### Author Topic: Help Me Math: Valuing defined benefit plan  (Read 4837 times)

#### La Bibliotecaria Feroz

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##### Help Me Math: Valuing defined benefit plan
« on: September 03, 2016, 03:48:55 PM »
Mr. FP and I are divorcing and I'm trying to figure out what value should be assigned to his defined benefit pension plan. Yes, I realize that a defined benefit plan should ideally be valued professionally. But its current value is only about \$9000 and my lawyer told me it would cost around a thousand dollars to have it valued, which to me seems like an unacceptable ROI. And I don't like the other obvious option, signing papers entitling me to a tiny monthly check thirty years from now.

Anyway, one thing I read in the packet they sent me was that if he quit tomorrow and never worked for them again, his monthly benefit in 30 years (when he will be retirement age) would be \$303/month.

So I am trying to figure out what amount of money now, left in the market, could be reasonably expected to generate that much money per month, if left in the market long enough. So far I got as far as \$90,900 being the sum of money to generate that much monthly income (using 4% safe withdrawal rate), but I don't know how to calculate how much money that is now.

Any suggestions? Did I even phrase the question so it makes sense?

ETA: I tried trial and error and got \$11,950 being the amount of money that, invested at 7% rate of return, would be about \$90,900 in 30 years' time.

Any input on this calculation is welcome :-).
« Last Edit: September 03, 2016, 03:52:16 PM by frugalparagon »

#### Goldielocks

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #1 on: September 03, 2016, 04:07:35 PM »
Okay,  I will look up the calcs for you ( I am suppossed to be studying them this week anyway)..  first.

1) How long has he had the pension,
2) Is he vested?
-->Vesting in Canada typically happens at 2 years for government based pensions, but the USA can be 5 or even 10 years.
The future benefit calc does not matter much to you today, if he is not vested yet, as he would normally just get his contributions plus interest back, not the company portion.

3) I assume he is well under normal retirement age (under 50)?

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #2 on: September 03, 2016, 04:47:19 PM »
He is NOT vested. The info I received said that he was NOT eligible for a refund but would be pension eligible; it would just be calculated different. Presumably if he vests, it will be worth a lot more.

He has had the job* for 2 years and needs 3 more years to vest.

He is 35 and will be retirement eligible at 65. Actually I guess that's only 29 years away since his birthday is this month.

*Actually, not that specific job--he's a teacher and can move between school districts.

https://www.copera.org/sites/default/files/documents/5-5.pdf

#### MDM

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #3 on: September 03, 2016, 04:51:29 PM »
Mr. FP and I are divorcing and I'm trying to figure out what value should be assigned to his defined benefit pension plan.
...
Anyway, one thing I read in the packet they sent me was that if he quit tomorrow and never worked for them again, his monthly benefit in 30 years (when he will be retirement age) would be \$303/month.

So I am trying to figure out what amount of money now, left in the market, could be reasonably expected to generate that much money per month, if left in the market long enough. So far I got as far as \$90,900 being the sum of money to generate that much monthly income (using 4% safe withdrawal rate), but I don't know how to calculate how much money that is now.

Any suggestions? Did I even phrase the question so it makes sense?
Much depends on the assumptions used.  You could look at the case study spreadsheet to see some of the possibilities.

Starting in row 69 of the 'Misc. calcs' tab you can find the following calculations:
 One way to evaluate "pension now"  vs. "pension later"
 Compare pension payment promised at the later time to either
 - the "Interest generated by Future Value" (Future Value principal is not touched), or
 - the "Constant withdrawal of FV over time L" (principal goes to zero), or
 - "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)
 Lump sum now PV \$27433 Payment starting now Pmt_now 0 \$/payment Interest rate i 4.0% /yr number of years n 30 yr number of payments/year freq 12 /yr When payments are made for each n type 0 0 = at end, 1 = at start Future Value FV \$90900 Interest generated by Future Value FV(i,n,P) * i 303 \$/payment Longevity of future pension L 30 yr Constant withdrawal of FV over time L Pmt_future 434 \$/payment Spending growth rate (e.g., CPI) g 2.0% /yr First year Trinity-style withdrawal W(FV,L,i,g) 4037 \$/yr 336 \$/pmt

Numbers above came from Excel's Goal Seek adjusting the "Lump sum now" to match the \$303/mo you mentioned.  That assumes the same interest rate during accumulation and withdrawal - one of many assumptions that may differ from what "should" be assumed.

