Pension vs investments

[larriveeman]

If one has a pension then for me the numbers mean you don't need as much in investments. 

Example:

If one has a pension of 66K yearly the really equals 1.6 million in an investment drawing at 4% until one dies, does that make sense?  Plus SS and what ever other investments you may have.  A good pension is a game changer.

[Sandi_k]

If one has a pension then for me the numbers mean you don't need as much in investments. 

Example:

If one has a pension of 66K yearly the really equals 1.6 million in an investment drawing at 4% until one dies, does that make sense?  Plus SS and what ever other investments you may have.  A good pension is a game changer.

Assuming the pension has a COLA provision, yes, that's correct. Even better, it's not constrained by 30 years, as the SWR 4% rule is.

[larriveeman]

Federal pensions get cola's

[ericrugiero]

If one has a pension then for me the numbers mean you don't need as much in investments. 

Example:

If one has a pension of 66K yearly the really equals 1.6 million in an investment drawing at 4% until one dies, does that make sense?  Plus SS and what ever other investments you may have.  A good pension is a game changer.

Sure, it has a big impact and can dramatically lower your FIRE number (of invested assets).  There are different risks compared to investments though.  With a pension, you don't have to worry so much about drops in the market.  But, you don't have a way to diversify either.  If something impacts the pension, that could be all $66K/yr gone at once.  The risk is probably low, but the stakes are high if you don't have anything else.  I would want at least some investments outside the pension even if it covered all my expenses. 

I have a pension through work and I'm counting on it for part of my FIRE #.  My pension has a cash buy out option.  I count the current value of that buy-out in my net worth and in my FIRE calculation.  It's about 20% of my net worth and 25% of my invested assets.   I'm planning to take the cash buy out whenever I leave my job.  There are a ton of different opinions on how to value a pension.  This is just how I'm counting mine.  I don't know for sure how I would value one without a cash buy out option. 

[Sandi_k]

 I don't know for sure how I would value one without a cash buy out option.

I personally would take your life expectancy, and subtract retirement age to get number of years in retirement. If 30 years (say, age 55 to age 85), then multiplying the annual income from the pension by 25x (the inverse of the 4% rule), you'd get a good value approximation. So a $70k annual pension x 25x = $1.75M equivalent.

If your pension also includes health care coverage, it's even more valuable - and even more golden handcuffs. I will not take a lump sum upon retirement, because I will lose retiree health care coverage if I do.

[Spicolli]

Yeah, this is my challenge too. I'll have a good, COLA based pension that will provide for my normal expenses but trying to factor in the chances that something catastrophic happens is not easy.

[six-car-habit]

Federal pensions get cola's

 I wouldn't ever expect more than a 2.5 %  COLA .  And usually in the 1.5% range, sometimes less.

[larriveeman]

my take home retirement will be 2K more then my current take home pay

[charis]

It depends on the type of pension, but it frequently involves a longer period of working than early retirees are interested in.

[KungfuRabbit]

A good pension is a game changer.

Yes, a good pension in a game changer.  There are some risks if the company goes bankrupt, but the chances of it going to zero are nearly zero (even if the company goes under the pension is generally in a separate fund and can still pay something, and often pensions are insured or backed up by the govt too...). 

My mom and step dad worked fairly standard jobs, but both at places with a good pension.  Between that and social security they are pulling in around $150,000 / year being retired, not even touching their savings.  Its a primary reason why so many baby boomers can retire super comfortably.

Lots of problems with pensions though.

-Most companies don't offer them anymore, or at least they don't offer them to new employees anymore. 

-Most pensions are HIGHLY back weighted.  So if you "only" work 20 years your pension will be VERY small compared to working the full 35 years or so.  I do happen to have a pension, and based on a basic model I put together if I had retired at 30 it would have been about $1,000 per year, if I wait to 40 it'll be worth about $8,000 per year, at 50 about $40,000 per year, and at 60 about $100,000 per year, and there is a COLA on top of that (my model is in todays dollars too....to compare them directly...they would all be inflation adjusted in reality...).  So super early retirement like MMM it barely enters your calculations, at 40 it's a decent chunk for a budget lifestyle, but only at 50 and beyond can it be a primary income source. 

-You have to work at a company for 30 years without getting laid off, and those are a very common part of the corporate world lately!!!  I am a high performing employee that always gets good reviews, but companies these days rarely lay off specific individuals (too many legal issues), so they lay off entire functions / groups because its easier.  And you can say "but good employees will find a new job within the company", except layoffs are often coupled with hiring freezes, so no - you can't.  In my 16 years there have been somewhere 8-10 company wide layoff rounds, and I've personally had 2 really close calls of being cut myself.  If you base your retirement plan on being working for 30 years straight, but then you get laid off after 20 years due to no fault of your own, your pension is screwed so hopefully you had other savings. 

