Calculating the PV of a DB Pension Plan??

[supernova72]

I've searched several times for an on-line calculator that calculates the present value of a pension plan. I found one but now the link is dead (for me anyway).

Maybe I should be searching on "cash out of a pension plan".

About me:

Age: 53
Eligable ER pension age: 55
Annual pension est: $36K yr (no COLA)
Current plan discount rate: 5.25%

At one point I thought I could just calculate how much I would have to invest at say 3% to get $36K a year but that number is $1.2M. Just seems too darn high Or maybe it's just a simple lifetime annuity calculator that I need to grab?

With other calculations like FIRECALC I'm using 30 years as life expentency.

Thanks in advance. Cheers.

 

[jebmke]

Just get a quote on a SPIA with the same terms.

 

[Lcountz]

Try the site "immediateannuities.com..

Put in your sex, age, your state, the dollar amount of either what you have to invest

( which will give you a monthly figure for a variety of scenarios) or, put in the dollar

amount per month you'd like to duplicate ( your monthly pension) and you can see

how much you would need to invest in a SPIA to get that amount per month!

From that site you can determine the present value of your intended pension!

 

[Hermit]

I put your numbers in at Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com and got $627,339. Keep in mind that a lot of the payout is return of principal which makes the big difference in your calculations. The annuities are for life as is your pension so the 30 year period doesn't really count. Use a couple other sites and then average for a good number.

 

[supernova72]

Thanks so much for all your help on this Hermit, LC Countz, Jebmke! Feeling a bit embarrassed about not thinking about checking the lifetime annuity quotes calculations.

Like Hermit posted above yes it looks like $627k is the number. That makes much more sense and yes I see now the 30 yr terms does not really count.

I'm also curious when a company offers a lump sum buyout of your pension they use this same calculation or maybe apply another factor that makes the number smaller? I'll save that for another time since my company does not offer that lump sum option.

Thanks again to all!

 

[pb4uski]

BTW, assuming a 3% discount rate and a 2 year deferral period that pension benefit is worth $591,327 right now. ($627,339/(1+3%)^2)

 

[jazz4cash]

..........I'm also curious when a company offers a lump sum buyout of your pension they use this same calculation or maybe apply another factor that makes the number smaller? I'll save that for another time since my company does not offer that lump sum option.

Thanks again to all!

I recently got a DB pension estimate from our plan admin which included a "new" lump sum option. I checked the lump sum vs. annuity on the immediateannuities.com website and it was spot on.

 

[gauss]

OP are you referring to pensionbenefits.com? I know they have lots of actuarial/benefit calculators of this nature. They appear to be offline currently but according to google cache, they were online as of Apr 4 2014.

-gauss

 

[supernova72]

OP are you referring to pensionbenefits.com? I know they have lots of actuarial/benefit calculators of this nature. They appear to be offline currently but according to google cache, they were online as of Apr 4 2014.

-gauss

yes, that is the one gauss. I was getting an error message about an invalid path or something like that when trying to access "pensionbenefits.com". It was a pretty cool website too in addition to what was suggested above. Thanks for following up!

 

[brett]

I would look up the cost of an annuity that mirrors your pension.

Then I would reduce the cost of that annuity by about 5-10 percent to be conservative.

Alternatively, you could simply ask your employer's pension department for the amount of your DB plan's commuted value as at today. That value, and an annuity, will of course vary inversely with the current interest rate.

Annuities are more expensive to buy than a DB equivalent for a number of reasons.

DB plans have slightly shorter longevity tables than annuities. This is based on the fact that annuity purchasers have good health and expect to live long lives. DB plans are simply a reflection of the population as a whole.

Also, DB plans average out male and female ages whereas annuity contracts are often priced slightly different for men and women of the same age.

 

[supernova72]

I would look up the cost of an annuity that mirrors your pension.

Then I would reduce the cost of that annuity by about 5-10 percent to be conservative.

Alternatively, you could simply ask your employer's pension department for the amount of your DB plan's commuted value as at today. That value, and an annuity, will of course vary inversely with the current interest rate.

