Poll: Does a Pension factor into your FIRE Plans?

[bada bing]

Yes. So, for a pension you are currently receiving, use 4% as the discount rate (others might suggest 3% but, you choose) to calculate equivalent NPV and include the resulting value as part of your fixed income allocation (not cash since it's not liquid) in your AA.

Example: You currently receive $3,333/mo pension ($40k/yr). $40k/.04=$1M equivalent NPV to be included in your AA as fixed income. Your total NW (in this calculation) is now $1M larger so, you need to recalculate your equivalent AA using the $1M.

If you have a pension (or SS) that starts in the future, you can use this same technique with an extra step. First, do the calc above; then discount that value to the present time. Example: your future pension starts in 10 yrs; divide the annual payout by .04, then discount that value (by 3% or whatever you think appropriate as a discount rate) for the 10 yrs until it starts.

Hope this helps. I'm sure others will add views on what discount rates to use.

PS: You will find that views here vary on whether to include pensions/SS in your AA. Regardless of one's view on that, I advocate doing the calculations to have that info when determining what AA you think appropriate for your situation.

I think your NPV calculation is way off. You can't use 4%, that is the SWR from a portfolio intended to maintain value, not the currently prevailing rate for annuity payouts. Current annual payout rates are about 6.25% for SPIA products for a 65 y.o., which results in a much lower (and more accurate) NPV estimate for a pension. A $40K/yr non-cola pension starting on a 65 y.o. is worth about $625K NPV today on the open market, quite a bit less than a $million. It is worth less NPV for a younger person waiting to start drawing in the future. It is also worth less to an older person because they have less life expectancy.

You don't want to use 4% and certainly not 3% for an accurate estimate of what a pension is worth.

The calculator at https://www.immediateannuities.com
is useful to estimate what a fair market value of a non-cola pension is.

 

[kcowan]

Yes, many (most?) people use this approach. In my view it is too conservative and would be somewhat akin to including bond interest received as an offset to expenses and then covering the rest of your expenses with a traditional AA. But it is simple and easy to conceptualize I guess.

I don't think it matters. Either reduce your expenses by the amount of the pension, or count the NPV in your AA. I do the latter because it helps me with my investment allocation but I can see how people could ignore that. I guess I am a purist! Because it is non-COLAd, I consider my approach more conservative.

 

[NoiseBoy]

. . .I expect that if enough people do not voluntarily retire in 2020 that we will see Voluntary Layoffs with 26 weeks severance offered as incentive.

The pensions at my megacorp freeze on 12/31/2019 for both future income calculations and years of service. I won't list all of the other changes, but I do wonder if management is hoping to see a wave of retirements and if not enough folks are smart enough to see the light, will they offer a VSP? I am very fortunate in that I turn 55 in 2019, so as long as I can stay employed until that date, I will be able to react to any offers that may come my way.

With respect to the poll, I have two modest pensions. One is from my megacorp and does not have a COLA, but it does include company subsidized HI, so that's a huge benefit. I can start that pension + HI as early as age 55 at a reduced amount, of course. The other pension is from my first career and is a public one with a 3% fixed COLA. I can start it at age 62. At that point, both pensions plus the option to start SS would cover a decent retirement. However, I continue to save because I want to travel and because health care costs are such a big unknown going forward.

I'd like to see a poll that asks the same question about health insurance. Do people have it from their former employer? Through a spouse? The military? How many retirees are buying it on the open market?

 

[kcowan]

As a former 30 year smoker I have set a realistic estimated age of death at 83. I do not believe that my quality of life will be that good past 70, hence that is why I am considering front loading my pension and social security distribution.l

MIL smoked her entire life and finally succumbed at 93. So do not count on it!

 

[islander]

Yes, more than 25%

My defined benefit non cola'd Telco (don't hate me!) pension will give ~40% of our initial retirement funds, with our investments giving us another 50% and the rest from the (Canadian) government. Hopefully class of 2019.

 

[Huston55]

Yes, more than 25%

My defined benefit non cola'd Telco (don't hate me!) pension will give ~40% of our initial retirement funds, with our investments giving us another 50% and the rest from the (Canadian) government. Hopefully class of 2019.

Only when I pay my monthly phone bill.

 

[Danmar]

I don't think it matters. Either reduce your expenses by the amount of the pension, or count the NPV in your AA. I do the latter because it helps me with my investment allocation but I can see how people could ignore that. I guess I am a purist! Because it is non-COLAd, I consider my approach more conservative.

