Looking at a pension 20 years from now

[soupcxan]

So megacorp has a pension benefit projector. If I retire in 20 years at 55, I would get a $900k lump sum at today's discount rates. If I work until 65, I get $1.2m. I'm kind of surprised that it doesn't increase more for 10 extra years of work.

If I can average a 2% raise, the 55 lump sum goes up to $1.4M and the 65 lump sum is $2.5M. Which sounds like a decent amount of money, until I remember that it's in 2035 or 2045 dollars, which are not worth all that much in today's terms.

Is this pension worth sticking around for?

 

[unno2002]

Lots of other factors, how is the salary, the job overall, living conditions and expenses, and what your own "crystal ball" tells you about inflation, the ongoing profitability of the firm, and the economy overall.

Lots of people stick around 20 years in the military for a whole lot less...[FONT=&quot][/FONT]

 

[radiotec]

I'm 53 at Megacorp and planning early (forced) retirement. The pension at 55 will meet about 30% of my income needs so it's very valuable. The risk is whether they will keep the pension for 20 more years. Our's was eliminated for new hires in 2008, and they are selling businesses left and right so they can freeze the obligation when the employees leave. You can run the calcs to figure out what you would need to save to offset the pension; it's probably a big number. The alternative job would need to make up the difference.

 

[meierlde]

I'm 53 at Megacorp and planning early (forced) retirement. The pension at 55 will meet about 30% of my income needs so it's very valuable. The risk is whether they will keep the pension for 20 more years. Our's was eliminated for new hires in 2008, and they are selling businesses left and right so they can freeze the obligation when the employees leave. You can run the calcs to figure out what you would need to save to offset the pension; it's probably a big number. The alternative job would need to make up the difference.

Actually you really only care about the next 2 years. Then once you retire you fall under the PBGC if the corp goes belly up. They can discontinue the pension, but they can't take away what you have already earned. (They can make offers to pay off other ways, but you have the right to refuse).

 

[pb4uski]

.....Is this pension worth sticking around for?

It really depends on whet the other alternatives are, but generally I think it would be foolish to base career decisions on a pension (or not). The pension is just another piece of your total compensation.

 

[radiotec]

@Meleide Good point about the PBGC backstopping accrued benefits, but actually I was referring to the risk that the OP has in assuming that the pension they are planning for will not change over a 20 or 30 year period.

 

[2B]

Many years ago I worked for a company (I think the same one your currently work for) that had great pension benefits. I had an opportunity to go to a new job that I believed had greater potential. I worked out what the value of the pension was versus increased savings on my part. I came to the conclusion that it was about 2% of my salary. My lost calculations were almost certainly inaccurate and incomplete. I'm sure I didn't factor in inflation or market growth properly. I do think the bottom line was correct in that a far distant pension isn't really worth that much if you don't like the position you currently have and think you can find something better. Twenty years is too long to "hang in there." Two years isn't IMHO.

What benefit do you have now? Subtract that from your totals and see what the next 2 decades are worth to you. How much would you have to invest to equal that? Also, what makes you think your company will still have the same type of plan in twenty years? The way insurance costs for pensions are going up I'm surprised if everyone doesn't bail on the defined benefit plans in the coming years.

You've posted other comments where you are worried about your job security. "They" may make the decision for you.

 

[gauss]

Actually you really only care about the next 2 years. Then once you retire you fall under the PBGC if the corp goes belly up. They can discontinue the pension, but they can't take away what you have already earned. (They can make offers to pay off other ways, but you have the right to refuse).

In radiotec's case it depends on his pension amount. If he takes at the young age of 55 (by PBGC) standards the single life age 65 cap amount of $60,136 in 2015 is reduced to $27,061. The reference is here. This assumes a private single employer pension.

If, on the other hand, radiotec is part of a multi-employer plan then the limits are lower and a bankruptcy is no longer required to restructure the plan (ie reduce accrued benefits retroactively) given the federal ERISA changes of late 2014.

In the single-employer case, PBGC provides a steep penalty for retiring/drawing pension early wrt the maximum amount that they will cover. These are often the cases that you hear about when PBGC doesn't cover an employees entire pension.

-gauss

 

[soupcxan]

The pension isn't making or breaking any decisions for me now. It's just something to think about. But down the road, if I continue to build up credit in it, I can see it would be hard to leave because there is a big benefit to making it to 55, and even more so to 60 or 65. And indeed, who knows if this pension will still be around then.

