Company pension vs saving

[jambo101]

Most of my friends are retiring or would like to but it seems that only the people with a company pension can afford to retire.
My company pension gives me about $2000 a month after tax. So i was wondering how much would a person need to have in the bank to get a similar amount of money as my company pension?

 

[chinaco]

Are you implying an asset class of CDs?

Assuming your pension is not indexed to inflation (and you are not concerned with spending power), it would be a Present Value calculation of the $2000 income streams for the projected life of the individual.... You are assuming the lump sum asset will grow based on an interest rate and some of the lump sum is spent a little at a time. it is a little more complicated than a simple PV calc... but that is the basic formula.


What you might do is project a min and max longevity (age) for a range, get a mid-point and assume the midpoint is the likely age of death. Or you could be conservative an use the high age or plan an early demise and us the low age. I like using ranges because it is simple and it gives me a sense of the possible outcomes.

Perhaps the most simple approach is to go to an insurance company and key in the payment of $2k/mo and see what they would require in a lump sum payment for a SPIA. If you know their interest rate... you can assume some level of expense charge and come pretty close.

 

[OAG]

I use a multiplier of 25 on a COLA'd Payout. This works out to an assumed withdrawal rate of 4% per year. An example of this is a $25K annual payout would equal a value of $750K. Seems to me a logical method if one accepts the SWR of 4%, which I do, so 4% of $750K is $25K. I do this before taxes since taxes can change and can fluctuate.

 

[W2R]

How about comparing with annuity rates? Is it COLA'd? Does it begin at age 62? Any survivor benefits?

One of the options for withdrawing from the TSP after retirement is to get a fixed immediate lifetime annuity. One can choose inflation protection (COLA) or not. So, here are some figures using their annuity calculator.

Choosing the inflation protected annuity, for a single person with no survivor benefits, it takes $445,500 at today's rate to produce an income of $2000/month before taxes at age 62.

Choosing the non-COLA'd version at today's rate for a single person with no survivor benefits, it takes $317,000 to produce an income of $2000/month before taxes at age 62.

Now, remember with annuities a lot depends on the interest rate environment. Had you bought the same annuities with last August's rates, the inflation protected annuity would have been $381,500 and the non-COLA'd one would have been $279,700.

 

[donheff]

How about comparing with annuity rates? Is it COLA'd? Does it begin at age 62? Any survivor benefits?

Choosing the inflation protected annuity, for a single person with no survivor benefits, it takes $445,500 at today's rate to produce an income of $2000/month before taxes at age 62.

SPIAs are a good comparator but, if I remember correctly, the TSP inflation protected annuity is only good for a maximum of 3% inflation per year. I think Vanguard's is 10%. The Federal pension and SS COLA is unlimited (although Congress would probably jump in if things got outrageous).

 

[W2R]

SPIAs are a good comparator but, if I remember correctly, the TSP inflation protected annuity is only good for a maximum of 3% inflation per year. I think Vanguard's is 10%. The Federal pension and SS COLA is unlimited (although Congress would probably jump in if things got outrageous).

I think you're right about the TSP annuities! The amount needed would be greater for an annuity elsewhere with a higher maximum COLA.

I wasn't quite sure if Jambo's pension was COLA'd at all, or not, though. He is getting it from a company apparently. If it's not COLA'd, then maybe the $317,000 figure would be helpful.

 

[jambo101]

Not cola'd i just get the $2k for life and if die my wife gets it till she passes on.I also get the federal and provincial pensions on top of that which comes to another $1k per month.

 

[ziggy29]

Not cola'd i just get the $2k for life and if die my wife gets it till she passes on.I also get the federal and provincial pensions on top of that which comes to another $1k per month.

I was about to say "yeah, but those are Canadian dollars," but it doesn't matter much these days.

 

[W2R]

Not cola'd i just get the $2k for life and if die my wife gets it till she passes on.I also get the federal and provincial pensions on top of that which comes to another $1k per month.

OK, a non-cola'd joint annuity with 100% survivor benefit that would pay $2,000/month, bought when both of you are 62, would cost $365,300 if obtained from the TSP through MetLife at today's interest rate.

TSP: Annuity Calculator; 2008 Feb 26

 

[ziggy29]

OK, a non-cola'd joint annuity with 100% survivor benefit that would pay $2,000/month, bought when both of you are 62, would cost $365,300 if obtained from the TSP through MetLife at today's interest rate.

Don't get me started on MetLife. Their dental plan is the worst piece of crap ever foisted off on us by our employee benefits team. What they did right this year in giving us an HSA with company contributions and an unlimited lifetime benefit amount, they screwed up on by giving us this junk.

 

[W2R]

Don't get me started on MetLife. Their dental plan is the worst piece of crap ever foisted off on us by our employee benefits team. What they did right this year in giving us an HSA with company contributions and an unlimited lifetime benefit amount, they screwed up on by giving us this junk.

Now calm down, ziggy. I was only trying to provide an example of what an annuity of that amount would cost just as an example. Nobody is recommending this annuity, which happens to be only available to federal employees anyway - - not to jambo, who works for a private company in Canada. Nobody else has come up with an estimate of annuity costs from any competing company, or if they did I missed their post. Please feel free to do so, if you wish!

 

[rs0460a]

Immediate Annuity Quotes

Try here:

Immediate Annuities - Instant Annuity Quote Calculator.

- Ron

 

[W2R]

Try here:

Immediate Annuities - Instant Annuity Quote Calculator.

- Ron

Ron, can you give us a dollar figure on that? A number along with a description of exactly what that number represents can be a lot more helpful than just the link. (?)

Maybe I am just trying to be too helpful, here! I didn't think that providing dollar amounts for annuities would be THAT hard.

 

[rs0460a]

Ron, can you give us a dollar figure on that? A number along with a description of exactly what that number represents can be a lot more helpful than just the link. (?)

Maybe I am just trying to be too helpful, here! I didn't think that providing dollar amounts for annuities would be THAT hard.

All depends on your state of residence, your age, and your marital status. The link/tool is not difficult at all!

BTW, the rates do change on almost a daily basis (just like a mortgage rate). But this is were I started my research last year, when I purchased my first SPIA.

- Ron

 

[boont]

Single Life

To get $2000 a month for a California resident male, 61 yrs of age, it takes $329,812 paid to an instant annuity.

Details...

"Single Life Income with No Payments to Beneficiaries ("SL")
You receive this income for your lifetime, which means, you can never outlive this income. After you die there are no payments made to beneficiaries."

As I have pointed out before, every time interest rates drop that "phantom value" of the pension increases.

boont