What's a pension worth?

[zesty]

I've considered looking for another job, but am at a place which still has a pension. It pays roughly 1.5% of your final salary times the number of years you worked there, payable at 65. It's also possible to get it at 55 at a reduced value.

Does anyone know of any methods to quantify the value of a pension? It would be useful when comparing other jobs without pensions, to see how much more annual income would be needed to match the pension value.

 

[pb4uski]

Look up the premium needed to provide the level of pension benefits you expect on immediateannuities.com

However, if you've been there more than 5 years you are probably vested (would still have the pension even if you change jobs) so the more relevant question then would be how much will the pension improve if I stay and what is the value of the improvement.

 

[omni550]

zesty,

Here's an old thread that might be of help....http://www.early-retirement.org/forums/f28/need-advice-on-early-pension-payments-55012.html

omni

 

[brett]

Just because a company has a DB plan now, does not mean that the plan will be in existence two years, or ten years from now.

Take a look at the stats on the percentage of companies that are freezing their DB plans, closing them off to new employees, and/or moving those plans over to DC plans. The percentages are high, and increasing each year.

So, I would not count on the existence of the current plan, it its current form.

 

[Stevewc]

If the pension is well funded by a very stable State it could be worth a small mint.
Using the 4% withdrawal rule that is frequently spoken of, a $40,000 a year pension payout could have the same value as a $1,000,000.00 invested portfolio. Especially if it has a cola benefit.
Just my thoughts,
Steve

 

[pb4uski]

I would agree Steve IF a pension is COLA'd as you note, but many pensions are not COLA'd and a non-COLA pension would probably be worth only about half of that $1 million.

 

[Chuckanut]

I would agree Steve IF a pension is COLA'd as you note, but many pensions are not COLA'd and a non-COLA pension would probably be worth only about half of that $1 million.

To further complicate the issue some pensions have COLA caps, usually in the area of 2-3%.

 

[almost there]

Lot of truth below. If you do get into one, ask if they have a cash balance plan. Many DB have been or are being swapped to cash ball / Lump sum.
That's been my experience anyway............
I would not chase a job just for the "possible pension" in this day and age.

Just because a company has a DB plan now, does not mean that the plan will be in existence two years, or ten years from now.

Take a look at the stats on the percentage of companies that are freezing their DB plans, closing them off to new employees, and/or moving those plans over to DC plans. The percentages are high, and increasing each year.

So, I would not count on the existence of the current plan, it its current form.

 

[Shawn]

As a rule of thumb for mental calculations, I consider the lump sum or capitalized value of a fully COLA'ed pension to be 25 times the annual payout for a typical early retiree. If the pension does not have a COLA, I use a factor of 15. If the pension has a partial COLA or if the COLA is capped, I use a factor of 20.

So if the annual pension payout is $40,000/yr for a 55 year old early retiree, the rule of thumb pension value using these factors is:

$1,000,000 for a pension with a full COLA
$0,800,000 for a pension with a partial or capped COLA
$0,600,000 for a pension without a COLA

I am still working and have a future pension with a partial COLA. In part, I use the above calculations to determine the value of every additional year (or month) of work. In turns out that the value of my pension's growth is about equal to my salary (i.e., my salary is effectively twice what it formally is). Awareness of the increasing value of my pension has made it difficult to ER.

 

[pb4uski]

But once you have enough you have enough.

 

[Telly]

To further complicate the issue some pensions have COLA caps, usually in the area of 2-3%.

I would have loved to have been served an un-capped COLA, but instead the megacorp served up a diet unCOLA, and drank out of it first using the GATT interest rate. So I didn't even get a full bottle. And it was warm.

 

[zesty]

Thanks, these numbers are very helpful. Unfortunately it's a non-COLA, and yeah it wouldn't surprise me if the pension goes away in the next decade or so. The liability is currently about 15% of the yearly gross income of the company.

 

[tuixiu]

We have problems trying to figure out the value of a pension too. Pension has a COLA but it is only given if certain conditions are met so in reality they haven't had one in 5-6 years and one isn't projected to happen until at least 2020. It is a state pension.

Bottom line = if we retire when expected we could either take out approx 200k lump sum or start receiving $12k/year starting seven years later. With aforementioned COLA that doesn't seem like to exist. Would it be wiser to take the cash and go bird in hand?

Would love to hear any opinions from the wise folks around here.

 

[brett]

Megacorp closed off their DB plan to new hires and those below a certain combination of age/service in 2000. I was grandfathered...given the choice to stay in the DB or move to a DC. The plan was closed at the end of 2010.

I was given a value of $113K for my DB plan-this is what they would have placed in the DC plan for me. I remained in the DB plan. Just got my pension statement (no cola). The commuted value option as at July 1 is $1.17M. Most people took the DC option at that time. Glad that I did not.

The real kicker for me is that my pensionable earnings increased significantly in my final 5 years because of performance bonus'

Megacorp made significant changes to the DC plan since 2000. The capped their contributions, then they tied them to quarterly profit targets. It was a much less attractive DC plan 10 years later. Among other benefits, DC plans are much easier to adjust-and they are usually adjusted downward.

 

[2B]

You neglected to give your age or years until you qualify for the pension. When I was young, I was with a company with "golden handcuffs" in the form of great benefits and rich pension. I was offerred big money to go somewhere else. I figured out that that future possible pension was really only worth 1 1/2% to 2% of my salary at my young age. At another employer, I had seven years to go until I qualified for early retirement with a full pension and retiree health care. That was worth a lot; but true to form, I got let go before all this vested.

 

[Big_Hitter]

it's the present value of the cash flow of the expected pension payments

so you take the pension payment multiplied by the probability you get the payment and discount those with an interest rate assumption

it is not equal to an annuity certain payable for your life expectancy

 

[Mulligan]

it's the present value of the cash flow of the expected pension payments

so you take the pension payment multiplied by the probability you get the payment and discount those with an interest rate assumption

it is not equal to an annuity certain payable for your life expectancy

Well Big, I like your strategy as it makes me feel wealthier. My pension is straight line increase 2% annually. I started drawing at 45. If I die at 75 it makes my pension worth $3 million dollars. The big "if" is making it to 75. Too bad my portfolio isn't worth a fraction of my pension may be worth.

 

[Amethyst]

Also depends on taxation...e.g. my pension will be taxed as ordinary income, which makes it worth less than the equivalent in dividends, capital gains, or withdrawals.

Amethyst

 

[Mulligan]

Also depends on taxation...e.g. my pension will be taxed as ordinary income, which makes it worth less than the equivalent in dividends, capital gains, or withdrawals.

Amethyst

Thanks for bringing me back to reality, Amethyst. I will need to knock at least 25% off my number, too.

 

[tuixiu]

Good stuff, thanks all.

 

[zesty]

You neglected to give your age or years until you qualify for the pension.

30, so 25 years till I qualify for the early pension withdrawal and 35 years until normal. Yeah it is a long time, and it's hard to tell if it is worth the "golden handcuff" effect of staying around for a long time. Especially since raises are not given very much and they typically just match inflation, nothing more.