How do I calculate the value of a pension?

[martyb]

In 6 yrs at age 55, I'll begin receiving a cola'd pension that will start at ~$36000 per year. At age 60, I'll start drawing another cola'd pension of~$14000 per year. Both are before-tax amounts and deductions will be made from the larger pension for health insurance (current rate is about $300/month). Both pensions will be hit for fed taxes, no state tax, but both will also have survivor benefit deductions witheld. How do I figure the value of the pensions as if they were in a regular portfolio? When I use a retirement calculator, it always asks about my portfolio amount, and I'm not sure how to answer. Do I take the $36000, calculate what amount that would be a 4% swr of ($900,000) and that's the answer? Is my $36000 pension the same as having $900,000 in an account? I'm a newbie at this FIRE stuff, but really want to learn everything I can to have a successful ER.

 

[Cut-Throat]

Well, if you have pensions that are cola's and will last until you die, why do you even care what they would be equiv. to? - IOW - take 4% of your Savings for your SWR and just add them to Pensions and Spend it!

Maybe I'm not understanding you, but what problem are you trying to solve/working on? What you can spend every year or ?

And yes the $36K a year pension is roughly the same as having $900K in a portfoilo.

 

[martyb]

Not really a problem, I guess after reading so many posts on this board about everybody's net worth, savings, investments, portfolios etc. I'm just curious as to where my financial situation in retirement might stack up. I will probably only have maybe $250,000 in savings (401k/TSP) to go along with the pensions, wife will have SS later down the line. Just kind of trying to see how my stuff measures up, I reckon.

 

[LOL!]

Just kind of trying to see how my stuff measures up, I reckon.

This article may help you feel better:
http://today.reuters.com/news/artic...DEL344445_RTRUKOC_0_US-INDIA-CONDOMS-SIZE.xml

Oh, you meant P-E-N-S-I-O-N, I guess I was a little dyslexic this evening.

 

[martyb]

LOL! Somebody's been peeking!

 

[martyb]

Just kind of trying to see how my stuff measures up, I reckon.

I suppose I could have worded that differently!

 

[Cut-Throat]

Not really a problem, I guess after reading so many posts on this board about everybody's net worth, savings, investments, portfolios etc. I'm just curious as to where my financial situation in retirement might stack up. I will probably only have maybe $250,000 in savings (401k/TSP) to go along with the pensions, wife will have SS later down the line. Just kind of trying to see how my stuff measures up, I reckon.

Well, you are in the minority here with so many good pensions. So you don't really have to sweat the details like the rest of us. If you have $50K of Pensions coming in and can live on it, you have nothing to calculate, invest, or worry about. So you're in the clear. Must be a Government Worker or a Teacher Huh? That is the only land of Pensions these days.

 

[martyb]

Yeah, I work for the Air Force as a civilian, maintaining the weapons systems on B-52's. Also am an Air Force reservist, which is where the age 60 pension comes in. I'll have just shy of 36 yrs service when I retire. I do understand that it was sheer luck that I snagged the pension, I know they're pretty much a thing of the past. I guess that's the trade-off for sticking with the government all this time. Maybe could have made more $$ doing something else. I have a real estate license and worked as a residential RE agent for several years (while also working for the govt.) and I did enough business to see that I could have been successful in that endeavor if I wanted to walk away from my pension, insurance, regular salary, relative job security etc. With 3 kids & DW, I decided to go the safe route. Now that kids are grown, I'm contemplating ressurrecting my license again. The real estate market is still in pretty good shape here. It helps to have a major military installation, 5 casinos, General Motors etc. I do realize that some would consider my two pensions as a situation where I have nothing to worry about, a no brainer etc. I still have concerns about whether I'll make the right choices about things like survivors benefits, allocation choices for my savings and the IRA's I'm about to do, etc.

 

[Rich_by_the_Bay]

Well, you are in the minority here with so many good pensions. So you don't really have to sweat the details like the rest of us. If you have $50K of Pensions coming in and can live on it, you have nothing to calculate, invest, or worry about. So you're in the clear. Must be a Government Worker or a Teacher Huh? That is the only land of Pensions these days.

Unless you wish to leave a bequest for heirs, that is. In that case, your savings count.

The rest of us end up leaving a bequest for heirs whether we want to or not -- conventional SWR planning means leaving a bunch in your treasure chest even as you leave this earthly abode.

 

[Bikerdude]

I Is my $36000 pension the same as having $900,000 in an account? I'm a newbie at this FIRE stuff, but really want to learn everything I can to have a successful ER.

Yeah, it's the same except you don't have the $900K. If you really want to know what its worth get an immediate annuity quote for the same amount of income with inflation protection and the survivor options you want.

 

[Spanky]

Your $36K (in year 1) and another $14K (in year 5) combined has a NPV of $1,508,170.99 based on a 3% discount rate and a period of 35 years (when you are 90 years pf age).

That's a great deal.

I wonder how the government is going to pay for it.

