Pseudo-annuity rate

[BigNick]

I'm about to join the class of 2012 and will be taking my pension in December at age 52. It is fully COLAed, and if I die, DW (who will be 55 by then) continues to get the same amount in full (a nice benefit of our company scheme).

I would like to express the value of this pension as if it were a fixed sum. So I was wondering if anyone has an idea of the cost per K$ of an annuity with those terms (M52, F55, full COLA, full survivor benefit). I've looked at a couple of sites, but the ones which claim to be able to calculate this require sign-up and the ones which don't, don't seem to have a calculation this "sophisticated".

 

[pb4uski]

Have you checked out immediate annuities.com?

 

[ERD50]

Or just look at what something like FIRECALC would tell you - at mid-fifties and a (assumed) solid pension, I'd figure 100% success for 40+ years, which will probably take you to a ~ 3% SWR, or 33x your annual pension.

That's the worth I'd put on it, if I needed a number (some people like to look at their pension as 'fixed income' in their overall AA, which makes sense, IMO).

-ERD50

 

[jclarksnakes]

Or just look at what something like FIRECALC would tell you - at mid-fifties and a (assumed) solid pension, I'd figure 100% success for 40+ years, which will probably take you to a ~ 3% SWR, or 33x your annual pension.

That's the worth I'd put on it, if I needed a number (some people like to look at their pension as 'fixed income' in their overall AA, which makes sense, IMO).

-ERD50

That 33X seems like it might be right if not possibly a bit low. 25X was for a long time the number used in approximating the lifetime value of a pension with no COLA. The full COLA and full spousal benefit AND the recent low interest rates make the OPs pension IMO much more valuable than 25X the current annual payout.

 

[ERD50]

That 33X seems like it might be right if not possibly a bit low. 25X was for a long time the number used in approximating the lifetime value of a pension with no COLA. The full COLA and full spousal benefit AND the recent low interest rates make the OPs pension IMO much more valuable than 25X the current annual payout.

25x is with COLA. Think about the 4% 'SWR' in Firecalc. The 4% increases with inflation each year, so it's essentially a COLA pension, and 4% = 25x portfolio.

A non-COLA pension would only be worth about half that, ~ 12x.

But I agree, you should buffer that for > 30 years.

-ERD50

 

[MasterBlaster]

You are still missing some key parameters....

What Mortality Table does your pension use ? They aren't all the same

What interest rate index (indices) is(are) your pension pegged to ? You need an exact percent.

take a look at this website. They have actual calculators for what you want but require more data as input: For non COLA-ed pensions look under the "Calculators" tab for "Lump Sum Value calculator" or the "PPA 2006 Lump Sum Value Calculator". For COLA-ed pensions use the "present value Based on cash Flow" calculator.

https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_cal

https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=cash_flow

 

[rescueme]

I would like to express the value of this pension as if it were a fixed sum.

I'm just wondering why you would want to know, or really care?

In your case (if I understand it correctly), it's a bit like SS; that is you or DW get a check every month you/DW are still alive. Your pension (also like SS) just reduces the amount of income you need to generate to cover your retirement expenses.

This is a bit different than the SPIA (joint life) that I hold, since I can tell you exactly what the minimum value is on a daily basis. That remaining "value" goes to our estate if we would both die tomorrow. SS (and in your case, your pension) does not, if I understand it correctly, and has no terminal value, after you both pass.

 

[BigNick]

I'm just wondering why you would want to know, or really care?

The question arose as an extension of a "rent or buy" discussion with DW.

We don't own our home. I estimate that, excluding kids who are shortly going to be off the payroll, we currently spend about 7000/mo, of which 1600 is rent. That 1600/mo in rent could be removed by investing X (300K, 400K, whatever, depends on the size and location of property) in a house. However, at that point, we of course have 300K/400K less in the portfolio.

I'm trying to build a model in which we can view all of our various income streams as cash lump sums, or all of our cash and other assets as a potential income stream. A 400K house is, say, 16K/year of SWR which we can't spend on anything else, but it's also 20K/year - less property taxes and maintenance - which we aren't spending on maintenance. A 34K/year pension is pretty much the same as another X (750K?) on the lump sum.

So it's mostly for theoretical value. When I ESR (Real Soon Now!) and my actual portfolio goes to 1300K, I would like to be able to say "put another way, if my pension were in the portfolio, the total value would be 2050K". One psychological benefit of that will be, I believe, that I will realise that we have a pretty fair amount of money (i.e., comparable to someone with no pension and 2 million in the bank; I think most people can survive on that.)

 

[Midpack]

Have you checked out immediate annuities.com?

They don't quote on COLAd annuities that I've found, at least online. The few places that I find that mention COLAd annuities will only quote if you call and work directly with them...no quick-n-easy online sites I know of. And from what I read, they'll only provide a fixed COLA (ie, 3%), not related to CPI or any actual adjustments which could vary wildly. If there are any, someone clue me in...

 

[rothlev]

you could play with this one. Might require working backwords until you get the right monthly payout.

https://www.tsp.gov/planningtools/annuities/annuityCalc_select.shtml

 

[Independent]

I'm about to join the class of 2012 and will be taking my pension in December at age 52. It is fully COLAed, and if I die, DW (who will be 55 by then) continues to get the same amount in full (a nice benefit of our company scheme).

I would like to express the value of this pension as if it were a fixed sum. So I was wondering if anyone has an idea of the cost per K$ of an annuity with those terms (M52, F55, full COLA, full survivor benefit). I've looked at a couple of sites, but the ones which claim to be able to calculate this require sign-up and the ones which don't, don't seem to have a calculation this "sophisticated".

