How to Think About Future Pension

[Texan1636]

I have a vested defined benefit pension (non COLA) from a prior job that won't beginning paying out until I hit age 65, which may be 12-13 years after retirement. The pension is significant, but it certainly won't be the dominant source for retirement funds. I'm trying to figure out how to take the pension into account for purposes of retirement withdrawals prior to age 65. It seems to me that one possibility may be to include some approximation of the present value of it when calculating our overall portfolio. From immediateannuities.com, I can see what it would cost, today, to buy an annuity matching my pension's payment amount but with payments not beginning until age 65. Based on that, it appears that the pension's value would be about 17% of our overall portfolio if the pension is counted as an asset.

Our plan has been to spend 4% of current portfolio balance each year (we understand that spending will bounce around, but this includes a very large discretionary travel budget, among other things). Basing the 4% off of the larger portfolio (including the pv of the pension) would increase available spending in year 1 by 18% or so, which would really be nice to have. I realize the conventional wisdom around here is to think of a pension only as a reduction in needed spending, rather than an asset, but it seems unreasonable to simply ignore the pension between now and age 65.

An alternative might be to take some of the other portfolio assets and buy a period certain annuity, that would just pay until age 65 and then be exhausted, but the pricing on those annuities is so terrible right now that it would be hugely expensive to do that.

Am I crazy to think of the pension as an asset for this purpose? Are there creative ideas others have? Thanks very much.

 

[pb4uski]

I think most of us treat it like we do social security... income or a reduction of expenses that starts on a certain date in the future.... only difference is SS is COLAed and most DB pensions are non-COLAed. A minority view would be to calculate a value for the pension and include that as an asset.

For those of us who retire early, commonly our WR in ER will be higher and then will decrease once pensions and SS start. Our current WR is between 4-5% but once my pension and SS start it declines to about 2-3%.

 

[stepford]

Find a modeling tool that allows you to include annuity/pension income (I use Fidelity RIP and/or FireCalc). Then just model various spending levels and see which provide a sufficiently high success rate for your comfort level. This is a little more complicated than a fixed % withdrawal rate, but should give you a pretty good idea of where you stand.

 

[Alan]

I've always just plugged future pension payments into retirement calculators and the year by year numbers they produce show how much should come from savings and how much from pension income.

This means the early years before pensions kick in have a higher WR than later on.

 

[dallas27]

Present value of a non-cola perpetuity is the annual payment value divided by your discount rate (oppurtunity cost).


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[Chuckanut]

Pensions are what I have heard called "phantom assets". They are real, they affect our lives, but we can't get a solid grip on them, and, depending upon the rules, they may dissappear completely or in part during our lives.

FWIW, I do not include the pension 'value' in my assets. If I live to be 100+ it will have a huge value. If I get run over by a truck today, its value is far less. FWIW, I figured I would live as long as my dad, and then found what a SPIA that gave me the same monthly payment would cost. That is the value of my phantom asset.

May your phantom asset haunt you for a long, long time.

 

[nash031]

I use it to discount our withdrawals from our portfolio on the future, and that is how FIREcalc accounts for them as well as stepford mentioned. (e.g. spend $80k/yr with a $40k pension, I need to provide $40k from withdrawals from portfolio. Then 25*40,000 = $1,000,000 portfolio required for 4% WR).

As pertains to asset allocation, I treat my future pension as fixed income, thus the bond portion of our portfolio is smaller than most people would probably recommend/feel comfortable with.

 

[youbet]

I've always just plugged future pension payments into retirement calculators and the year by year numbers they produce show how much should come from savings and how much from pension income.

This means the early years before pensions kick in have a higher WR than later on.

+1. FireCalc does a nice job of handling future cola'd or non-cola'd pensions. Just type in the amount, the year it starts and check the cola'd box if appropriate.

Unless you have good reason to doubt that your company or your gov't body will be able to pay, there's no good reason to ignore a future pension because you don't know how to handle the math. As Alan says, most retirement calculators account for pensions as easily as they account for future investment returns.

 

[W2R]

Pensions are what I have heard called "phantom assets". They are real, they affect our lives, but we can't get a solid grip on them, and, depending upon the rules, they may dissappear completely or in part during our lives.