The same \$27,433 would generate \$434/mo if one planned to withdraw the entire amount monthly over 30 years (and continued to get the same 4%/yr earnings).
The same \$27,433 would generate \$336/mo if one planned to withdraw the entire amount monthly over 30 years (and continued to get the same 4%/yr earnings) but increase the monthly amounts by 2% to keep up with inflation.

Again, it depends on the assumptions.  Do you know what assumptions are "supposed" to be used, or is this amicable enough that the two of you can agree on what makes sense?

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #4 on: September 03, 2016, 05:01:26 PM »
It is very amicable, as divorces go, but there is some resentment on his part that he has to give me some of his retirement (he wanted me to work more in the last few years, but we have small kids). We both agree in principle that we should share our combined retirement savings 50/50.

30 years is not the length of the pension; it is the time until he can draw it.

The idea here is for him to keep his ENTIRE pension. However, he has an old 403(b) that he's going to share with me. The goal is to figure out how much of the 403(b) NOW it would take to offset the value of the PERA--in thirty years, when he can draw it. I realize that was not clear before.

#### MDM

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #5 on: September 03, 2016, 05:31:54 PM »
30 years is not the length of the pension; it is the time until he can draw it.

In that case, change "Longevity of future pension   L   30   yr" to whatever you wish to use.  That value is used in 2 of the 3 calculations - the calculation of "interest only" payment does not use it.

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #6 on: September 04, 2016, 10:39:37 AM »
Thanks so much for all the help! I figured out the "solve for any of the five" spreadsheet and got about the same present value that I got by trial and error for generating \$309* per month in perpetuity.

I do not understand the "pension now" vs. "pension later" part. I guess the question for that part would be, what amount of money NOW, stored in the market for 29 years, would generate \$303 per month over some reasonable number of years if one was OK with drawing down the principle. (20? 25? His family is not very long-lived but mine seems to be.) The \$90900 then has no significance, because I wouldn't need as much, right, if I were drawing down the principle? I can't figure out how to extract that number.

It seems like it would yield a lower number than I am getting by assuming \$303/month forever. And, umm, frankly I want to show that it's worth MORE.

That \$309 per month is a low figure. If he works another 3 years, he'll be eligible for a different kind of calculation that will greatly increase his monthly benefit.

That being the case, is it unreasonable to use the interest-only calc? That would put the current value of his PERA at \$12,777 rather than about \$9K.

*I remembered it wrong before. It is \$309, not \$303.

I have been using a 7% interest rate and 4% safe withdrawal rate. Are those reasonable numbers to use?

#### Goldielocks

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #7 on: September 04, 2016, 10:55:59 AM »
The \$27k number and response is an excellent analysis of the future \$303/mo amount, in today's dollars.

But there are a few considerations:

Assuming his pension is made up of a combination employee payroll contributions and employer funding to guarantee future pensions.:

1)  Usually the \$303 number assumes he will be vested, and continue to work to full retirement age.  It is the value of the credits, stated in future monthly cashflow, assuming many more years of future service credits, but no added money.

eg. 2 years service credits x 2% of today's income = \$303/mo.   assuming taken after full vesting, at full retirement age.

2)  If he were to quit teaching next year, he would not get this, or close to it --> he would get a commuted value lumpsum (that can't be withdrawn until retirement, but could be transferred).  Some plans, he would get zero until vested.. it depends on if he put in employee payroll contributions or not.   I think this may be the \$9000 number you mentioned.

