Author Topic: Comparing job w/& w/o pension  (Read 819 times)

Captain FIRE

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Comparing job w/& w/o pension
« on: October 10, 2017, 07:20:18 AM »
Please help check my rough math in comparing a job with and without a pension.  Im not a math person, so Im testing it with some round figures.

I'm just testing it at 4.5 years right now, when I vest the pension.

Pension: $15k in 18 years, largely indexed to inflation
Equivalent to a stash of $375,000
Less contributions to it of: $50,000
Less the loss of SS benefits (Windfall Elimination Provision) w/pension: $400/month or $120,000 stash
Benefit: $205k

Requires a pay increase of roughly $24k for 4.5 years to get a stash of about $205k in 18 years at 4% increase each year (rather than 7%, to keep inflation out of it).  Adding back in taxes & SS at a generous 40%, that means about $33,600/year.

Am I missing anything here?  I understand there are a lot of other factors (risk diversification with pension, ability to pass on the stash after I die, etc.) to consider, but is this a reasonably accurate way to look at it?

Laura33

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Re: Comparing job w/& w/o pension
« Reply #1 on: October 10, 2017, 08:06:56 AM »
I haven't run the math, but conceptually, in the "no pension" scenario, don't you need to add back in the $120K in SS benefits that you wouldn't lose because of WEP?

Also, does the job with the pension also allow you to max out your 401(k)?  And will you be able to do so?  Or will that $50K you are throwing into the pension come from money that would otherwise have gone to your 401(k) or IRA?

I think this is sort of difficult to compare correctly, because you are assuming that the two scenarios are (A) current savings plus pension, and (B) current savings without pension.  But the reality is that pension costs you something (you have listed $50K in contributions over some period of time), and if you didn't throw that money at the pension, you could throw it at some other investment (which, in turn, would likely earn you more -- it just wouldn't be guaranteed like a pension).  So if Job B paid the same gross as Job A, then scenario B would really be current savings - pension + $50K* more to invest over the time period.

*This could be pre-tax or post-tax, depending on whether you are putting it into an IRA/401(k) or regular post-tax account.
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Captain FIRE

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Re: Comparing job w/& w/o pension
« Reply #2 on: October 10, 2017, 09:01:01 AM »
Yeah this is exactly why I'm asking for help kicking tires, because I think it's pretty confusing to make sure I'm comparing it correctly.

SS & WEP
I didn't want to double count the SS.  I'm not sure if that happens with your suggestion?  In the pension scenario, I was subtracting what I'd lose in SS benefits by having a pension.  (Effectively making no pension the baseline of 0).  It's a bit more complicated because I'd actually have a higher SS benefit if I contributed five more years than I would right now with no pension, but for ease of the basic calculations I haven't figured that out precisely.

401k
Yes, I can max a 457 at the pension job (generally functionally equivalent to a 401k) and do max it out.  The pension contributions are mandated - and instead of contributing to Social Security.  So with a regular job, I'd need to add back in SS taxes, hence my handwaving 40% taxes at the end (33% taxes + 6.2% SS taxes, rounded to 40% for ease).  Technically I should also account for the stash needing to pay taxes on it...but I also think I have to pay taxes on my pension too, so I've assumed they'll cancel each other out.

Savings
I'm not attempting to compare current savings at all.  I haven't listed that above.  More what I was trying to do was figure out how much more $ in a job offer I would need for the two jobs to be equivalent (or the new one be better).  So I conceptualized it as how much more I'd need to get in a paycheck - that I would stash away - to get an equivalent income stream as the pension in 18 years.  The math gurus likely have better calculations for it than me, but this was how I was able to work it out to make sense to me.

Laura33

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Re: Comparing job w/& w/o pension
« Reply #3 on: October 10, 2017, 01:03:22 PM »
Yeah, you are right on the SS -- the $205K is the delta between what you'd otherwise get for full SS vs. what you'd get with less SS + pension.  Sorry about that.

