Author Topic: Help me understand how much I'm giving up  (Read 4869 times)

mlm2016

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Help me understand how much I'm giving up
« on: September 08, 2016, 01:00:52 PM »
I am leaving a job that has a defined benefit pension.  If I stayed until my "retirement age" of 65 (this would be in 2043) I would collect $6000/month from the pension.  Leaving the job now means that my benefit will decrease to $1200/month once I turn 65.

How much would I need to save to replace the $4800/month I am walking away from????

My new employer will match up to $7200/year of a 401k contribution.   If they contribute until 2043 will this be comparable to the $4700/month benefit?

Thanks in advance!

dandarc

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Re: Help me understand how much I'm giving up
« Reply #1 on: September 08, 2016, 01:13:45 PM »
Based on the 4% rule, $4800 per month comes to $1.44 million.

At various return rates, it would take the following annual payment to have 1.44 million in 27 years:

Return Rate    Required Annual Payment           
0.0335372.4628674866
0.0430583.4984876674
0.0526340.2782080389
0.0622603.9195144362
0.0719333.0569856163
0.0816485.2585388927
0.0914018.2637796861
0.111891.0048776964

nereo

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Re: Help me understand how much I'm giving up
« Reply #2 on: September 08, 2016, 01:53:47 PM »
...
At various return rates, it would take the following annual payment to have 1.44 million in 27 years:
Return Rate    Required Annual Payment           
0.0335372.4628674866
...

I just love that you presented your numbers so precisely, down to the 10th decimal point (or 0.00000001th of 1)
:-)

OP: A better question to ask yourself is "how much do I need to save to be FI?"  It might be an additional $1.44MM, or it could be much less.

Quote
My new employer will match up to $7200/year of a 401k contribution.   If they contribute until 2043 will this be comparable to the $4700/month benefit?
It depends on how much you contribute yourself.  If you contribute the maximum tax-deferable amount of $18,000/year, total annual 401(k) contributions will be $25,200.  With 5% real-returns you'll hit $1.44MM by 2043.  If you get 6% returns (which is closer to the historical average) you'll hit that target in 2041.

This ignores additional savings in a IRA or taxable accounts, which will get you there even faster.

RFAAOATB

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Re: Help me understand how much I'm giving up
« Reply #3 on: September 08, 2016, 02:00:16 PM »
Be aware a pension typically goes away when you and your designated beneficiary die.  A 401k can be passed down to help with generational wealth.

zephyr911

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Re: Help me understand how much I'm giving up
« Reply #4 on: September 08, 2016, 02:04:49 PM »
I am leaving a job that has a defined benefit pension.  If I stayed until my "retirement age" of 65 (this would be in 2043) I would collect $6000/month from the pension.  Leaving the job now means that my benefit will decrease to $1200/month once I turn 65.

How much would I need to save to replace the $4800/month I am walking away from????

My new employer will match up to $7200/year of a 401k contribution.   If they contribute until 2043 will this be comparable to the $4700/month benefit?

Thanks in advance!
If you plan on needing 6 grand a month when you're 65, but not before then, this may not be the best place to ask for help. I plan on quitting my last full-time job at 38 with <3K in income, and I'm sort of an underachiever here....

nereo

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Re: Help me understand how much I'm giving up
« Reply #5 on: September 08, 2016, 02:21:40 PM »
If you plan on needing 6 grand a month when you're 65, but not before then, this may not be the best place to ask for help. I plan on quitting my last full-time job at 38 with <3K in income, and I'm sort of an underachiever here....

Just to be overly technical, it would be $6k/mo in pension/401(k) income, plus SS of (ballpark per SS estimates at approximate salary) $2,609/mo at age 67, plus any income from IRA and taxable accounts.
In all likelihood this represents over >>$9k in monthly support.

dandarc

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Re: Help me understand how much I'm giving up
« Reply #6 on: September 08, 2016, 02:24:19 PM »
...
At various return rates, it would take the following annual payment to have 1.44 million in 27 years:
Return Rate    Required Annual Payment           
0.0335372.4628674866
...

