1:38 pm Do I understand it correctly: if you leave now, your pension is worth 300k (calculated how ? Do you begin receiving your pension now, or do you have to wait ?). If instead you stay in your job for another 19 years, in 2040 your pension will be worth 1.3M (calculated how ? Has inflation been taken into account ? What about the probability that, God forbid, you don't live that long ?)
Anyway, assuming the calculations have been made properly, it is not as simple as saying that your new job has to pay the same salary, plus an extra million over the next 19 years for you to break even.
Consider this example:
Job A pays you no salary, but you accumulate 100k for every year of work and they are paid to you when you leave.
Job B pays you 100k in cash every year.
You would, of course, pick Job B over Job A.
So, your new Job doesn't have to pay you an extra 1M/19 per year in order to be equally attractive; it can pay you less. How much less, depends on the discount rate you use and that is not a straightforward choice.
One could say the additional 1M in pension in 2040 is guaranteed money, so the discount rate would be a rate typical of very safe investments. Let's say the 1.77% 20-year treasuries are paying now.
But one can also say that the money you receive from your new employer could be invested in a "safe" stock/bonds portfolio that over 19 years may be expected to yield 4%, instead of just 1.77%, therefore your new employer could pay you even less.
Re: Value of Pension in Salary Negotiations
This sounds like a great way to look at things but I'm not sure what % of my salary is contributed to the fund. I will find this out. I'm 100% vested and have up until recently planned to remain at this company until retirement. Most people in my department leave only for retirement.
Mike Scott wrote: ↑Sat Dec 04, 2021 2:09 pm In the immediate short term, what is the % contribution of your salary to your pension fund? That and the 401k match are what you need to replace. In the long run, what are the chances of staying in this pension system long enough to collect? Are you vested? Eligible? Never plan to switch jobs?
In our pension plan, there is a monthly contribution as a % of salary (but it's not refundable to me), a real future value after vesting, a larger real future value after becoming eligible for early retirement and the largest real value after reaching full eligibility. Specific terms depend on the date hired and years of service and while it is still a valuable pension system for new hires, they don't get as much value out of it as the employees who have been here longer.
Re: Value of Pension in Salary Negotiations
I'm trying to get an idea of how much salary I need to be in a better financial situation at a new employer who doesn't have a pension.
Re: Value of Pension in Salary Negotiations
Thanks for your comments. The scenario you mention has not really been a concern of mine until reading more about this happening to others.
Gryphon wrote: ↑Sat Dec 04, 2021 6:25 pmI would use something like firecalc to compare the two scenarios - one where you stay & receive the estimated future pension, and one where you leave & only receive the pension you've already earned - and determine how much extra you need to contribute to retirement savings to make up the difference. It's not as simple as $1 million divided by 19 (which would be roughly $53K per year) unless you're keeping your retirement savings in cash.
You should also consider the possibility that your current employer will modify your pension plan sometime in the next 19 years & you won't actually receive the higher pension payment. That happened to me - my pension basically got frozen at the end of 2015 and I retired a little over a year later. I can't say it was the deciding factor but it certainly eliminated an incentive to stay on the job longer.
Re: Value of Pension in Salary Negotiations
Thanks for your comments. I'm in a situation where I love my current work and really like the company but the future growth is limited (flat organization and no movement other than for backfilling for retirements) and I'm underpaid. I have had higher offers in the last year (15% - 20%) but this one should be higher and have more growth potential. I just want to be sure that what I ask for is actually an increase in total compensation.
Admiral wrote: ↑Sun Dec 05, 2021 7:19 amWelcome!Ashdog wrote: ↑Sat Dec 04, 2021 12:56 pm I've read a lot of posts on this forum related to determining the value of a pension but I'm still not sure I'm making the right considerations. I'm considering moving from a private sector job that has a pension and 5% 401K matching to another job that doesn't have a pension. I'm trying to estimate the value of my pension in terms of current salary. I ran estimates of my pension payout if I leave today and if I stay at my current company until retirement (63 years old).