Annuities are more expensive to buy than a DB equivalent for a number of reasons.

DB plans have slightly shorter longevity tables than annuities. This is based on the fact that annuity purchasers have good health and expect to live long lives. DB plans are simply a reflection of the population as a whole.

Also, DB plans average out male and female ages whereas annuity contracts are often priced slightly different for men and women of the same age.

Thanks so much for the insight and differences to take into account on each. You are very knowledgible on this subject! I work for Boeing and it was recently announced our plan will be frozen Jan 1 2016 so I'm paying a bit more attention to that impact beyond that point. So far there is not a lump sum option.

We knew it was coming but still a big change for those with 15 yrs to go vs. more near term ER folks.

http://money.cnn.com/2014/03/06/news/companies/boeing-pension/index.html

 

[brett]

My guess is that once frozen the company will move everyone to a DC plan. Those of a certain age and service will be grandfathered.

The choice for those grandfathered will be to leave the money in the DB plan and for subsequent years participate in the DC plan or take the commuted value of the DB and move it to the DC plan.

One thing to check on is how the DB entitlement is calculated post close time. In our jurisdiction, even though the DB plan was closed in 2010, employees who remained in the plan had their final average earnings calculated on the basis is their last years, NOT the years ending in 2010. It can make a difference if you plan to work well past the DB plan closure date. Also, some plans remove benefits if you select the cash balance option. I have no doubt that your union will provide some education seminars on this. It will be worth attending. You only have one shot at this!

My guess is that your numbers are what is referred to as 'normal form' pension. If you plan to have survivor rights, ie a certain percentage keeps going to your spouse in the event of your death, then your pension amount will be reduced. The percentage reduction will be based on your spouse's age. The younger she is to you, the more the reduction will be.

 

[supernova72]

My guess is that once frozen the company will move everyone to a DC plan. Those of a certain age and service will be grandfathered.

The choice for those grandfathered will be to leave the money in the DB plan and for subsequent years participate in the DC plan or take the commuted value of the DB and move it to the DC plan.

One thing to check on is how the DB entitlement is calculated post close time. In our jurisdiction, even though the DB plan was closed in 2010, employees who remained in the plan had their final average earnings calculated on the basis is their last years, NOT the years ending in 2010. It can make a difference if you plan to work well past the DB plan closure date. Also, some plans remove benefits if you select the cash balance option. I have no doubt that your union will provide some education seminars on this. It will be worth attending. You only have one shot at this!

My guess is that your numbers are what is referred to as 'normal form' pension. If you plan to have survivor rights, ie a certain percentage keeps going to your spouse in the event of your death, then your pension amount will be reduced. The percentage reduction will be based on your spouse's age. The younger she is to you, the more the reduction will be.

Yes, what has happened now is that we are all "frozen" in Jan 2016 with the exception of the engineers who are represented by SPEEA. Their contract is up then and mos expect the company to freeze theirs as well but they will get a vote of course. I'm a non rep IT person so no vote for ours. All the other unions (machinists etc) have had theirs frozen recently too.

As near as I can tell even though no more $$ will flow into the DB the years of service still "count" and it grows still past 2016---just not like before.

They established an additional savings plan post freeze. 9%, 8%, 7%, then 5% thereafter. It's in addtion to our 401K with a 6% on the first 8%.

I'm not married so no survior spouse choice there. BUT, we can take an accelerated pension stream from 55-62 then it drops down when you draw SS at 62. It looks like this:

 

[brett]

My strong advice, when the timing is appropriate, is that you seek out a fee for service actuary/financial planner in order to get some true understanding of the financials, after tax, associated with both. Spend some time to get referrals from friends, associates. Then shop around for the 'right' person.

Whatever you do, NO NOT consult a financial planner who gets paid based upon your investments. This planner will have a financial interest in having you take the commuted value so that he or she can make commission by investing it and managing it on your behalf.

Your commuted value will change as interest rates change. If rates go up, the commuted value of your pension will decrease. Timing is important if you plan to take the commuted value.