Maybe not be too many people reading these forums on MDW but hopefully I'll get some opinions in the next week or so.
How do you value a federal government pension in your net worth - if at all. I'll be vested a week from now.
Up until now for NW purposes, I was just adding in the money I had been contributing to the pension over the last 5 years because as an unvested employee, I could get that money back out if I left the government. Now (or in a week) I'll be vested. I'm 39. Pension would pay out something like $8800/yr beginning at age 62. I hope to NOT stay in the government for the rest of my career. I REALLY dislike the job but have held onto it for a while for resume purposes + pension vesting; I'd like to move back to the private sector though I know that with the current recession/covid I may end up hanging out in the gov't for another year or more as it'll be hard to find jobs (so in that case the yearly payout would grow). So how do I value the pension in my NW. It is a "stable" pension in the sense that it's backed by the fed government; anything is possible of course and Congress could change the rules to get rid of it, but a fed pension isn't as likely to go away as say a corporate pension if the corp. goes bankrupt in 5 years.
One formula I've seen = yearly payout * 25; based upon the 4% rule. That to me though seems like it values a payout in perpetuity. Would you consider your NW as being $220,000 higher as of next week because of vesting or does that seem like pumping up NW disingenuously? Would you use some other formula? Leave it out of NW altogether because it's not something that has been received yet? Thoughts?
At 5 years of service you would get 5% of your annual salary when you hit 62. Are you including future inflation to come up with $8,800/year? Otherwise you'd have to be making $176,000 a year right now which is a bit high for a federal employee.
I did the same calculations and I’m also confused how you came up with $8,800/year at the 5 year mark. $176k/year is beyond the GS scale, even for a HCOL area like San Francisco. Your pension is 1% of your 3 year high salary x your years of service. (Bumps up to 1.1% if you have more than 20 years of service). I.e. if you make 100k/year and are at 5 years service that’s 100k x.01 = 1,000 x 5 years = $5,000/ year at age 62. If you plan on staying say for 8 years total, that’s $8,000 a year at age 62. That number is NOT inflation adjusted. You don't get COLAs until after you start your annuity, which means you would have 20+ years of inflation eating away at that $5-8k a year.
Even after you’re vested, you can withdraw your contributions when you leave and roll them over into your TSP. Also what I plan to do. Given your age, if you leave after say 8 years total service, your best bet is to roll over your contributions. So you should continue only calculating your contributions in your net worth.
If you want to see the tipping point of when it’s better to keep the pension or roll it over, calculate your estimated annuity at various years of service and x that by 25, then use an inflation calculator to adjust that number down to today’s value. Next calculate what your contributions (that you can roll over in TSP) would be at that # years of service, and plug it into a compound interest calculator at 7% (or 6 etc. to be conservative) for the number of years you would have left until you could draw the annuity. (Note that 7% already takes inflation into account so you don’t further adjust this value down). Which number is larger?
I.e. 100k/year for ten years of service is 10k/year annuity. You’d be 44 when you leave and have 18 years until you could draw a full annuity. Your contributions after ten years would be $44,000, which you can roll over instead (actually with treasury interest rate added, which I’m not including for simplicity). 10k/year x 25 = $250,000, which with 2.5% average inflation a year until 62 is $125,219 today’s value. 44k at 6% for 18 years is $125,000. Essentially a wash, so I’d still withdraw the contributions and roll them into TSP to have full control over the money.