But I do think you need to consider the amount you are contributing to the pension, because that is an automatic deduction from your pay that you wouldn't have at another job.  So one option would be to blow it on more stuff.  But since you're living now without it, you'd likely just put that extra cash in some other investment, right?  So the real value of the pension is in the company's contributions, and possibly the tax-deferred savings vehicle (if you have otherwise maxed out available tax-sheltered savings).

Example to illustrate:  Say you make $50K now, and you put $18K toward your 401(k) and $5K toward your pension.  So you are living on 50K-23K= $27K (gross -- ignoring taxes for simplicity).  Meanwhile, assuming your employer adds $10K/yr to your pension, so the total contributions go up $15K/yr, and the pension earns whatever it earns, so that in XX years it will be worth YY.  [Side note:  you do not actually have to compute this out -- you already know that your pension will have a 'stache value of @$375K in 18 years.  I am just breaking it out here as an illustration.]

Now you look at another job:  same salary, but no pension.  Now you can put away the same $18K to your 401(k), but not the $5K toward the pension, so you end up with $32K gross -- that's $5K extra left.  One option is to give yourself a "raise" at the same salary and spend it on other stuff -- but that's not an apples to apples comparison, because now you have increased your lifestyle to $32K instead of $27K.  So the other option is to open an IRA* and put that $5K/yr into VTSMX -- that is the apples to apples comparison, because your living expenses stay at $27K, and all you are doing is changing where you put that remaining $5K. 

Now, that IRA will not get as much every year by way of contributions, because you are only putting in your own $5K, and not the employer's $10K.  But since it is in VTSMX, it will probably grow faster than the pension, because pensions tend to be invested more conservatively.  So you can calculate out what $5K/yr in VTSMX will likely be worth at whatever your target date is.  FWIW, I just ran a quick online calculator, and it said $5K/yr in an IRA for 18 years is on the order of $180K (gross). 

So for your case, the "value" of the pension is then the delta between scenario 1 above and scenario 2 here.  Scenario 1 is $375K minus WEP = $205K.  Scenario 2 is $180K.  Therefore, the net "value" of the pension is on the order of $25K.

*I'm using an IRA in this example because that way we can keep focusing on gross numbers, because the pension and IRA are both pre-tax contributions that are taxed on withdrawal.  Obviously, if you can't do a tIRA or have maxed out tax-sheltered options, it can get more complicated.
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Rocketman

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Re: Comparing job w/& w/o pension
« Reply #4 on: October 12, 2017, 09:16:51 AM »
Also check out how well the pension is funded.   If it is not funded well and likely to get kicked back to the pension guarantee agency, you will get much less.

Captain FIRE

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Re: Comparing job w/& w/o pension
« Reply #5 on: October 12, 2017, 09:32:38 AM »
Yes, I'd be stashing away the increased salary, rather than spending it - or at least for this calculation I'm treating it that way to get an apples to apples comparison.  (I suspect a small amount might be spent on a cleaner...)  I calculated the value of investing it at 4% (7% less inflation to keep numbers easy). 

Pension is not well funded - but it's from a state, which is unlikely to go under.  So I'm not too worried about that.  Another current benefit is a health care "wrap" to Medicare but as that's much easier to remove, I'm not considering it at all.  I suspect that within the next 5-10 years it'll be taken away.  (The only question is if they grandfather anyone and if so, if I qualify.)

reeshau

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Re: Comparing job w/& w/o pension
« Reply #6 on: October 13, 2017, 10:18:03 AM »
To disagree slightly with Rocketman, PBGC would not cut this pension, which is only a partial income of $15k, in 4 years.  The PBGC guarantee limit for 2017 is $64,432 at age 65, which is the year that the pension payout is probably valued at.  As it's under the cap, it's covered.  (I have such a beast, so I am speaking from personal experience)

However, as a public pension, this may not go to PBGC at all.  In Detroit's bankruptcy, the pensioners were unsecured creditors, like any other.  They had some special handling because of State oversight and the optics of impacting voters, but they took a big haircut.  I don't believe a state pension plan has ever gone broke, so there isn't a historical precedent to point to what may happen.