3) If he were to quit teaching in 4 years (after vesting), he would get a lot more than in #2), but it would still be less than \$1... as he won't have the years of service.   This might be the \$27k number (which will be larger after 4 more years of contributions / earned credit)

So the confusing part is not how to calculate this, but to determine what is fair.  Should you get a portion of money that he does not yet have credit for (depends on him working many more years), or a portion of the money that he does have credit for (\$0k to \$9k), or something in between?

Given the unvested nature of it, I would think that (50% of the \$9000) is the fair outcome, although good negotiators start by asking for more  (50% of 27k).   This assumes you were married for longer than he was employed.

ETA -- I wrote this response before I saw your reply.   I am not sure now about the "different" calc you mentioned, so the \$303 if it is the amount he is guaranteed to get in pension if he QUIT TOMORROW, you would ask for 50% of the 27k.

If the new calc is actually more like 30 years x 2% service credit x \$ of the last salary or average = much much bigger number, that is a pure "what if" dependent on working many more years...not relevant to today's discussions.

Can you provide the details of the two different calcs?

#### Goldielocks

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #8 on: September 04, 2016, 11:01:20 AM »
Thanks so much for all the help! I figured out the "solve for any of the five" spreadsheet and got about the same present value that I got by trial and error for generating \$309* per month in perpetuity.

I do not understand the "pension now" vs. "pension later" part. I guess the question for that part would be, what amount of money NOW, stored in the market for 29 years, would generate \$303 per month over some reasonable number of years if one was OK with drawing down the principle. (20? 25? His family is not very long-lived but mine seems to be.) The \$90900 then has no significance, because I wouldn't need as much, right, if I were drawing down the principle? I can't figure out how to extract that number.

It seems like it would yield a lower number than I am getting by assuming \$303/month forever. And, umm, frankly I want to show that it's worth MORE.

That \$309 per month is a low figure. If he works another 3 years, he'll be eligible for a different kind of calculation that will greatly increase his monthly benefit.

That being the case, is it unreasonable to use the interest-only calc? That would put the current value of his PERA at \$12,777 rather than about \$9K.

*I remembered it wrong before. It is \$309, not \$303.

I have been using a 7% interest rate and 4% safe withdrawal rate. Are those reasonable numbers to use?

How long you will live and how long he will live are not relevant.  How much you withdraw and swr are not relevant.

The pension calcs are based on acturarial tables that take how long the average person will live into account, as the payouts are spread across a large population.  Like figuring out the cost to purchase an annuity.  They also use consistent interest rates for everyone.

That age to payout may be 80 or 82 years old... or even may be 90 years old...  but is not your number, it is the pension company's number.

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #9 on: September 04, 2016, 11:06:29 AM »
The approximately \$27K # comes up seems to assume that over the next 29 years, whatever money I get now would earn only 4% interest. Isn't 7% more commonly used?

How long you will live and how long he will live are not relevant.  How much you withdraw and swr are not relevant.

The pension calcs are based on acturarial tables that take how long the average person will live into account, as the payouts are spread across a large population.  Like figuring out the cost to purchase an annuity.  They also use consistent interest rates for everyone.

That age to payout may be 80 or 82 years old... or even may be 90 years old...  but is not your number, it is the pension company's number.

Pension calcs may be based on actuarial tables... but wouldn't lifespan and SWR be relevant in trying to assign a current lump sum value to a future lifetime benefit?

#### Goldielocks

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #10 on: September 04, 2016, 11:11:54 AM »
The approximately \$27K # comes up seems to assume that over the next 29 years, whatever money I get now would earn only 4% interest. Isn't 7% more commonly used?

How long you will live and how long he will live are not relevant.  How much you withdraw and swr are not relevant.

The pension calcs are based on acturarial tables that take how long the average person will live into account, as the payouts are spread across a large population.  Like figuring out the cost to purchase an annuity.  They also use consistent interest rates for everyone.

That age to payout may be 80 or 82 years old... or even may be 90 years old...  but is not your number, it is the pension company's number.

Pension calcs may be based on actuarial tables... but wouldn't lifespan and SWR be relevant in trying to assign a current lump sum value to a future lifetime benefit?