Based on the inputs, my pension is worth 1,300,000 (monthly annuity x 22 yrs of retirement) if I remain in my current job or 300,000 if I leave now. Is it as simple as taking the difference in value divided by my remaining working years (19) to estimate the pension value in terms of salary that I need to make up? I feel like I must be missing an input/consideration. Maybe it's that I need to consider this value in terms of today's dollars?
The pension is well funded and the company is financially stable and in a stable industry. Also, I was conservative with the inputs in the pension calculator (I didn't include any future promotions and used 22 years as the time in retirement). Any guidance would be greatly appreciated.
The value (or future value, or hoped for value) of your pension in your current job is not going to be relevant to a new employer. Put simply, they don't care. Just because you say to them "I'm giving up $50,000 per year for 22 years to work here" doesn't mean they will pay you that because they're wonderful people. They will pay you what you are worth/what the market demands, based on what they can afford, presumably with some premium over current salary. You can certainly ASK for any amount you want. But you could do that anyway even if you didn't have a pension.
You cannot directly compare a DB pension plan to a DC plan. The new company may give you a more generous 401k benefit, but it comes with market risk: You're not going to match the pension value by investing in fixed income. Also, who knows if you'd even stay at current company for another 19 years even if you don't accept the new offer.
If you like the new job and it seems interesting, AND you're getting a reasonable premium over current salary, then take it. Or, if you're unhappy in current job, then leave. There's no reason to stay in a job you don't like for another two decades just to get a bigger pension. If you had say, 5 years left before retiring, I think staying just for the pension might be wise (assuming you are not miserable). But that's not the situation here.
Re: Value of Pension in Salary Negotiations
Think of it this way: Assuming 4% SWR, for every $100 you would receive as a pension payment, you'd need 25 x $100 in your portfolio to generate that $100. So if the pension (for example) increases by $2,000 for each addl year worked, you'd need $50,000 saved to generate that amount.
The problem is that the pension is not subject to market risk, while your investments are.
Re: Value of Pension in Salary Negotiations
I work in big 3 auto and have a non COLA pension with about 8 years left to hit 30 years of service which is the sweet spot for our pension (I'll be 52).
Here's how I treat my pension:
Amount A: I periodically calculate the lump sum payment I'd receive if I quit today. That's my money free and clear (minus taxes of course) even if they freeze pensions or I get fired/quit. I do include this in my net worth calculations however I personally don't include it in my asset allocation determination since as mentioned above I can't rebalance with it at this time.
Amount B: Each year I calculate what my lump sum payout would be at full retirement. I do not include this larger number in my net worth calculations. I do play around in cFIREsim or FIRECalc and use this and social security estimates to model what things could look like if all goes well.
Since my pension is not COLA, the lump sum estimate method makes sense. If you're early to mid career with a decent investment horizon then treating Amount A the same as I do for a COLA pension probably makes sense (this assumes you have a lump sum option and you feel your investment strategy can beat the COLA factor of your pension).
Here's how I treat my pension:
Amount A: I periodically calculate the lump sum payment I'd receive if I quit today. That's my money free and clear (minus taxes of course) even if they freeze pensions or I get fired/quit. I do include this in my net worth calculations however I personally don't include it in my asset allocation determination since as mentioned above I can't rebalance with it at this time.
Amount B: Each year I calculate what my lump sum payout would be at full retirement. I do not include this larger number in my net worth calculations. I do play around in cFIREsim or FIRECalc and use this and social security estimates to model what things could look like if all goes well.
Since my pension is not COLA, the lump sum estimate method makes sense. If you're early to mid career with a decent investment horizon then treating Amount A the same as I do for a COLA pension probably makes sense (this assumes you have a lump sum option and you feel your investment strategy can beat the COLA factor of your pension).