Author Topic: Convo I had with a friend-increasing salary and pensions: Go where the money is  (Read 2120 times)

EconDiva

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I was speaking with a friend of mine about my company's pension as one day we were having a conversation about maximizing income.  I was asking him his thoughts on say, if was offered a raise to go work for another company if I should consider leaving to take it, or if the prospect of getting a pension at my current company is a big enough deal to forgo opportunities for a bigger raise from other companies.  I believe I could make more money pursuing another position(s) somewhere else but am overall content with my current employer and position. 

I know many do not consider their pension in their retirement income calculations-I do not either.  However, my argument to my friend went something like this:

Let's say I stay with my current employer for 10 years.  Estimated monthly pension payout amount is $1,000.  Because my friend has worked at UPS in upper management and has been there over a decade, my pension would obviously pale in comparison to his.  So he heard this and was like "No way you should pass up on any offers for a bigger salary somewhere else because (a) you might not get that pension and (b) the amount is not all that high."  While I agree with the "you might not get it" side of the argument, I think it's easier for him to say because he's already got a large one coming to him. 

Anwho, I was thinking about the situation this way:  If I stay here 10 years and get $1,000 a month in a pension, using a SWR of 4% isn't that free $1k/month ($12,000 a year) equivalent to having $300,000 in the bank?  Am I calculating that right?  In other words, say I decided to take a different job at a higher income and no pension.  The salary would have to be high enough for me to then save an additional 300k by retirement time on my own to generate the same amount in retirement income the pension at my current job would be giving me.  Right?

So basically, while his stance was "From a maximizing your retirement income perspective, you should consider as many other higher salary offers you can at other places."  But my stance was moreso "From a maximizing my retirement income perspective, my company's pension could be more valuable than any other salary offer I'm likely to get from any other employer."

What are your thoughts?  Again, I don't include the pension numbers in my retirement calculations.  Right now I'm just in a place where I am evaluating my budget and income.  I'm always trying to find ways to lower costs but I am also looking at ways to increase my income again.  I'm not necessarily "married" to my job but I'm not averse to leaving for more money either.  Of course there are many other factors to consider but when it comes to leaving my biggest consideration is forgoing a potential pension and I am just curious if others wouldn't even consider the pension and would just "chase the dollar" as my friend suggested.

NathanDrake

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Pensions are a promise, while a salary increase is guaranteed.

Your company may decide to get rid of the pension and cap your payout.

Is the $1,000 / month inflation adjusted in today's dollars or is that the amount you would receive at retirement? You can try and run the math and see if your salary increases, if saved in the market and compounded for X years until you're eligible to take the pension would equal 300K or not in today's dollars.


Goldielocks

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Your friend has likely seen many, many others not stay long enough for the pension benefit, due to many reasons outside of their control.

If you were at year 9, and it takes only 1 more year to vest, that is a different conversation.   

Your example calculation assumes that you will start to receive a pay out in 10 years of $1000 per year.    If you are only 30 now, that pension in 10 years, gets to grow for another 35 years before you touch it.  So in 10 years, it would be worth a LOT less than you are indicating with your formula.

 In general, your ability to save more money in the next 10 years with an increased income can far outweigh the pension.   Go for the best income + immediate benefits (eg health insurance value) that you can.

Laura33

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Your math is close, but not quite.

First, the pension vs. 'stache figure is not quite right, because the pension disappears when you do, whereas under the 4% rule, most scenarios show that you will still have quite a bit of 'stache left to pass on.  This may not matter to you, but it does make the pension slightly less valuable than the equivalent 'stache.

Second, you are correct that $1K/mo. is what a $300K 'stache would throw off, but I think you are misinterpreting the magnitude of that because of the timeframes involved.  That $1K/mo. is what you would get at 65 (probably) -- and that's in future dollars, which means you'd have only a fraction of your current buying power.*  Which means it really, really wouldn't take that much to save the equivalent on your own.  If you are 30, and the market gets 7%, then a quick internet calculator tells me that putting aside $175/mo. in a tax-deferred account will get you $300K by 65 -- and your heirs get to keep any of that you don't end up spending.  Which suggests that even a small raise would more than offset the value of the pension.