I didn't think that private firms offered fully COLA'd pensions. Maybe someone here can correct me. Is this common? Or is this a one-in-a-thousand plan?

 

[pb4uski]

My understanding is that there are many private pension plans that make COLA adjustments at the discretion of the plan sponsor and the frequency and magnitude of COLA adjustments vary widely.

My impression is that private sector pension plans where benefits increase based on CPI or some other measure of inflation are pretty rare.

My former employer's plan make COLA increases every once in a blue moon.

 

[BigNick]

you could play with this one. Might require working backwords until you get the right monthly payout.

https://www.tsp.gov/planningtools/annuities/annuityCalc_select.shtml

Thanks. They quoted me $158/mo per $100,000 invested, with 3% COLA.

I also found this site which quoted $£376/mo per $100,000 invested, with 3% COLA.

Conclusion: either I'm filling in the forms wrong, or somebody is getting very rich, or somebody is going to go broke.

If anyone else wants to try and see what I got wrong: annuity from December 2012, M/52, F/55, 100% survivor benefit.

 

[Midpack]

you could play with this one. Might require working backwords until you get the right monthly payout.

https://www.tsp.gov/planningtools/annuities/annuityCalc_select.shtml

Thanks, I saved the link to play with later, hadn't found it on my own.

I ran calcs with all the same inputs except one with and one without COLA. With COLA the initial payouts are 45% lower, half for all practical purposes! Shows once again how costly COLAs are, and why plans that offer them have a much larger and more unpredictable liability.

 

[pb4uski]

From the perspective of the issuer, one problem with COLA'd payout annuities is finding the right assets to support the liabilities - IMO that is why we see so few offerings in the marketplace and those that exist are very conservative.

 

[rothlev]

So, the bottom line is your pension is worth more than you thought

 

[BigNick]

I didn't think that private firms offered fully COLA'd pensions. Maybe someone here can correct me. Is this common? Or is this a one-in-a-thousand plan?

I work for an international organisation (think of something like the UN or the EU, only it's neither of those). We have public sector job security and pension schemes, but with better, almost private sector-style salaries (except perhaps for the top executives), and our salaries are typically free from income tax. (My pension will, however, be taxable.) It may appear to be an indefensible racket, but I'm not complaining.

(There are good reasons why international organisation staff don't pay income tax: mostly, it's because if you have 100 member states, 99 of them don't want 1/3 of their budget contribution going straight to the host country's revenue department. In theory, salaries are adjusted to take account of this, but that's a bit of a fig-leaf; most people at the UN or comparable organisations make close to twice the public sector going rate for the same job. Of course, you do typically get to live in expensive cities like New York or Geneva, although my city isn't especially expensive.)

 

[ERD50]

I didn't think that private firms offered fully COLA'd pensions. Maybe someone here can correct me. Is this common? Or is this a one-in-a-thousand plan?

I couldn't find a source that gave a number on this. I'm not familiar with any private pensions that are COLA'd. Looks like not even Coca-Cola offered COLA'd pensions.


-ERD50

 

[Independent]

I work for an international organisation (think of something like the UN or the EU, only it's neither of those). We have public sector job security and pension schemes, but with better, almost private sector-style salaries (except perhaps for the top executives), and our salaries are typically free from income tax. (My pension will, however, be taxable.) It may appear to be an indefensible racket, but I'm not complaining.

(There are good reasons why international organisation staff don't pay income tax: mostly, it's because if you have 100 member states, 99 of them don't want 1/3 of their budget contribution going straight to the host country's revenue department. In theory, salaries are adjusted to take account of this, but that's a bit of a fig-leaf; most people at the UN or comparable organisations make close to twice the public sector going rate for the same job. Of course, you do typically get to live in expensive cities like New York or Geneva, although my city isn't especially expensive.)

Thanks. I see more of a public organization than a private firm for pension purposes - probably no ERISA/PBGC compliance.

I always wished that my former employer would have given me the option of a COLA pension (at a substantial discount) rather than non-COLA. Somebody in HR said that would be illegal, and I've always been skeptical of that answer.

 

[BigNick]

In fact our pensions are not formally COLAed - they are related to the ongoing evolution of the salary scales for staff. So I will retire at grade X and my pensions will be a fixed percentage of the salary for grade X, whatever that might be. In practice our salaries are COLAed more or less regularly. I'm fairly confident that if that were aver to be broken, than pensioners would be higher up the priority list than serving staff.

 

[zinger1457]

Your pension is probably going to look real good compared to any SPIA being offered today. A SPIA is directly tied to interest rates which are at historically low levels, your pension isn't (except for any future COLA's).

 

[BigNick]

They quoted me $158/mo per $100,000 invested, with 3% COLA.

I also found this site which quoted $£376/mo per $100,000 invested, with 3% COLA.

A quick update... I was at my bank today, arranging to move some stuff around in my various retirement accounts. (Basically, I'm moving the guaranteed accumulation investments to a couple of accounts which have taken capital losses up to now, so they essentially function as tax-free CDs.) The investment guy at the bank likes me because I speak his language, unlike most of his customers who say "I don't know anything; you pick something for me" and then shout at him when the market goes the wrong way, as if the fee the pay entitles them to psychic powers.

Anyway, I mentioned my model of overall wealth including a lump-sum pseudo-value for my pension, and he liked it. So he pulled up the bank's annuity plan and showed me a return of $187/mo per $100,000 invested, with 3% COLA. That's quite close to the first figure quoted above. Taking the average of the two lower monthly figures, my 2800/month with full COLA is the equivalent of 1.6 million. (For what it's worth, the last two figures are in Euros, which at $1.31 makes $3670/month and $2.1 million. Put that way, it's a huge amount of money!)