I just love that you presented your numbers so precisely, down to the 10th decimal point (or 0.00000001th of 1)
:-)
Is it precision, or laziness?  Note I also didn't bother to turn my ROR's into properly formatted percents either.

nereo

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Re: Help me understand how much I'm giving up
« Reply #7 on: September 08, 2016, 02:33:48 PM »
...
At various return rates, it would take the following annual payment to have 1.44 million in 27 years:
Return Rate    Required Annual Payment           
0.0335372.4628674866
...

I just love that you presented your numbers so precisely, down to the 10th decimal point (or 0.00000001th of 1)
:-)
Is it precision, or laziness?  Note I also didn't bother to turn my ROR's into properly formatted percents either.

Reminds me of a joke:
Q: Why do economists give growth forecasts down to 1/100th of a percent?
A:
Spoiler: show
 to show they have a sense of humor.

Retire-Canada

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Re: Help me understand how much I'm giving up
« Reply #8 on: September 08, 2016, 04:41:57 PM »
Reminds me of a joke:
Q: Why do economists give growth forecasts down to 1/100th of a percent?
A:
Spoiler: show
 to show they have a sense of humor.


Boom! I like it. :)

backyardfeast

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Re: Help me understand how much I'm giving up
« Reply #9 on: September 08, 2016, 09:58:54 PM »
If you plan on needing 6 grand a month when you're 65, but not before then, this may not be the best place to ask for help. I plan on quitting my last full-time job at 38 with <3K in income, and I'm sort of an underachiever here....

Just to be overly technical, it would be $6k/mo in pension/401(k) income, plus SS of (ballpark per SS estimates at approximate salary) $2,609/mo at age 67, plus any income from IRA and taxable accounts.
In all likelihood this represents over >>$9k in monthly support.

Yeah, I think this is the important shift in thinking.  I am contributing to a defined benefit pension, along with my colleagues.  One colleague keeps saying, "I have to work until I'm 65, or maybe even older, otherwise my pension will be clawed back." I keep asking her, "how much do you need to live on comfortably?"  She doesn't know; does not compute.  Personally, we're looking to keeping our expenses under $4000/mo, so I'll be looking at my pension distributions and DH and my SS etc every year from 55 on, and retiring whenever the numbers look good.  What's the point in earning money you don't need?! Says I. :)

nereo

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Re: Help me understand how much I'm giving up
« Reply #10 on: September 09, 2016, 05:30:53 AM »

Yeah, I think this is the important shift in thinking.  I am contributing to a defined benefit pension, along with my colleagues.  One colleague keeps saying, "I have to work until I'm 65, or maybe even older, otherwise my pension will be clawed back." I keep asking her, "how much do you need to live on comfortably?"  She doesn't know; does not compute.  Personally, we're looking to keeping our expenses under $4000/mo, so I'll be looking at my pension distributions and DH and my SS etc every year from 55 on, and retiring whenever the numbers look good.  What's the point in earning money you don't need?! Says I. :)


Yeah, the fear of "losing" a pension is a big driver in 'one-more-year' (OMY) syndrome.  People see a projected decline in pension income of, say, $2,000/mo if they quit a 55 instead of 65 and convince themselves that this is 'lost' income, ignoring the fact that htey need to work an additional 10 years to get it.  That's 10 years you can't ever get back.

IMO the only sensible solution is to start with what you will need (with whatever layers of safety you want) and work from there to decide when you 'enough'. 

boarder42

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Re: Help me understand how much I'm giving up
« Reply #11 on: September 09, 2016, 05:36:20 AM »
yeah there is some guy in another thread here thats already FI and is working 3 more years to get health insurance and possibly 9 to get full pension!!!! just a waste IMO with his numbers.

jim555

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Re: Help me understand how much I'm giving up
« Reply #12 on: September 09, 2016, 07:29:37 AM »
Pensions can be frozen at any time so it is not something to be counted on.

nereo

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Re: Help me understand how much I'm giving up
« Reply #13 on: September 09, 2016, 07:38:53 AM »
yeah there is some guy in another thread here thats already FI and is working 3 more years to get health insurance and possibly 9 to get full pension!!!! just a waste IMO with his numbers.
Oh, I've seen plenty of OMY cases, both here and in RL.  I vividly remember one poster who was around 50 and had a 'stache large enough to use a ~2.1% WR, not including a five year bond ladder, nor a modest pension which covered ~50% of his monthly expenses and also not including SS payments in 15 years. I calculated out that if he included his bond ladder and current pension (but still ignored SS) he'd need a WR of just 0.9%.
He wanted to stick out another decade because it would double his pension and he hated the idea of 'leaving money on the table'.

plog

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Re: Help me understand how much I'm giving up
« Reply #14 on: September 09, 2016, 08:41:32 AM »
This is bigger than pensions.   I've know many people  who hang on for many miserable years thinking the IPO is always just months away.  Or girls who've been with a guy for 5 years and just know an engagement is coming on their next birthday.   And all these people working crappy government jobs hoping in one short decade their student loans will be erased.