You would think so, but everyone has different numbers, so somewhere we all have to agree, and the default is to use the accountants numbers..

As this is calculation is for a fair division of assets, a legal exercise, you need to use the numbers that are standard practice in pension plans to use.

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #11 on: September 04, 2016, 02:12:39 PM »
The approximately \$27K # comes up seems to assume that over the next 29 years, whatever money I get now would earn only 4% interest. Isn't 7% more commonly used?

How long you will live and how long he will live are not relevant.  How much you withdraw and swr are not relevant.

The pension calcs are based on acturarial tables that take how long the average person will live into account, as the payouts are spread across a large population.  Like figuring out the cost to purchase an annuity.  They also use consistent interest rates for everyone.

That age to payout may be 80 or 82 years old... or even may be 90 years old...  but is not your number, it is the pension company's number.

Pension calcs may be based on actuarial tables... but wouldn't lifespan and SWR be relevant in trying to assign a current lump sum value to a future lifetime benefit?

You would think so, but everyone has different numbers, so somewhere we all have to agree, and the default is to use the accountants numbers..

As this is calculation is for a fair division of assets, a legal exercise, you need to use the numbers that are standard practice in pension plans to use.

Actuarial tables suggest that I can expect to live to age 82, or for about 17 years after Mr. FP retires. BUT--17 years worth of payments is not worth as much TO ME as a guaranteed lifetime benefit, now is it?

I do not "need" to use standard practice numbers--I need to use numbers that my ex and I can agree on and that seem fair. There is no law telling us how to split up our assets.

And even let's say that I wanted to calculate what the value would be of receiving payments of \$309 per month for 17 years starting 29 years from now--how would I even do that? I am confused by the pension now vs. pension later spreadsheet because the "interest generated" does not look like it's a fillable field, it looks like it's a field that is calculated based on other inputs--but I want to start with a monthly payment and work backwards.

Right now I am drawn to the figure around \$12K that would equal \$309 payments forever because it seems like the "forever" aspect balances out the "but he will probably actually get more" aspect. I am open to suggestion!

#### Greenstache

• Posts: 31
##### Re: Help Me Math: Valuing defined benefit plan
« Reply #12 on: September 04, 2016, 02:36:59 PM »
There are various online calculators that might help you develop the current-day lump-sum value (https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_cal, among others).

Can you access the plan documents for the defined benefit plan?  Those should give you some more insight into the valuation assumptions, rates of return, etc. being used to develop his future benefit amount, and that could be a helpful start.  If this is a plan with over 100 participants in the United States, you can look up the annual audited financial statements using the DOL's online search tool (https://www.efast.dol.gov/portal/app/disseminate?execution=e1s1).

#### Seagal

• Posts: 7
##### Re: Help Me Math: Valuing defined benefit plan
« Reply #13 on: September 04, 2016, 06:07:17 PM »
Hi FP,

Pension actuary here who has been quietly following your journey via your journal and divorce thread.  I have a few thoughts.

The problem here, which you already understand (and goldielocks also discussed), is that the portion of Mr. FP's pension that you are truly entitled to is unknowable because it depends on future events (Mr. FP's future pay and future years of contributing to the pension plan).  If you agree to receive a low-end value payoff based on Mr. FP's current accrued benefit (the \$309), you give up potential value from Mr. FP's future pay increases that you ARE entitled to, which could be a meaningful amount if he works a long career under this pension system.  If I were you, it would bug me to leave that potential value on the table.

On the other hand, if I were Mr. FP, I would be less than thrilled to base your payoff on a pension amount that I have not yet earned, and very well may not actually earn if I take a job outside of my current pension system.  You said Mr. FP deep down doesn't really want to pay you off at all, so I would guess that he REALLY doesn't want to overpay.

You and goldielocks are both correct in a sense.  I didn't make an attempt to follow your estimates, but they aren't "right" not just because the pension amount is unknowable, but because these should be actuarial calculations.  On the other hand, yes, of course you can do whatever you want.  You can take whatever portion of the 403(b) that you both agree is fair (calculated based on whatever methodology makes sense to you, knowing there is no "right" way to do it at this point in time - can't help you with that) in lieu of the portion of the pension you're entitled to, absolutely.

