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How do you calculate the value of a pension?
Old 06-01-2008, 10:39 AM   #1
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How do you calculate the value of a pension?

I'm looking at changing jobs. I'm stuck in corporate mire now and the new job is small company and energizing.

My current job has a pension plan. the new one doesn't.

Does anyone know how i can value the pension.

If I leave right now I'm still entitled to about $350 / month @62 from this job

If I stay until 60 I'll get about $1,000 month pension.

I'm 50 now do I eat S--- for 10 more years for the pension?
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Old 06-01-2008, 11:21 AM   #2
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Quote:
Originally Posted by cvoz View Post
I'm looking at changing jobs. I'm stuck in corporate mire now and the new job is small company and energizing.

My current job has a pension plan. the new one doesn't.

Does anyone know how i can value the pension.

If I leave right now I'm still entitled to about $350 / month @62 from this job

If I stay until 60 I'll get about $1,000 month pension.

I'm 50 now do I eat S--- for 10 more years for the pension?
Let's see. $350/month is $4200/year. At an SWR of 4%, you would need $105K to produce this income.

$1000/month is $12,000/year. At an SWR of 4%, you would need $300K to produce this income.

So, this is very rough but I'd say that you would need about $200K extra to make up for the difference if you retired at $350/month ? There are several ways to estimate this but I think $200K is in the ballpark.
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Old 06-01-2008, 11:23 AM   #3
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Does anyone know how i can value the pension.
Give this whirl. It may give you a ballpark figure. But the real value is the income stream that it will generate for you in the future. Hope it helps.

Immediate Annuities - Instant Annuity Quote Calculator.
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Old 06-01-2008, 11:33 AM   #4
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Is healthcare tied to your pension ? If so the value is a lot higher .
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Old 06-01-2008, 02:21 PM   #5
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... and does the pension have a COLA or not?
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Old 06-01-2008, 04:24 PM   #6
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I would calculate the present value of the future cash flows (for the rest of expected life) for both of the two alternative choices. (It would be necessary to choose a reasonable assumed interest rate, maybe 5% or 6%, or so.) The difference in present values would determine the cost of making the decision. If you want to provide the exact details of what you are expecting to get from the two senarios and how long you think you will collect, I could do that for you and we could see whether anyone (CFB) buys into it. It will only be approximate since the there are assumptions involved, the largest being the interest rate that we use. If health insurance or COLA are involved that makes a big difference and should be factored in also.
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Old 06-01-2008, 06:03 PM   #7
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I agree in essence with RockOn. Excel and google spreadsheets have a PV (present value) function that will provide a starting point. Even simpler, multiply a year's worth of pension payments by 25. If it has a COLA, it's worth considerably more but that amount would be impossible to calculate without making assumptions about inflation (e.g. 3% per year or so?).
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Old 06-01-2008, 08:46 PM   #8
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Here are my quick and dirty calculations:

The present value of the first plan of you leaving now and collecting $350/month starting at 62 is $22,600.15

The present value of the second plan of leaving at 60 and collecting $1000/month is $76,856.93.

Here are the assumptions:

You didn't say if your pension is COLA indexed, but because you quoted two straight dollar amounts, $1000/month at 60 and $350 month at 62, I'm assuming that you pension is not COLA indexed. You also didn't say if there are any vesting requirements. Look in your company's annual report to get the following information:

Life expectancy (that tells you how long your company expects you to collect your pension)
The discount rate used by your company (used to find the PV)
The anticipate rate of compensation increase
The pension calculation method (usually some percentage of your final year projected pay times the number of years of service)

I have seen the following: 75-80 for life expectancy, 6-8% for discount rate, 2-4% for anticipated compensation increase. Let's go with the most conservative of these estimates and use 80 as life expectancy, 6% discount rate, 4% anticipated compensation increase. Actually, we don't need the rate of compensation increase because you already told me what your pension payments will be.

For the first plan, these assumptions yields an FV at 62 of $45,475.93 because annual payment is $4,200 ($350 * 12), the number of collection years is 18 (80 - 62), and the discount rate is 6%. Discount the $45,475.93 12 years to now using 6% yields a PV, as indicated above, of $22,600.15.

For the second plan, using the same assumptions yields an FV at 60 of $137,639.05 or PV of $76,856.92.
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Old 06-01-2008, 09:05 PM   #9
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Thanks BGF, I didn't check the numbers but it looks to be well done. I think the assumptions are reasonable. If we had a few more facts such as COLA and health insurance the projections could be more accurate. Be careful because things could look a lot different if either of those are present. Is it worth ~$54k in your current net worth to put up with it? Only you can answer that.
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Old 06-01-2008, 09:31 PM   #10
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Let's see. $350/month is $4200/year. At an SWR of 4%, you would need $105K to produce this income.

$1000/month is $12,000/year. At an SWR of 4%, you would need $300K to produce this income.

So, this is very rough but I'd say that you would need about $200K extra to make up for the difference if you retired at $350/month ? There are several ways to estimate this but I think $200K is in the ballpark.
Great estimate above. $200K over 10 years means you'd need to earn $20K/ year more at new job to be equivalent to "old job plus pension growth".

Most DB pensions are Years x Pay x Factor (factor is usually around 1-1.3%). When you quit, obviously your years freeze - but the pay used in the calculation also freezes.