[Sandi_k]

Point #1 - There is a middle ground with the pension: qualify for it, but delay claiming. While it's true that "years of service" is typically one factor, the other is age at claim. Our "multiplier" of your years of service upgrades by between 5-7% for each additional year of your age upon claiming. So it makes sense not to claim until the multiplier maxes out, at age 60.

So at 50, your multiplier is 1.85% of your years of service, using an average of the top 3 consecutive years of income.

1.85% x 20 years = 37% of $50k = $18,500 annually.

But if you wait to claim until age 60, the multiplier changes to 2.5%:

2.5% x 20 years = 50% of $50k = $25k annually.

I have used that method to assume I would retire forcibly at age 50 - and every year after that increases both my years of service, AND my multiplier. It's EXTREMELY powerful to have both increase. So at age 60, I will have *36* years of service, multiplied by 2.5%. That's a 90% multiplier on my salary. So essentially I'll make the same as I would working, since I won't be paying FICA on retirement income.

Point #2 - you can also find local city governments, libraries, state colleges and universities as employers. They also offer pensions, even if reduced in generosity in recent years.

[Metalcat]

Yes, of course a pension impacts your retirement savings.

You have to account for the type of pension, if it includes healthcare, if it's indexed to inflation, if the pension fund is in good shape and well managed, etc.

[ericrugiero]

-Most pensions are HIGHLY back weighted.  So if you "only" work 20 years your pension will be VERY small compared to working the full 35 years or so.  I do happen to have a pension, and based on a basic model I put together if I had retired at 30 it would have been about $1,000 per year, if I wait to 40 it'll be worth about $8,000 per year, at 50 about $40,000 per year, and at 60 about $100,000 per year, and there is a COLA on top of that (my model is in todays dollars too....to compare them directly...they would all be inflation adjusted in reality...).  So super early retirement like MMM it barely enters your calculations, at 40 it's a decent chunk for a budget lifestyle, but only at 50 and beyond can it be a primary income source. 

Yes, they are highly back weighted but if you look at normal investments and the power of compound interest they look pretty similar.  Pensions are typically invested a little more conservatively than a stock heavy portfolio but the value follows the same curve. 

https://money.usnews.com/investing/investing-101/articles/2018-07-23/9-charts-showing-why-you-should-invest-today

[jeroly]

If one has a pension then for me the numbers mean you don't need as much in investments. 

Example:

If one has a pension of 66K yearly the really equals 1.6 million in an investment drawing at 4% until one dies, does that make sense? Plus SS and what ever other investments you may have.  A good pension is a game changer.

I’d say not.  The 4% rule leaves open a huge possibility of having lots left over after you die, perhaps multiples of what you started with.  With a pension, there is nothing left after you die.

You have to take the present value of the expected payment stream. If you live 30 years and discount at a rate of 4%, that’s worth around 18x the annual payments ($1.188mm).

That also assumes that there is perfect inflation protection, which may not be the case.  Many COLAs get capped at 3% or so, and if we have a few 15% inflation years, that COLA becomes fairly meaningless.

[lutorm]

Seems the easiest thing to do is to just subtract whatever the pension will pay out from your expenses in your FIRE calcs. Trying to figure out a net present worth is only useful if you can convert it into a lump sum, and I don't know how many pensions have that option. The big value of a pension is that it's guaranteed to not run out (ideally), so you can just count on it handling a part of your expenses until you die.

[sixwings]

I work in the pension industry and it can be a very valuable benefit but also has it's drawbacks. For higher income earners, or people who are good at saving and looking to retire early it isn't always a good deal depending on the plan, but it's really fantastic for lower-middle income earners, or higher income earners who suck at saving. It's a forced savings plan that enables what is basically a guaranteed income for life. If you're someone who is making 40-50K for your entire working career, a guaranteed income for life once you hit 60 or 65 is awesome. I think pensions could play a big role in solving a lot of the wealth inequality issues. It's basically a UBI for people who work. I like that a lot and it's why i work in the industry despite the drawbacks I see.

However, for a lot of mustachians who are looking to retire early and are good at saving, pensions may not be a great deal.