But I'm having a hard time seeing how you two will come to an agreement on this given all of the unknowns.  Which brings me to a question...  why the aversion to "signing papers entitling you to a tiny monthly check 30 years from now"?  What is so horrible about that?  I think that's the best solution for you because it is the solution where you both know that you will end up with exactly what you are entitled to and not a penny more.  Easy-peasy.

#### Bicycle_B

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #14 on: September 04, 2016, 09:36:25 PM »
Hi FP,

Pension actuary here who has been quietly following your journey via your journal and divorce thread.  I have a few thoughts.

The problem here, which you already understand (and goldielocks also discussed), is that the portion of Mr. FP's pension that you are truly entitled to is unknowable because it depends on future events (Mr. FP's future pay and future years of contributing to the pension plan).  If you agree to receive a low-end value payoff based on Mr. FP's current accrued benefit (the \$309), you give up potential value from Mr. FP's future pay increases that you ARE entitled to, which could be a meaningful amount if he works a long career under this pension system.  If I were you, it would bug me to leave that potential value on the table.

On the other hand, if I were Mr. FP, I would be less than thrilled to base your payoff on a pension amount that I have not yet earned, and very well may not actually earn if I take a job outside of my current pension system.  You said Mr. FP deep down doesn't really want to pay you off at all, so I would guess that he REALLY doesn't want to overpay.

You and goldielocks are both correct in a sense.  I didn't make an attempt to follow your estimates, but they aren't "right" not just because the pension amount is unknowable, but because these should be actuarial calculations.  On the other hand, yes, of course you can do whatever you want.  You can take whatever portion of the 403(b) that you both agree is fair (calculated based on whatever methodology makes sense to you, knowing there is no "right" way to do it at this point in time - can't help you with that) in lieu of the portion of the pension you're entitled to, absolutely.

But I'm having a hard time seeing how you two will come to an agreement on this given all of the unknowns.  Which brings me to a question...  why the aversion to "signing papers entitling you to a tiny monthly check 30 years from now"?  What is so horrible about that?  I think that's the best solution for you because it is the solution where you both know that you will end up with exactly what you are entitled to and not a penny more.  Easy-peasy.

1.  I like Seagal's analysis.  Yet you clearly have expressed basically that you want something now instead of waiting until later.  Consider that if you get "less than what you deserve" in current dollars, that is the price you are paying for getting the format ("current dollars, not payments later") that you want.

2.  Since you are tentatively calculating \$12k as your reasonable number, if you get \$9k you're paying \$3k for the format you want.  If that's a fair deal to you, maybe save time and just agree to the \$9k?  Your time has value too.

Best luck regardless.  Anyone who can divorce amicably is better off than most.  Congrats to you.

#### MDM

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #15 on: September 04, 2016, 09:40:05 PM »
I do not understand the "pension now" vs. "pension later" part. I guess the question for that part would be, what amount of money NOW, stored in the market for 29 years, would generate \$3039 per month over some reasonable number of years if one was OK with drawing down the principle. (20? 25? His family is not very long-lived but mine seems to be.)
The answer to that question (see specific numbers used below) is \$18,387.

Are you familiar with Excel Goal Seek?  Google that if not - it makes it much easier to adjust the "Lump sum now" amount to match one of the desired monthly numbers.

 One way to evaluate "pension now"  vs. "pension later"
 Compare pension payment promised at the later time to either
 - the "Interest generated by Future Value" (Future Value principal is not touched), or
 - the "Constant withdrawal of FV over time L" (principal goes to zero), or
 - "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)
 Lump sum now PV \$18387 Payment starting now Pmt_now 0 \$/payment Interest rate i 4.0% /yr number of years n 29 yr number of payments/year freq 12 /yr When payments are made for each n type 0 0 = at end, 1 = at start Future Value FV \$58541 Interest generated by Future Value FV(i,n,P) * i 195 \$/payment Longevity of future pension L 25 yr Constant withdrawal of FV over time L Pmt_future 309 \$/payment Spending growth rate (e.g., CPI) g 2.0% /yr First year Trinity-style withdrawal W(FV,L,i,g) 2981 \$/yr 248 \$/pmt

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #16 on: September 04, 2016, 10:06:25 PM »
Thanks, MDM! I'll Math some more tomorrow when my brain is fresh.