 

[Goonie]

I'm kind of in the same boat with a DB municipal pension. Starting @ $31,000, plus 3% cola (cola based on first year pension....i.e. 3% of $31k = $930/year until I 'expire' ) plus an additional yearly "bonus" check (they call it the "13th check" which is usually about 40%-48% of a monthly pension check) somewhere round about $1000.

So somewhere around $823,250 over 25 years, or $1,152,550 over 35 years.

Am I semi-correct with my cyphering??

If so, I think know I can survive thrive on that plus investment income. 8)

 

[kcowan]

Well, if you have pensions that are cola's and will last until you die, why do you even care what they would be equiv. to? - IOW - take 4% of your Savings for your SWR and just add them to Pensions and Spend it!

Maybe I'm not understanding you, but what problem are you trying to solve/working on? What you can spend every year or ?

And yes the $36K a year pension is roughly the same as having $900K in a portfoilo.

The reason I did it was to correctly calculate my asset allocation between equity and fixed income.

Plus it made me feel a lot better to see the bigger number for total assets but that is because I was being anal...

 

[RP]

Congrats to Sparky for figuring out the proper way to value MartyB's pensions. Even many attorneys and financial advisors are lost when thye are asked how to value the vanishing government "defined benefit" annuities (under the law they are annuities even though they don't have a lot in common with the annuity you can buy from your friendly local fund salesman).. That's why non-professional "geeks" like me have found a tiny niche market. Calculating NPV for government pensions often provides some surprises as these vehicles tend to be massively undervalued in many cases.

If the value has to be determined for (say perhaps) a divorce court the points that have to be proven are the discount values and the life expectancy table chosen.

Good to see a fellow Air Reserve Technician on the board, Marty, for those with a little hint of green in their comments, you don't have any idea of what it took to get to the position where Marty is ... unless you're familiar with Minot in winter, Diego Garcia and some of the other "garden spots" of the world.

In a large sense these pensions are very much a vanishing breed, Congress took care of that in 1986, (keeping the best for themselves, of course) but some of us rank and file folk are still alive to enjoy them ..."here's to us and those like us, not many of us left and most of them are dead".

 

[Cut-Throat]

Unless you wish to leave a bequest for heirs, that is. In that case, your savings count.

The rest of us end up leaving a bequest for heirs whether we want to or not -- conventional SWR planning means leaving a bunch in your treasure chest even as you leave this earthly abode.

Well, I am going to do my best that this does not happen. - Buying Annuities, Reverse Mortgage - And lots of spending!

 

[Barnstormer]

This should help you get a value on your pension value..


http://www.immediateannuities.com/

just plug in your numbers...it's not cola, but a good approx.

 

[Delawaredave]

I think Bogle said somewhere to get a rough valuation of a pension, take 15x the annual payout.

Then use this amount as a "virtual bond" in your asset allocation scheme.

 

[MasterBlaster]

I copied a post that I made last year...

Change the numbers to reflect your own circumstances. The concepts are the same

Anyone know how to convert today's $33,864/year pension with future CPI-U COLAs into a lump sum ??


The Lump sum (present value) calculations must always assume a prevailing interest rate. Some people use the 30 year T-bond rate (maybe 4.50 % or so) or you can use whatever is reasonable.

For present values of annuities that have an inflation adjusted kicker then just use the prevailing rate (ie. T-bond rate) less the prevailing inflation (CPI rate - maybe 3.3 percent or so).

So if my numbers are correct the interest rate you'd use to compute your present value would be (4.5-3.3 = 1.2 percent)

You'll need to compute the present value of the annuity over your life expectancy which (of course) varies with age and gender.

So using my interest numbers numbers, and guessing a life expectancy of 25 years, I get a prese4nt value of $727,674.42 for your payout.

Here's a link to a calculator that will figure your lump sum given an interest rate

http://www.hughchou.org/calc/missing.cgi

 

[FIRE'd@51]

For present values of annuities that have an inflation adjusted kicker then just use the prevailing rate (ie. T-bond rate) less the prevailing inflation (CPI rate - maybe 3.3 percent or so).

I agree with your methodology with one exception. I would use the YTM of the TIPS which most closely approximates your life-expectancy as your discount rate, since it's the expected real interest rate that you are looking for. That way you don't have to guess what the expected inflation rate is. The market is telling us. From Bloomberg that rate is currently 2.06% on 30-yr TIPS. Comparing this with the 30-yr Treasury says the market's expectation for inflation is about 2.5%.

 

[martyb]

I truly appreciate all the replies to my question. There are a few things I wish I'd done differently early in my career that would put me in a better position when I take the plunge, and even with pensions I expect to be nervous about the big step. The threads I read on this board are an inspiration to me to keep plugging away, with the big day right around the corner, but to keep in mind that I need to be taking positive steps to ensure I do the things that will ensure a successful retirement. RP, happy & maybe a little surprised to run across another ART on this board. Wonder if there might be more?!?! I guess by my posts, you can tell where I work, sounds like you're familiar...how long do you have till you pull the plug? Ever been to Barksdale? I've worked F-4's, F-16's, A-10s & B-52's over the years, ya think maybe I've settled on a career choice? : Thanks again to everybody!