#### newellcr

##### Recycles dryer sheets

- Joined
- Aug 26, 2003

- Messages
- 224

Someone always has a comment about a fat pension, but what's it really worth? That depends on the plan, of course. A recent thread on military pensions started me thinking more about pensions and I figured I start a thread on the real value of them so there would be something in the archive. I don't think that there is a need to cover every caveat and detail. I just wanted to give folks an idea of what a pension is worth other than describing it as "fat" or "big". I'd encourage other folks to post a quick description of their plan and run through a quick set of numbers if they'd like to share.

I'm covered by the new federal pension (FERS) the basic benefit of the pension is similar to the current corporate pensions as far as I understand. Under FERS, employees are required to contribute .8% of each pay to fund a portion of the benefits. The basic pension then pays 1% of the average of your high 3 annual salaries for each year of service. 30 years equals 30% of what is typically a little less than your last years salary. There is also a "company" match for the TSP (think 401k) with a maximum benefit of 5% that is gained if 5% is contributed. TSP vesting is different than pension vesting. Nothing can be collected from the pension before the minimum retirement age (MRA). The MRA is between 55 and 57 based on your year of birth. Let's just call it 57. I plan on working in constant year dollars and a real rate of return so the math doesn't get obnoxious.

The basic benefit. An employee who makes $50k/yr, has worked the magic 30 years, and meets the MRA would typically get a little less than $15k/yr (benefit based on high three not just final year salary). Which is probably worth about $300k which would then be converted into an annuity... (I'd use the 4% SWR if this was a lump that was accessible by the retiree, but it isn't. IMO, there is a real benefit to a lump, maybe this is a good assumption, maybe not.) To have a $300k lump available in 30 years at a 6% real rate it would take about $300/mo investment.

Additional benefits. Then there are health benefits and a special supplement until SS kicks in. The health benefits are worth approx $8k/yr and the SS supplement is worth approx $12k/yr. These figures are best guesses. Both of these benefits are available until the retiree turns 62 and is eligible for Social Security. The retiree is then no longer eligible for these benefits and is expected to apply for SS benefits to replace them. So the health benefit and supplement is worth about $100k total. To have a $100k lump available in 30 years at a 6% real rate it would take about $100/mo investment.

Employee cost of retirement plan. This employee could have contributed no more than $50k/yr x .8% x 30yrs = $12k total. The typical person gets promotions and smaller raises in addition to COLAs so a wild guess might be they paid in no more than 75% of the max. This would work out to about $300/yr. Investing $300/yr on your own at a 6% real rate would give you an account of about $25k.

Then there is the TSP (401k) match that could either be considered a retirement benefit or not since it isn't tied to the same vesting requirements as the pension is. I'm deciding to exclude this as a retirement benefit, but here's what it might be worth, just for fun. Using the same type of salary figures as above in the employee cost part. The invested match is worth about $156/mo. Again using 30 years and a 6% real return, the TSP would be worth about $150k. Using a 4% SWR, this is worth $6k/yr. Since the plan requires 5% employee contribution to get the 5% match, the retiree has about $12k/yr income from the TSP.

So what's it worth? For this retiree, the basic pension is worth about $300/mo. The additional benefits are worth about $100/mo. The opportunity cost of the plan to the retiree is about $25k. So the real benefit is worth about (300+100-25) is $375/mo. And the retiree will have $39k/yr available plus any other savings or IRAs (15k/yr pension + 12k/yr SS + 12k/yr TSP swr = 39k/yr).

Is 57 early, dunno, but leave earlier and the benefits are worth less... Make more money, it's worth more... There are enough guesses and approximations here to argue with. I didn't even mention a reduction in pension for survivor benefits...

Cheers,

Chris