*By way of comparison, the calculator I used said that after taxes and accounting for inflation, that nominal $300K at 65 is actually worth less than 1/3 of that in today's dollars.

Cromacster

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I would also find out if you can cash out your pension when you leave. 

I had the option to roll my pension balance over to an IRA when I left my last employer.

EconDiva

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Your math is close, but not quite.

First, the pension vs. 'stache figure is not quite right, because the pension disappears when you do, whereas under the 4% rule, most scenarios show that you will still have quite a bit of 'stache left to pass on.  This may not matter to you, but it does make the pension slightly less valuable than the equivalent 'stache.

Second, you are correct that $1K/mo. is what a $300K 'stache would throw off, but I think you are misinterpreting the magnitude of that because of the timeframes involved.  That $1K/mo. is what you would get at 65 (probably) -- and that's in future dollars, which means you'd have only a fraction of your current buying power.*  Which means it really, really wouldn't take that much to save the equivalent on your own.  If you are 30, and the market gets 7%, then a quick internet calculator tells me that putting aside $175/mo. in a tax-deferred account will get you $300K by 65 -- and your heirs get to keep any of that you don't end up spending.  Which suggests that even a small raise would more than offset the value of the pension.

*By way of comparison, the calculator I used said that after taxes and accounting for inflation, that nominal $300K at 65 is actually worth less than 1/3 of that in today's dollars.

You make some very good points.  Your example of the $175 month for 35 years is interesting.  FYI, in my example the 300k pension figure is based on working at my company 11 more years for a total of 15 years and then leaving the company around age 50 and withdrawing at age 60.  So although in your example it wouldn't take that much to save to get to the 300k, issue is I'm closer to 40 than to 30 and have less time to save as I'm also unlikely to be making my current income at 55 or 60 (will probably be lower)....

EconDiva

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Your friend has likely seen many, many others not stay long enough for the pension benefit, due to many reasons outside of their control.

If you were at year 9, and it takes only 1 more year to vest, that is a different conversation.   

Your example calculation assumes that you will start to receive a pay out in 10 years of $1000 per year.    If you are only 30 now, that pension in 10 years, gets to grow for another 35 years before you touch it.  So in 10 years, it would be worth a LOT less than you are indicating with your formula.

 In general, your ability to save more money in the next 10 years with an increased income can far outweigh the pension.   Go for the best income + immediate benefits (eg health insurance value) that you can.

I'm approaching year 4 and it takes 5 years to vest here FYI.  I've been running the numbers quite a bit and although I realize $1,000 a month in 25 or so years from now will be worth much less than it is today, I'd been focusing a lot on how much that amount is worth via lump sum and wondering what it would take me to do to save to get to that same amount by the time I estimate I'd like to stop working my current job (around age 50ish).

trollwithamustache

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Vested Pensions are extremely valuable for the sheep. You can't spend down principle, you can't mess up investment choices.  It just pays what it pays, every month.

heck, you can even borrow against pension income! 

So, really, how good is your your buddy with money> Not everyone has the personal responsibility to join the Triple-M herd ranging out on the debt free planes.

Goldielocks

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Stay the 1 year for the vesting at 5 years.   After that, the commuted value versus final pension analysis will rise and fall. 
When interest rates are low, it will rise in value to take a lump sum and leave.   When your income spikes (e.g., a major promotion) waiting for the pension will rise in value if you are based on a "best 5 years salary" model.

Assuming that you have a defined benefit pension...
In general, pension dollars earned per year are more valuable to the older employees (over age 45) that those under 35... because of the ability to make the your same dollar grow to more if you have more decades to do so....   the employer actually has to put in more dollars per payout dollar, for the older employees.  It's part of the actuarial calculation.