I think it does matter if you are trying to compare your AA to some benchmark to understand your risk level. If I were to reduce my spending requirements by my pension, then take a 60/40 AA for the rest if would increase my FI allocation by about 25%. Big difference.

 

[Huston55]

I think it does matter if you are trying to compare your AA to some benchmark to understand your risk level. If I were to reduce my spending requirements by my pension, then take a 60/40 AA for the rest if would increase my FI allocation by about 25%. Big difference.

Pls explain this in more detail; I don't understand what you mean by "FI allocation."

 

[Huston55]

I think your NPV calculation is way off. You can't use 4%, that is the SWR from a portfolio intended to maintain value, not the currently prevailing rate for annuity payouts. Current annual payout rates are about 6.25% for SPIA products for a 65 y.o., which results in a much lower (and more accurate) NPV estimate for a pension. A $40K/yr non-cola pension starting on a 65 y.o. is worth about $625K NPV today on the open market, quite a bit less than a $million. It is worth less NPV for a younger person waiting to start drawing in the future. It is also worth less to an older person because they have less life expectancy.

You don't want to use 4% and certainly not 3% for an accurate estimate of what a pension is worth.

The calculator at https://www.immediateannuities.com
is useful to estimate what a fair market value of a non-cola pension is.

Agreed. Using an annuity calculator like immediateannuities.com is a better method to calculate equivalent NPV. I was more focused on the methodology than the discount/payout rate. But, for someone Backdraft's age and marital status, the rate would be closer to 5%.

 

[Huston55]

This is a follow up to a poll that was conducted 5 years ago.

Poll:What are your sources of retirement income?

Pensions (especially private sector ones) are becoming more and more rare - but they do seem to be mentioned fairly frequently on this forum. So the question for everyone is:

Do you have a pension that has any significant impact on your retirement budget?

Thanks to exnavynuke for the suggestion to re-run the poll.

Edit: This should not include Social Security. While that is likely an important factor in most people's retirement calculations, it is available to most (but not all). This is considering a specific defined benefit pension from a private or public entity

JBG-Congrats! Your poll, although a "non-random" sample, now has enough responses (sample size) to indicate active E-R.org community characteristics with a 90+% confidence level.

 

[JohnnyBGoode]

Thanks Huston55 - Super interesting outcome for sure! FIRE is such a hard thing to do even with a pension and clearly it is an important part of this community.

The ongoing demise of pensions will make it that much harder for folks to FIRE in the future, no doubt.

 

[exnavynuke]

Pls explain this in more detail; I don't understand what you mean by "FI allocation."

I'm pretty sure he's saying that if his fixed income allocation in his investments would go up significantly if he didn't count his pension as fixed income and maintained the same asset allocation.

 

[HadEnuff]

20 some years ago I was going through a divorce. My ex was a school teacher. I was going to be entitled to a share of her pension, which was to be figured by taking her final pension numbers, using a formula that factored how many of her work years we were married.
Alternatively, we could negotiate some mitigation of some lump some money she was going to get out of "my" pension.
So I came up with something that made sense to us at the time. Part of that was based upon what interest rates would likely be.
Of course, nobody figured interests rates would be so low, so when you look at how much money one would need now to secure that much safe income, I probably didn't make out too well.
However, it's just an academic exercise. WE are both doing just fine now, so everyone's happy. I think.

 

[Backdraft57]

You are younger, correct?
My first president was Eisenhower, for reference.

Retired last year at 57. Now 58

Sent from my SM-G935V using Early Retirement Forum mobile app

 

[Danmar]

Pls explain this in more detail; I don't understand what you mean by "FI allocation."

Capitaizing (ie PV) your pension and treating it as a notional Fixed Income amount in your Asset Allocation. There is a fair bit of support for this approach in the literature but I think it's not that common in practice. The basic premise is that a pension reduces your risk and thus allows you to make a higher equity allocation in your asset allocation and still keep the same overall risk level.

 

[Cobra9777]

I don't normally count the NPV of pensions or SS in AA, except maybe as a what-if after reading a thread here. I conceptually understand the reason some people do and it is interesting to think about. But as a practical matter for us, this inevitably says I need to hold 100% equities in order to be anywhere close to 50/50 overall. I'm just not comfortable with that, nor do I think I'm being too conservative. Our pensions cover roughly 60% of spending, but the remaining 40% is still a hefty dollar figure and includes a large chunk of non-discretionary.

All that said, I have been letting the equity % rise naturally last several years. Mainly I just haven't been able to stomach the idea of buying bonds. The current AA, excluding rental real estate and cash, is 65/35, and that suits me just fine for covering 40% of spend. At whatever point we decide to start SS, we can reevaluate and perhaps 100% equities would be appropriate at that time.