I think Chuckanut makes a very good point. Seems like pensions have been frozen or have been diminishing or vanishing at the speed of light during the past couple of decades. That's probably something to keep in mind, just in case that happens to you.

 

[devans0]

We have an un-cola pensions, light like 7-Up. They are a diminishing income stream. They account for 25% of our wages were when we worked. They will help to stave off S.S. draw until 70 though. This offsets the un-cola negatives.

Our pensions are pretty well funded per 10-Ks. In a bare-boned budget, we can do well enough from these pensions, so in that respect, our needs are met. I also am able to draw down under 1.9% of assets, so it adds to our safety margin while spending above basic needs.

 

[DrRoy]

I look at my modest pension as a reduction in the WR that I will need to achieve my retirement income. I do not count SS. If I get any, I will look at it as a one time inflation adjustment.

 

[purplesky]

I have a vested defined benefit pension (non COLA) from a prior job that won't beginning paying out until I hit age 65, which may be 12-13 years after retirement. The pension is significant, but it certainly won't be the dominant source for retirement funds. I'm trying to figure out how to take the pension into account for purposes of retirement withdrawals prior to age 65. It seems to me that one possibility may be to include some approximation of the present value of it when calculating our overall portfolio. From immediateannuities.com, I can see what it would cost, today, to buy an annuity matching my pension's payment amount but with payments not beginning until age 65. Based on that, it appears that the pension's value would be about 17% of our overall portfolio if the pension is counted as an asset.

Our plan has been to spend 4% of current portfolio balance each year (we understand that spending will bounce around, but this includes a very large discretionary travel budget, among other things). Basing the 4% off of the larger portfolio (including the pv of the pension) would increase available spending in year 1 by 18% or so, which would really be nice to have. I realize the conventional wisdom around here is to think of a pension only as a reduction in needed spending, rather than an asset, but it seems unreasonable to simply ignore the pension between now and age 65.

An alternative might be to take some of the other portfolio assets and buy a period certain annuity, that would just pay until age 65 and then be exhausted, but the pricing on those annuities is so terrible right now that it would be hugely expensive to do that.

Am I crazy to think of the pension as an asset for this purpose? Are there creative ideas others have? Thanks very much.

Its sounds like this pension at age 65 will be your " icing on the cake" if its less than 20% of your portfolio. It's not an asset.

I also have a small pension payable at age 65 and another large pension payable at age 57.

But I save and invest like I have no pensions. Because as I type this post there are forces with big pockets trying to destroy all pensions.

I don't even think about my pensions so if and when I do receive that first direct deposit from my pension fund it will be very strange.

 

[RunningBum]

I do what you propose, take the PV of the pension and base my WR rate off my net work including the pension. Don't forget to account for taxes on the pension. My pension is pretty small, and the mega corp still has it very well funded, and I'm not very close to a 4% WR so if I never collect from the pension I'll be ok. It's up to you to decide how risky relying on a pension is.


You can certainly do whatever you want since it's your money. But I sure wouldn't take out an annuity just to make it easier to figure out how to smoothly bridge your pension that will come later. As you say, it's a bad investment, especially with today's rates, so don't make a bad investment just to try to simplify your calculations. I guess one thing you could do is "pay yourself" that annuity. Figure out what that annuity would cost to match the income you'll be getting later. Take that off your net worth, and figure out your WR off that number, but also know that you'll be getting your "personal annuity" until 65, then the same amount in a pension at 65. Not sure how that works with inflation but maybe it's close enough.

 

[Texan1636]

Its sounds like this pension at age 65 will be your " icing on the cake" if its less than 20% of your portfolio. It's not an asset.

I also have a small pension payable at age 65 and another large pension payable at age 57.

But I save and invest like I have no pensions. Because as I type this post there are forces with big pockets trying to destroy all pensions.

I don't even think about my pensions so if and when I do receive that first direct deposit from my pension fund it will be very strange.