1) There are often penalties for early withdrawal, in the plans I work with the earliest you can start withdrawing your pension is age 55 and for every year between 55 and 60 there is a 6% reduction. So if you retire at 55 your pension is worth 30% less. Ouch.
2) If you retire at 50 and leave it in the plan to take at age 60, that benefit is usually then locked in. For 10 years there's no growth, some plans might COLA it at like 1-3% a year. Generally the value it was when you were 50 is the same value when you're 60. If the lump sum of your pension was say 500K, you're losing out on 10 years on returns, that could be worth another 500K that you don't get anymore.  That's a bummer.
3) If you want to take a lump sum at say age 50, depending on the investment strategy, the returns may not be as high as a S&P500 index return over your working career, often pension funds are very conservative
4) You have a lack of control, pension funds are run by a board of mostly old white guys who have their own interests and priorities, usually appointed by the employer and/or unions and they usually have the power to alter your benefit if they want. For instance, the reduction i mention in #1 was introduced last year and it was increased from 2% to 6%. So if you were 54 you were looking at retiring with a 10% reduction in a year, that's manageable, suddenly some old white guys decided they dont want early retirement anymore and now you're looking at a 30% reduction, so you gotta work another 5 years. That sucks.
5) If you take your pension and die shortly after you're leaving nothing to your estate

So, I guess like with all things financial, whether a pension is good depends on you, your financial situation, the rules of the plan, and your retirement plans. Make sure you understand the plan rules and how it works if you're planning on retiring early, and look at the board and whether you feel they are competent (many are not). However, I am a big proponent of pensions for most people as most people are not good savers. Having a locked in forced retirement savings is incredibly valuable for most people.

[larriveeman]

I'm specifically talking about a federal retirement pension, mine will be 66-68K plus cola's, my health insurance goes into retirement as well and I pay what I currently pay while employed.  If I wait until my FRA (66 and 10 months), I will get 3K per month, wife has a smaller fed pension of 13K yearly plus SS of 17K yearly.  I also have 15K tax free VA disability.  Plus we have TSP's and are debt free 

[elaine amj]

Seems the easiest thing to do is to just subtract whatever the pension will pay out from your expenses in your FIRE calcs. Trying to figure out a net present worth is only useful if you can convert it into a lump sum, and I don't know how many pensions have that option. The big value of a pension is that it's guaranteed to not run out (ideally), so you can just count on it handling a part of your expenses until you die.

That's what we did. But we decided not to treat it as golden handcuffs (to be honest, I refused to crunch numbers of what DH's pension would be like if he kept working. When we were planning in FIRE, I just added the expected pension for our desired FIRE date. It turned out to be a tiny amount - but it will be really nice to have that tiny amount of guaranteed cash coming in every month at that time. I've decided it would make more sense to leave it as a defined benefit pension rather than taking it as a lump sum and consider it as one of the conservative, low risk parts of our FIRE plans. I did reduce our FIRE number based on this small pension.

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[Weisass]

I work in the pension industry and it can be a very valuable benefit but also has it's drawbacks. For higher income earners, or people who are good at saving and looking to retire early it isn't always a good deal depending on the plan, but it's really fantastic for lower-middle income earners, or higher income earners who suck at saving. It's a forced savings plan that enables what is basically a guaranteed income for life. If you're someone who is making 40-50K for your entire working career, a guaranteed income for life once you hit 60 or 65 is awesome. I think pensions could play a big role in solving a lot of the wealth inequality issues. It's basically a UBI for people who work. I like that a lot and it's why i work in the industry despite the drawbacks I see.

However, for a lot of mustachians who are looking to retire early and are good at saving, pensions may not be a great deal.

1) There are often penalties for early withdrawal, in the plans I work with the earliest you can start withdrawing your pension is age 55 and for every year between 55 and 60 there is a 6% reduction. So if you retire at 55 your pension is worth 30% less. Ouch.
2) If you retire at 50 and leave it in the plan to take at age 60, that benefit is usually then locked in. For 10 years there's no growth, some plans might COLA it at like 1-3% a year. Generally the value it was when you were 50 is the same value when you're 60. If the lump sum of your pension was say 500K, you're losing out on 10 years on returns, that could be worth another 500K that you don't get anymore.  That's a bummer.
3) If you want to take a lump sum at say age 50, depending on the investment strategy, the returns may not be as high as a S&P500 index return over your working career, often pension funds are very conservative
4) You have a lack of control, pension funds are run by a board of mostly old white guys who have their own interests and priorities, usually appointed by the employer and/or unions and they usually have the power to alter your benefit if they want. For instance, the reduction i mention in #1 was introduced last year and it was increased from 2% to 6%. So if you were 54 you were looking at retiring with a 10% reduction in a year, that's manageable, suddenly some old white guys decided they dont want early retirement anymore and now you're looking at a 30% reduction, so you gotta work another 5 years. That sucks.
5) If you take your pension and die shortly after you're leaving nothing to your estate

So, I guess like with all things financial, whether a pension is good depends on you, your financial situation, the rules of the plan, and your retirement plans. Make sure you understand the plan rules and how it works if you're planning on retiring early, and look at the board and whether you feel they are competent (many are not). However, I am a big proponent of pensions for most people as most people are not good savers. Having a locked in forced retirement savings is incredibly valuable for most people.

Yup. We are pretty good savers, and my job happens to require a pension. The frugal part of me is chafing at the notion of leaving so much money on the table if I retire early, but we will get to a point soon where we just don’t need my extra salary.