I find that only about 10% of the population has the ability to delay gratification properly.   70% have no ability to do so, spending what they make before they make it. And the other 20% fall on the other end of the spectrum--they are unable to see that the best option is the one in front of them right now.  They hope to chase a huge payday they don't really need and they take on risks that they don't even realize.

$1 dollar today is often better than the promise of $2 tomorrow.         

sirdoug007

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Re: Help me understand how much I'm giving up
« Reply #15 on: September 09, 2016, 09:06:02 AM »
Be aware a pension typically goes away when you and your designated beneficiary die.  A 401k can be passed down to help with generational wealth.

This is an important factor.

The better way to estimate the cash value of the pension difference is to get a quote for an immediate annuity for $4800 starting at age 65.  Those run about $1 million.  A 44% discount from the 4% rule (due to the loss of funds on your death).

https://www.immediateannuities.com/annuity-calculators/?sce=hc

To achieve $1 million in 27 years takes about $13.5k at 7%.

Although, as others have said, there is 27 years of baggage to get that $1 million annuity which makes it MUCH less valuable.

boarder42

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Re: Help me understand how much I'm giving up
« Reply #16 on: September 09, 2016, 09:09:04 AM »
yeah there is some guy in another thread here thats already FI and is working 3 more years to get health insurance and possibly 9 to get full pension!!!! just a waste IMO with his numbers.
Oh, I've seen plenty of OMY cases, both here and in RL.  I vividly remember one poster who was around 50 and had a 'stache large enough to use a ~2.1% WR, not including a five year bond ladder, nor a modest pension which covered ~50% of his monthly expenses and also not including SS payments in 15 years. I calculated out that if he included his bond ladder and current pension (but still ignored SS) he'd need a WR of just 0.9%.
He wanted to stick out another decade because it would double his pension and he hated the idea of 'leaving money on the table'.

this will likely be me in 7 years ... i'll have ESOP stock at my company that is probably earning 150-200k per year and compounding on that and rising.  hard not to one more year it to get an extra 8k buffer but that can only go on so long

BTDretire

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Re: Help me understand how much I'm giving up
« Reply #17 on: September 09, 2016, 10:14:34 AM »
I am leaving a job that has a defined benefit pension.  If I stayed until my "retirement age" of 65 (this would be in 2043) I would collect $6000/month from the pension.  Leaving the job now means that my benefit will decrease to $1200/month once I turn 65.

How much would I need to save to replace the $4800/month I am walking away from????

My new employer will match up to $7200/year of a 401k contribution.   If they contribute until 2043 will this be comparable to the $4700/month benefit?

Thanks in advance!
If you plan on needing 6 grand a month when you're 65, but not before then, this may not be the best place to ask for help. I plan on quitting my last full-time job at 38 with <3K in income, and I'm sort of an underachiever here....

  Using the last 23 years of inflation as a model for the next 23 years,
$6,000 a month in 2043 is the equivalent of $2,853 today.

Goldielocks

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Re: Help me understand how much I'm giving up
« Reply #18 on: September 09, 2016, 11:18:14 AM »
The 1.44 million number looks scary, but remember -- that is after working many more year.

The pension calc usually looks like this

Years of service x 2% (or other number) x Annual salary (or average, etc).

So the key difference is that quitting today, you have fewer years of service, versus at age 65, when you will have 25+ more years. BUT -- That is because there will be  25+ more years of additional money contributions.

Instead, you could put the same (or less) additional money into your own self directed retirement plan over the next 25 years and easily replace it, if you like.   Hopefully future employers that do not provide pensions give more $'s directly as compensation or you negotiate well.

So, you have not "lost out" on your pension, just moving it to a different format.  The only times you "lose out" is when you collect a pension early, (lower payouts) and die early, or quitting before you are vested.