I've reached out to XFP to see how he feels about the now vs. later aspect; Seagal makes an excellent point that dividing the future pension is the only way to be really fair. If he feels strongly about doing it now, I'll have a stronger case for a larger lump sum!

#### SnackDog

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #17 on: September 05, 2016, 02:28:31 AM »
What you want is the present value of that future income stream with an assumed investment rate.  Assuming \$309/month starting in 30 years and lasting 30 years, with no annual inflation adjustment and 7% discount rate I get present value of \$18,890. 7% is a reasonable long term return.

You would be entitled to a portion of this if he was 100% guaranteed to collect it (live to age 95).  The life expectancy of a 35 year old, however, is 43 years (age 78). So, that trims the PV back to \$11,750.   You can argue his family is long-lived but he can argue he could get hit by a bus tomorrow and never receive his pension.

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #18 on: September 05, 2016, 10:35:31 AM »
What you want is the present value of that future income stream with an assumed investment rate.  Assuming \$309/month starting in 30 years and lasting 30 years, with no annual inflation adjustment and 7% discount rate I get present value of \$18,890. 7% is a reasonable long term return.

You would be entitled to a portion of this if he was 100% guaranteed to collect it (live to age 95).  The life expectancy of a 35 year old, however, is 43 years (age 78). So, that trims the PV back to \$11,750.   You can argue his family is long-lived but he can argue he could get hit by a bus tomorrow and never receive his pension.

There are very generous survivor benefits if that happened while he was still working, actually.

And there are co-beneficiary options where the payments would continue until MY death, not his, so using that 43 year figure wouldn't be fair. Even using a 47 year figure would be unfair to me because if I were getting the monthly payments straight from PERA, I would never have to worry about them running out. Although a suppose there is a bird-in-the-hand issue with getting a lump sum now vs. later.

#### Bicycle_B

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #19 on: September 05, 2016, 05:18:01 PM »
If you are getting divorced, the co-beneficiary options aren't relevant, are they?  Aren't they for the situation where he voluntarily reduces his income to ensure that you get more income in the event you outlive him?

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #20 on: September 05, 2016, 05:41:02 PM »
If you are getting divorced, the co-beneficiary options aren't relevant, are they?  Aren't they for the situation where he voluntarily reduces his income to ensure that you get more income in the event you outlive him?

Oooh, you're right. You CAN make your ex a cobeneficiary, but he probably wants to save that for a potential second wife. I would be an Alternate Payee and payment would stop with his death. (I think I would get something if he died BEFORE retirement.) If he died at 66, I would certainly wish I had taken a lump sum now!

This is complicated...

I was just going to take his PERA at face value, but my lawyer insists that it's worth a lot more than the face value.

#### Seagal

• Posts: 7
##### Re: Help Me Math: Valuing defined benefit plan
« Reply #21 on: September 05, 2016, 06:58:50 PM »
At retirement, the portion of Mr. FP's pension that is your share would actually be converted to a monthly benefit payable over your lifetime.  (Another of those pesky actuarial calculations...)  :)  In other words, your payment wouldn't stop upon his death; it would continue for your lifetime.

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #22 on: September 05, 2016, 09:49:38 PM »
At retirement, the portion of Mr. FP's pension that is your share would actually be converted to a monthly benefit payable over your lifetime.  (Another of those pesky actuarial calculations...)  :)  In other words, your payment wouldn't stop upon his death; it would continue for your lifetime.

