How to calculate the value of a defined benefit pension

[runbikerun]

A brief description: I work in financial services, and am currently in a role that isn't quite what I want to be doing long term. Roles where I want to work are fairly limited in my company, and I'm conscious that to get where I want to be I may need to consider moving.

However, I'm lucky enough to have a defined-benefit pension, which is tied to my salary - so a 40k salary continuing with my employer may be equal to a 50k salary elsewhere thanks to the fact that it means I continue to accrue defined benefit, particularly since my living expenses are already lower than my salary. The problem I have is that I don't know how I should treat this entitlement when assessing numbers - can anyone point me in the right direction for something that would help with this? At the moment, I have no way of accurately comparing salaries within and outside the company.

[mintleaf]

I would just run the numbers backward, using the 4% rule as a guide. For example, suppose we're looking at a pension that will pay $1k per month for life, starting in 10 years. That's $12k per year, which would require a stash of (12k * 25) = 300k to generate perpetually. Assuming an average of 7% yearly growth in the meantime, that would be worth (300k / 1.07 ^ 10) = about $152k in today's money.

You might need to tweak the calculations based on how your specific pension is structured, but that's the basic idea.

[HenryDavid]

Also, a DB pension will involve compulsory contributions from you, so that counts toward your savings rate. As does the foregone salary which your employer is contributing.
When I was in this situation, I added my employers' DB pension contributions to my nominal salary to get my "real" salary. And included all of the pension contributions in my savings rate. Cause it was all (forced) savings.
That can be a very good thing in the early, possibly dumb, stages of a working life.

[runbikerun]

It's been a very good thing alright - if I were to walk out now, the accumulated benefits so far would be enough along with the state pension to cover about 80% of my cost of living from age 64 on.

[PhilB]

The kind of approach suggested by @mintleaf is probably the only sensible way to go.  The value depends so much on you age - £1k a year starting next year is worth a lot more than if it started in 30 years' time.  You could use transfer value, but they tend to be a bit inflated at the moment so unless you are actually planning to transfer may be too high. 
DW is still accruing DB rights and is 11 years from when it's due to pay out.  In that situation I just use the 20x valuation used for LTA purposes as a rule of thumb, but if you are much younger than us then you should probably be using something lower.

[dude]

https://www.immediateannuities.com/annuity-calculators/

[jim555]

Also, a DB pension will involve compulsory contributions from you, ...

Not every company requires contributions from the employees, mine didn't.

[BrightFIRE]

Thanks for this thread, and for mintleaf's calculation. I was trying to figure out this exact thing myself last week!

I work for a nonprofit and we don't make any contributions ourselves, but in exchange, we also don't get 403b matching. The pension is still a really sweet deal and I'm lucky to have it - my golden years are already covered; I just have to stash enough to cover the years in between.

[hadabeardonce]

K7=(F7*12)*25
L7=K7/1.07^M7
M7=1982+D7-2018

$3,546.40 * 12 = $42,556.80 * 25 = $1,063,920.66/1.07^19 = $294,182.93

I keep a spreadsheet to help calculate my CalPERS pension stuff, it was interesting to apply the formula to each year. Looks like 55 is really a sweet spot to collect.

[deborah]

Maybe life is different where you live for DB pensions, but where I am, they can be bad, or they can be good.

Firstly, is your pension indexed to inflation or CPI? because, if it isn't, it will gradually decrease in value over its lifetime, and can't be directly compared to a lump sum that you invest (which is effectively indexed). Secondly, these sorts of pensions are often called "golden handcuffs" because quite often, if you leave that employer early, the pension is worth a lot less than if you retire at a certain age from that company.

[the_fixer]

RE golden handcuffs.

At my current employer most people talk about not being able to leave because of the golden handcuffs but in reality if you read the SPD and do the math you still get a good pension it is just less due to not having as many years of service.

As the discussion of retirement continues with them it become obvious that the real reason is that they are 100% dependant on needing the full retirement income because they are not adding money to thier company 401k or saving elsewhere.

I try to tell them how amazing our 401k is and they all look at me like I am stupid and say it sucks it only matches 1%.... I then tell them about the tax savings and that we have the ability to do a mega backdoor Roth and their eyes glaze over and they just say well I can not afford to contribute to the 401k. Yet they all drive fancy cars like $70k trucks despite having a company car to commute in, live in huge houses and blow money like crazy.

Self imposed golden handcuffs...

I just happily go along collecting my $248 - $300 bi-weekly paychecks, FIRE at 49 and will happily collect my $10,800 (inflation adjusted) per year at age 62 that I get for putting in 5 years with the company.

Sent from my walkie talkie