If you stay, each year your pay goes up (around inflation) and your years go up.

Friend of mine was in similar situation - he analyzed that his pension went up 2% (real $) for every additional year he stayed. He estimated that he'd draw pension for 10 years.

Under these assumptions, he'd need to make 20% more per year at new job just to offset pension freezing by leaving.

If you hate your job and/or have more salary growth potential and/or would be more marketable with new job - these all could override pension impacts.
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Old 06-01-2008, 10:13 PM   #11
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Another quick and dirty calculation:
multiply the annual benefit by 15.
What you might miss out will be:

(1000-350)*12 * 15 = 117,000
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Old 06-01-2008, 11:10 PM   #12
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A caveat about pension plus healthcare: Current policy on retiree healthcare could change at any time, with some extended phase-in period of a decade or more. The pension benefit is probably funded as an annuity (locked-in numbers), the retiree healthcare benefits are likely part of current operating costs. I expect to see most non-government retiree healthcare change from full life to terminating at age 65 (MediCare age).
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Old 06-02-2008, 09:24 AM   #13
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Most DB pensions are Years x Pay x Factor (factor is usually around 1-1.3%). When you quit, obviously your years freeze - but the pay used in the calculation also freezes.

If you stay, each year your pay goes up (around inflation) and your years go up.
I used Dave's method when I was trying to make this decision. The "Pay" in his formula is often "average of highest __ months of consecutive salary". I'll do an example using some guesses about your situation.

Maybe you've been with your current employer 7 years, your "average" pay is $60,000 per year, and the "factor" is 1.0%.
In this case, your annual pension is 7 x $60,000 x 1.0% = $4,200.

If you stay one year, and your average pay goes up 3.33% during that time, the new calculation will be 8 x $62,000 x 1.0% = $4,960.

Using BGF's method, with an life expectancy of 18 years and a discount rate of 6%, the PV of the $4,960 at 62 is $53,705.
This is $8,229 more than the $45,476 that he calculated for the $4,200 pension.
If you discount the $8,229 for 12 years, you get $4,090.

So, if all the numbers in the example were correct, your pension would add a little over $4,000 to this year's compensation.

I like the one year calculation because it recognizes that the decision to stay isn't necessarily irrevocable.

Some warnings about this approach:
I'm assuming that your estimate of $1,000 per month if you stay did not include future raises. I'm using raises for this year and recent years in this calculation.
If I use Mikeyd's approach of equating a pension to an annuity, the value of the pension is about 20% higher.
This approach will show increased annual value as you get older. The reason is twofold - each year's raise is multiplied by a bigger number of years, and the discount to age 62 shrinks. Hence, older workers feel more "locked in" when they've got traditional pension plans.
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There are also a few companies that operate on seniority
Old 06-02-2008, 12:50 PM   #14
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There are also a few companies that operate on seniority

Past 50, you probably don't have to worry about being laid off in less than dire circumstances where you currently are. You may have to expect a much higher likelihood of being laid off at a new company where you won't have much time in and may not be able to find another by that age. Risks only rise with age.
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Old 06-02-2008, 01:37 PM   #15
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Some othere things you might want to consider:
* Your estimated $1000/mo might not actually be available when you get there. Many companies are freezing and otherwise changing their pension plans and payouts. My former company (Motorola) changed their payout formula right after I RE'ed. It used to use your salary as "average of the top 5 of the last 10 years." They changed it to "average salary of the last 10 years ending with 2007 and all the years after 2007". The new formula keeps all the old low salary years.

* You might get laid-off. The company might go out of business or close down your division and layoff everybody.

* You might stay and eat s*** for 10 years, and then die one month later. All that eating for nought.
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Old 06-02-2008, 04:03 PM   #16
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I only skimmed the posts - so sorry if this has been said. Very easy way to figure needed assets to match monthly pension income:

$350. x 12 = 4200 x 25 = $105,000 needed invested

$1000. x 12 = 12,000 x 25 = $300,000
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Old 06-02-2008, 05:31 PM   #17
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I only skimmed the posts - so sorry if this has been said. Very easy way to figure needed assets to match monthly pension income:

$350. x 12 = 4200 x 25 = $105,000 needed invested

$1000. x 12 = 12,000 x 25 = $300,000
That is true but it fails to address the time factor for recieving the payments. I think it is much too rough of a calculation. The PV loss for making this decision is more in line with $50k, not $200k. Dave said you would need to make about $20k more for 10 years. That may be close but would it all have to be saved to come out the same? I think so, but it gets confusing especially w/taxes involved.
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Old 06-02-2008, 06:10 PM   #18
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NPV for $1000/mo from age 60 to age 99 = 126,410
NPV for $350/mo from 62 to age 99 = 39,449

Discount rate used = 5%

Difference = 86,961
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Old 06-02-2008, 07:30 PM   #19
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Thanks everyone !! I can't begin to tell you what a big help this was. First post .

I actually went back to renegotiate with the new job! (with stregnth and confidence)
keep you posted.

there were a number of differerent ways to value the pension but I'm willing to incur some risk so I kind of averaged the results.

COLA is big but I couldn't verify my fund does that.

health care is included but minimal (<100) but still to be accounted for.

hope I can help others in the future.

you guys (gals) rock!!!
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Old 06-03-2008, 06:24 AM   #20
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What are your thoughts on not being laid off after 50 ?
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