I understand your point, purplesky, and I certainly think it is a reasonable position. However, choosing to ignore the pension, in our case, may mean giving up a really high-end trip to Europe each year or some similar experience that will create great memories. I would hate to look back at the end of my life and wish we would have done more. That being said, we would be living extremely well even without counting the pension as an asset - it is a balancing act, I suppose.

The pension, while well funded, certainly is subject to risk if my old employer's business falters going forward. In a sense, it is much like "single stock" risk, but I don't think that means that it's not an asset. Unlike the risk of a single stock, which necessarily would completely worthless if the company's business totally fails, at least there is the PBGC back-up (which is subject to a cap) for the pension.

 

[Cobra9777]

Withdrawal rate, pre-SS and pre-pension, is not all that important by itself. It will be high for many early retirees. What matters is the sustainability of the entire plan. FIRECalc, ********, RIP, i-orp... can all deal with cash inflows and outflows that come and go at various times.

There is one section of my retirement spreadsheet where I add the PV of both pensions and SS to our financial assets. Multiplying that number by 4% results in almost exactly the number that i-orp and FIRECalc say we can safely spend, which I find interesting. We actually spend about 30% less than that. Anyway, kind of a quick and dirty sanity check. The more detailed planning is done the conventional way.

 

[purplesky]

I understand your point, purplesky, and I certainly think it is a reasonable position. However, choosing to ignore the pension, in our case, may mean giving up a really high-end trip to Europe each year or some similar experience that will create great memories. I would hate to look back at the end of my life and wish we would have done more. That being said, we would be living extremely well even without counting the pension as an asset - it is a balancing act, I suppose.

The pension, while well funded, certainly is subject to risk if my old employer's business falters going forward. In a sense, it is much like "single stock" risk, but I don't think that means that it's not an asset. Unlike the risk of a single stock, which necessarily would completely worthless if the company's business totally fails, at least there is the PBGC back-up (which is subject to a cap) for the pension.

Chances are your pension will hopefully be fine and it should help fund travel.

I motivate myself by pretending my pensions don't exist because I know so many people who have lost pensions or have had them reduced to nothing.

This forces me to be a supersaver and I have trained myself to be terrified that my pensions are not real.

The PBGC back-up does offer some confidence just in case the worse happens.

 

[niven]

I have two small defined-contribution pensions without COLA. The first I was able to take half the lump sum at time of separation from the company and put it in my IRA. I continued to count the remaining lump sum amount (it received an interest credit every year) as part of my assets until I was informed PBGC was taking the pension plan over. I stopped counting it as part of my assets then since I could no longer collect a lump sum, and it became a possible future income stream to reduce my expenses.

I don't see the point in trying to treat a pension income as a lump sum unless that is actually an option. Your calculation will be subject to change as annuity companies change theirs. As others have mentioned, retirement calculators (at least the good ones) allow for future income streams to be entered, so why treat it as something it's not?

As to my second pension - I still have the option of collecting the lump sum on it so I'm still tracking it as an asset for now.

 

[truenorth418]

I also take the conservative approach. I have a non COLA pension waiting for me in 13 years at age 65, but I don't factor it into my financial plan or WR yet. I consider it, like SS, reinforcements.


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[kaudrey]

I think most of us treat it like we do social security... income or a reduction of expenses that starts on a certain date in the future.... only difference is SS is COLAed and most DB pensions are non-COLAed. A minority view would be to calculate a value for the pension and include that as an asset.

For those of us who retire early, commonly our WR in ER will be higher and then will decrease once pensions and SS start. Our current WR is between 4-5% but once my pension and SS start it declines to about 2-3%.

+1

For my planning purposes, I put in an income stream to offset my projected expenses - so it lowers my WR.

My projected WR is all over the map because I'll get a non-COLA pension and a FERS annuity supplement for 5 years at age 57, then my pension starts being COLA'd, but I lose my annuity supplement, then I start SS at 67 or 70, and my DH starts his SS 5 years later than me.

The WR will be higher in the beginning than in later years. This isn't ignoring the pension - it's realistically dealing with cash flows. What to go to Europe? Go ahead! If you withdraw 5 or 6% in the early years but will later go down to 2%, factor in that decrease. 4% is a guideline - it was NEVER meant as a hard and fast rule.