My current benefit is $13k/year if I retire at 65.

 

[pb4uski]

....But down the road, if I continue to build up credit in it, I can see it would be hard to leave because there is a big benefit to making it to 55, and even more so to 60 or 65. ...

That's why they call them (and other similar programs to retain employees) golden handcuffs.

 

[jim584672]

I would be amazed if you got through the whole 20 years without the pension being frozen before that.

 

[Big_Hitter]

I would be amazed if you got through the whole 20 years without the pension being frozen before that.

why?

it's very possible his megacorp is committed to providing DB income

 

[jim584672]

why?

it's very possible his megacorp is committed to providing DB income

My Megacorp used to be very committed to good benefits. Then as new management came in they started to take away one benefit after another. To count on 20 years for a pension today, in my view is wishful thinking.

 

[Pilot2013]

I left a company that had a pretty lucrative Pension, but 5 years after I started, they really curtailed it (and temporarily boosted 401K match). Was gone about 3 years, when they sent a letter offering a lump sum payout, which could be rolled to my current 401k. After a little "current value of a future stream" analysis, and also inquiring as to inheritability of the pension and my findings there, I took the money/rollover. Have another small pension that I can do nothing with, but i would roll it in a skinny minute if I had the option.

You never know what can pop up. I would never let that keep me somewhere I didn't want to be, but also would look at it in the "total comp" analysis of changing jobs.

 

[ERhoosier]

In radiotec's case it depends on his pension amount. If he takes at the young age of 55 (by PBGC) standards the single life age 65 cap amount of $60,136 in 2015 is reduced to $27,061. The reference is here. This assumes a private single employer pension.

If, on the other hand, radiotec is part of a multi-employer plan then the limits are lower and a bankruptcy is no longer required to restructure the plan (ie reduce accrued benefits retroactively) given the federal ERISA changes of late 2014.

In the single-employer case, PBGC provides a steep penalty for retiring/drawing pension early wrt the maximum amount that they will cover. These are often the cases that you hear about when PBGC doesn't cover an employees entire pension.

-gauss

Thanks for the analysis....and reminder that PBGC has its limits.

 

[ERD50]

In radiotec's case it depends on his pension amount. If he takes at the young age of 55 (by PBGC) standards the single life age 65 cap amount of $60,136 in 2015 is reduced to $27,061. The reference is here. This assumes a private single employer pension.

...

In the single-employer case, PBGC provides a steep penalty for retiring/drawing pension early wrt the maximum amount that they will cover.
....

-gauss

Good info, but I'm not sure I'd say the PBGC is providing a steep penalty for retiring/drawing pension early.

If I took my pension from MegaCorp at 55 versus 65, it would be cut in half (roughly in line with the PBGC numbers you published - ~45% vs 50%). I think it just reflects the price of taking most private pensions prior to age 65.

I think it is a point lost on many people with public pensions, which sometimes (often?) can pay in full at age 55, not to mention having some sort of COLA (ooops! I mentioned it!).

-ERD50

 

[John Galt III]

.......
My current benefit is $13k/year if I retire at 65.

My pension was frozen at mega many years ago (converted to cash balance). I can take a lump sum, or monthly payments. I started monitoring it just for kicks. Back in 1990, let's say, I used the projector to tell me my monthly pension if I were to take it in 2000, and it said $220 per month. Then in 1991 I checked again, same thing, amount of monthly pension starting in 2000: the amount went down to $200 per month. Maybe changing interest rates, or something. Pretty annoying, though.

 

[gauss]

Good info, but I'm not sure I'd say the PBGC is providing a steep penalty for retiring/drawing pension early.

If I took my pension from MegaCorp at 55 versus 65, it would be cut in half (roughly in line with the PBGC numbers you published - ~45% vs 50%). I think it just reflects the price of taking most private pensions prior to age 65.

I think it is a point lost on many people with public pensions, which sometimes (often?) can pay in full at age 55, not to mention having some sort of COLA (ooops! I mentioned it!).

-ERD50

True -- However some employers subsidize early retirement via a schedule that does not fully recognize the actuarial cost. In these cases the employee might think that the shallow curve is what PBGC would pay and this is of course not the case.

In DW's case, I believe that the early draw on the pension only results in about a 3% reduction for each year drawn early. This is in contrast to the %6-%7 per year that would apply for PBGC. Over a 10-15 year period this can make for very different results.