That's what I would have thought, but this document makes it appear that would be true only if I were the cobeneficiary (see p. 3): https://www.copera.org/sites/default/files/documents/8-145.pdf

And I would not be the cobeneficiary. He only has 2 years in--if he works another 20, say, it would hardly be fair for me to get a cobeneficiary-type share. As Alternate Payee, it appears that benefits would stop with the participant's death.

#### La Bibliotecaria Feroz

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##### Re: Help Me Math: Valuing defined benefit plan
« Reply #23 on: September 05, 2016, 10:42:01 PM »
So I fiddled with some more numbers and read the plan documents.

Right now, Mr. FP is on the "money purchase" option, meaning basically they will pay out to him what he has put in, or some approximately based on actuarial tables. That's where the \$309 comes from. But it's a lifetime benefit, stops when HE (not me), dies.

If he retires at age 65, he would have 31 years of service credit and would be entitled to a lifetime benefit of .75 of his salary. Now, last year that was \$55K, which would yield a monthly benefit of 3437. The marital portion of that benefit would be \$110, because two of the 31 years were during our marriage. Adjusted for inflation, that's \$259, which I could expect to receive (based on actuarial tables) for some 13 years. According to the spreadsheet that MDM explained so nicely to me, that benefit would be equal to a current lump sum of \$4700. (Not the value of the pension--just my share.)

But how likely is he to do that? Not very, frankly. In another scenario, let's say he works 3 more years to vest, then at age 65 he would be entitled to a monthly benefit of something like \$520 (12.5 percent of salary, which I was setting of \$50K--he took a pay cut this year.) My share would be \$104 (half of two-fifths), for a lump sum to me now of \$1800. I don't think inflation would come into play here because his benefit would be based on his 2019 salary, not his imaginary 2045 salary.

So... I think my lawyer's wrong. I don't this his PERA is worth TO ME so very much more than the face value (\$9000, so half would be \$4500). ! Unless there's something very wrong with my math. Further input is welcome! I do want my fair share here...

Another question--when one uses the 7% interest rate, is that supposed to adjust for inflation? So if I took \$4500 and put it in a compound interest calculator to see what it would be worth in 29 years and used 7%, would I be getting today's dollars or (in theory) 2045 dollars?

#### MDM

• Walrus Stache
• Posts: 9604
##### Re: Help Me Math: Valuing defined benefit plan
« Reply #24 on: September 05, 2016, 11:57:00 PM »
Another question--when one uses the 7% interest rate,...
Depends on what you mean by "the" 7%.

Quote
...is that supposed to adjust for inflation? So if I took \$4500 and put it in a compound interest calculator to see what it would be worth in 29 years and used 7%, would I be getting today's dollars or (in theory) 2045 dollars?
The calculation you describe here tells you the amount you would see in your account in 2045.

If that 7% includes inflation - in other words, you used the "nominal" market return - the result is in 2045 dollars.

If that 7% does not include inflation - in other words, you used the "real" market return - the result is in today's dollars.

#### Seagal

• Posts: 7
##### Re: Help Me Math: Valuing defined benefit plan
« Reply #25 on: September 06, 2016, 11:15:32 AM »
At retirement, the portion of Mr. FP's pension that is your share would actually be converted to a monthly benefit payable over your lifetime.  (Another of those pesky actuarial calculations...)  :)  In other words, your payment wouldn't stop upon his death; it would continue for your lifetime.

That's what I would have thought, but this document makes it appear that would be true only if I were the cobeneficiary (see p. 3): https://www.copera.org/sites/default/files/documents/8-145.pdf

And I would not be the cobeneficiary. He only has 2 years in--if he works another 20, say, it would hardly be fair for me to get a cobeneficiary-type share. As Alternate Payee, it appears that benefits would stop with the participant's death.

Good info FP, I learned something new today.  Thanks.  In my area of non-public plan practice and experience, the method of dividing the benefit and having both benefits (participant's and alternate payee's) end upon participant death generally applies in cases where the participant has already retired, not when the participant is still working.  Looks like that's not true in the public plan world.

And I agree that the fact that your share of the pension would end upon his death makes it a less favorable option.