Author Topic: How do I account for a defined benefit pension scheme?  (Read 1212 times)

StiffUpperLip

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How do I account for a defined benefit pension scheme?
« on: January 14, 2017, 02:07:23 PM »
I have a defined benefit pension scheme through my work and wondered how you would account for this in calculating net worth? 

I was thinking of multiplying the annual defined benefit as currently accrued by 25 to mimic the 4% rule, but as the pension won't pay out til 60 (I'm 33 now) I wonder if I'm missing something important?

This is my main pot of retirement savings thus far. I'm about to open a SIPP (UK) so taking baby steps at the moment.  But it's difficult to work out our starting point without figuring out how much my pension is worth...

It hurts my brain, can someone please help me figure this out?

frompa

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Re: How do I account for a defined benefit pension scheme?
« Reply #1 on: January 14, 2017, 06:11:09 PM »
....
I was thinking of multiplying the annual defined benefit as currently accrued by 25 to mimic the 4% rule, but as the pension won't pay out til 60 (I'm 33 now) I wonder if I'm missing something important?
......

I think you hit the nail on the head there.  And I'm pretty sure with a defined benefit pension, the actual amount paid out will not be definitively calculable until you actually take the pension. (At least that's been true with the ones I've had to deal with over the years.) 

But why do you want to be able to translate this defined benefit pension benefit into a net worth figure?  The reason you are doing so may influence how you should make the calculation. 
« Last Edit: January 14, 2017, 06:13:17 PM by frompa »

StiffUpperLip

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Re: How do I account for a defined benefit pension scheme?
« Reply #2 on: January 15, 2017, 04:05:19 AM »
But why do you want to be able to translate this defined benefit pension benefit into a net worth figure?  The reason you are doing so may influence how you should make the calculation.

I thought I should include this as it will supplement my income from 60 therefore the amount I need to FIRE overall is reduced in comparison to ignoring it and assuming I need enough to last forever without this bump. This is where I wonder if I'm missing something important...

I get a statement every year stating my accrued pension to date, it's a final salary pension so it could go up with promotions in the future,  and if you leave before 'retirement age' the benefits are scaled with inflation each year until it's drawn. I was intending to include this at its quoted value as per my statement each year.

Another Reader

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Re: How do I account for a defined benefit pension scheme?
« Reply #3 on: January 15, 2017, 04:53:36 AM »
This is a common question that has been discussed at length here and elsewhere.  Rather than trying to assign a value to the pension, make a conservative estimate of the annuity at the time you will take it.    That income stream will not have to be generated by your assets.  For example, if you were planning to retire at 60 and would receive a pension of $1,000 a month then, but anticipate needing $4,000 a month, your assets need to generate $3,000 a month.  Using your desired withdrawal rate, work backwards to the amount of income-generating assets you will need then.

If you are planning to retire earlier, your assets will need to generate whatever income you need until the pension kicks in.  If the pension is reduced, the lesser amount is plugged in.  There are retirement calculators out there, such as firecalc and c-firesim that will crunch the numbers for you, including different incomes and start dates.