 

[Huston55]

I don't normally count the NPV of pensions or SS in AA, except maybe as a what-if after reading a thread here. I conceptually understand the reason some people do and it is interesting to think about. But as a practical matter for us, this inevitably says I need to hold 100% equities in order to be anywhere close to 50/50 overall. I'm just not comfortable with that, nor do I think I'm being too conservative. Our pensions cover roughly 60% of spending, but the remaining 40% is still a hefty dollar figure and includes a large chunk of non-discretionary.

All that said, I have been letting the equity % rise naturally last several years. Mainly I just haven't been able to stomach the idea of buying bonds. The current AA, excluding rental real estate and cash, is 65/35, and that suits me just fine for covering 40% of spend. At whatever point we decide to start SS, we can reevaluate and perhaps 100% equities would be appropriate at that time.

I think this is an excellent point when one considers what AA is appropriate, even with a significant pension. We each have to be comfortable that our AA (with or without guaranteed income streams) will cover essential expenses within our risk tolerance.

 

[Danmar]

Including my PV of pension as a FI proxy, indeed does imply I should be close to 100% equity in my actual portfolio, which I am. I feel comfortable with this and this highlights the very personal aspect of risk tolerance and the resulting AA that people chose. Including PV of pension just seems to me a valid approach which might simplyshow you are more comfortable with a lower equity allocation than the "norm". Nothing wrong with that.

 

[dixonge]

The calculator at https://www.immediateannuities.com
is useful to estimate what a fair market value of a non-cola pension is.

Interesting calculations, and probably matches pensions better than others I've seen. I'm pretty sure my pension actually purchases an annuity when I retire, based on what I've read of their literature. Looks like our joint pensions are the equivalent of $900k NPV. Still not sure exactly how to treat that as far as AA goes...

 

[ABQ2015]

Agreed. Using an annuity calculator like immediateannuities.com is a better method to calculate equivalent NPV. I was more focused on the methodology than the discount/payout rate. But, for someone Backdraft's age and marital status, the rate would be closer to 5%.

What if the pension has a COLA? Does that make a difference in the methodology for calculating NPV? The example provided was for a non-COLA pension.

 

[Alan]

MIL smoked her entire life and finally succumbed at 93. So do not count on it!

+1
My Dad was a very heavy smoker all his life plus worked underground as a coal miner for 42 years and lived to age 84. One of my Great Grandfathers had the same background except at age 39 in 1914 he then served 4 years on the western front where he was inavalided twice after being gassed and then shot, and his discharge papers in 1919 showed him 60% disabled. In 1938 he then fell down a mineshaft and needed to have a leg amputated, and all the time I knew him he could still walk about with the use of a cane. He died at age 92.

As for how I deal with my pensions in financial planning, I don't include them in my AA. I deduct my pensions from my estimated expenses and calculate the WR I need from my investments, and set an AA accordingly.

 

[pablo]

I have (what appears to be, at least on this site) a contrary view on my pension and AA. I have a significant local govt pension payable beginning in a decade and in my view the single biggest risk of the pension being diminished is equity risk. That is, when the equity markets experience a significant decline the funded status experiences a significant decline due to the 70% equity allocation of the pension fund. The local tax base is also largely correlated with the equity market. It is for this reason that I treat my pension as Equity, not FI. My own personal assets therefore have a much higher FI allocation.

 

[Danmar]

What if the pension has a COLA? Does that make a difference in the methodology for calculating NPV? The example provided was for a non-COLA pension.

It certainly does. There are calculators that give a present value over an annuity that grows by a set percentage every year. Can't find one offhand but it would make the pension worth a LOT more.

 

[Danmar]

I have (what appears to be, at least on this site) a contrary view on my pension and AA. I have a significant local govt pension payable beginning in a decade and in my view the single biggest risk of the pension being diminished is equity risk. That is, when the equity markets experience a significant decline the funded status experiences a significant decline due to the 70% equity allocation of the pension fund. The local tax base is also largely correlated with the equity market. It is for this reason that I treat my pension as Equity, not FI. My own personal assets therefore have a much higher FI allocation.

Interesting. Whatever makes sense for you.

 

[RockyMtn]

I include a NPV of my pensions but not SS when figuring AA. I lump it under Fixed Income. I don't include NPV of pensions in assets for purposes of determining withdrawal rates/amounts. Yearly pension amount is assumed to diminish spending needs and therefore is deducted from expense budget resulting in a figure that needs to be covered with withdrawals.

Will follow same plan once SS begins.