FWIW, I believe these are the early retirement benefits that are protected , once accrued, by the ERISA anti-cutback rules -- at least under current law.

-gauss

 

[meierlde]

In radiotec's case it depends on his pension amount. If he takes at the young age of 55 (by PBGC) standards the single life age 65 cap amount of $60,136 in 2015 is reduced to $27,061. The reference is here. This assumes a private single employer pension.

If, on the other hand, radiotec is part of a multi-employer plan then the limits are lower and a bankruptcy is no longer required to restructure the plan (ie reduce accrued benefits retroactively) given the federal ERISA changes of late 2014.

In the single-employer case, PBGC provides a steep penalty for retiring/drawing pension early wrt the maximum amount that they will cover. These are often the cases that you hear about when PBGC doesn't cover an employees entire pension.

-gauss

NOte the following quote from the PBGC web site:
"Your maximum guaranteed amount is based, in part, on your age on the plan termination date (or the date the sponsor entered bankruptcy, if applicable) or, if you were not in pay status on that date, the date you begin receiving benefits from PBGC."
So its your age when the pension plan terminates not your age when you start taking benefits. Or as stated a bit earlier in the web site of the PBGC
"The PBGC maximum guarantee for participants in single-employer plans is determined using a formula prescribed by federal law that calls for annual increases. The formula provides lower amounts for people who begin getting benefits from PBGC before age 65, reflecting the fact that they will receive more monthly pension checks over their expected lifetime. Conversely, amounts are higher for benefits starting at ages above 65. The formula also calls for reducing the amount for retirees who choose a payment form that continues benefits to a beneficiary after the retiree’s death."http://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee.html

So whatever reduction you get due to starting early will not necessarily be reflected in what is guaranteed by the pbgc if a number of years elapse between when you start the pension and the time it goes belly up.

 

[soupcxan]

My pension plan definitely discourages ER. You get 100% of your pension benefit if you start receiving payments at 60. They're substantially reduced if you leave earlier than that. It's punitive, really.

 

[Theseus]

So megacorp has a pension benefit projector. If I retire in 20 years at 55, I would get a $900k lump sum at today's discount rates. If I work until 65, I get $1.2m. I'm kind of surprised that it doesn't increase more for 10 extra years of work.

If I can average a 2% raise, the 55 lump sum goes up to $1.4M and the 65 lump sum is $2.5M. Which sounds like a decent amount of money, until I remember that it's in 2035 or 2045 dollars, which are not worth all that much in today's terms.

Is this pension worth sticking around for?

Only you can answer the question about it being worth sticking around for, as as other point out, much more needs to factored in to answer that.

As far as additional lump sum for 55-65, dig deeper and deeper, contact corporate level benefits department, consult plan documents - I was not satisfied until I was able to replicate the available benefit projections by using the 'pension formula' in a spreadsheet. Understanding how longevity and early retirement plays in that formula is crucial.

And just an added thought, as others have also pointed out--and I have also become jaded (frozen pension accrual) by being similarly affected--assuming nothing will change in 10 or 20 years is countin' chickens before they are hatched.

 

[gauss]

NOte the following quote from the PBGC web site:
"Your maximum guaranteed amount is based, in part, on your age on the plan termination date (or the date the sponsor entered bankruptcy, if applicable) or, if you were not in pay status on that date, the date you begin receiving benefits from PBGC."
....
So whatever reduction you get due to starting early will not necessarily be reflected in what is guaranteed by the pbgc if a number of years elapse between when you start the pension and the time it goes belly up.

Correct!

Thanks for clarifying for everyone.

-gauss

 

[pb4uski]

My pension plan definitely discourages ER. You get 100% of your pension benefit if you start receiving payments at 60. They're substantially reduced if you leave earlier than that. It's punitive, really.

Is it if you "leave earlier" or if you start receiving benefits earlier? Big difference.

For my plan, while I left a long time ago I could have started receiving benefits at age 55 but they increase the longer I wait because I would receive benefits for a shorter period of time. The last time I looked at it, the discount for starting between 55-60 was more severe than if you start between 60-65.

 

[Midpack]

why?

it's very possible his megacorp is committed to providing DB income

Yes anything is possible, but the trend has been decidedly otherwise, so "very" might be a stretch...'if you can't do a search yourself.'

 

[Big_Hitter]

^ seen the graph, know the stats


regardless, some companies remain committed to DB plans