Author Topic: How to properly value and calculate my ER age with a pension?  (Read 4071 times)

missj

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How to properly value and calculate my ER age with a pension?
« on: August 17, 2014, 01:57:27 PM »
I'm quite lucky to have a traditional pension.  As such, this reduces my hourly compensation and 403(b) employer match  but is still a tremendous asset that I find difficult to factor in to my retirement calculations. (mostly because I'm dense with math)

I am 100% vested but the  earliest I can retire is age 51 and the earliest I can start drawing on the pension is age 55. (I am 33 right now).

I know a lot depends on the variables of when I retire, and when I start drawing the pension but since this is an early retirement website, I'll look at best case scenaro vs. "typical" retirement.

Scenario A: Work till 51. receive benefits at 55
$345,717   Lump sum
$   1,773    Single Life Annuity (monthly payment)
$   1,904    50% Joint and survivor Annuity (monthly payment)
$   2,927    level income until Social security kicks in with 10 year guarantee

Scenario B: Work until age 65
$1,169,154  Lump Sum
$       7,337  Single Life Annuity (Monthly payment)
$       8,417 50% Joint and Survivor Annuity (Monthly Payment)
$      10,745 Level Income until Social Security kicks in with 10 year guarantee

Is the best way to do this just to add the value of the lump sum to my hypothetical portfolio at that future age? 

Or, is the best way to use the monthly payment to offset my future income needs and figure I'm drawing down a lesser fraction of my portfolio value each year (so basically forecast my retirement income needs as being roughly half)?

Any guidance greatly appreciated!


Catbert

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Re: How to properly value and calculate my ER age with a pension?
« Reply #1 on: August 17, 2014, 02:11:52 PM »
If you're single and retiring reasonable close to being about to receive a pension, I think it's pretty easy...at least in theory.

*figure out how much you'll need each year in retirement (i.e., your budget)
*subtract the pension about from your budget
*take your remain budget needs and determine total portfolio to support using 4% withdrawal (or whatever % you've selected)

Then figure how much you'll need in the few years between retirement and starting your pension. 

For example, if your pension is 24K and you're 4 years out then you'd need an extra 100K.

Maybe someone else can weigh in on the survivor planning.  That's where it gets more difficult.

Catbert

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Re: How to properly value and calculate my ER age with a pension?
« Reply #2 on: August 17, 2014, 02:41:40 PM »
Okay I'll try to tackle a surviving spouse situation.  Pretend you're dead.  What would your surviving spouse need to live reasonably well?  Probably less that when there are two of you but certainly more than half of your baseline budget.  Then go through the above process. 

That'll mean that you'll need a larger 'stache or to continue with life insurance to make up the difference.

DoubleDown

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Re: How to properly value and calculate my ER age with a pension?
« Reply #3 on: August 17, 2014, 03:25:22 PM »
I am 100% vested but the  earliest I can retire is age 51 and the earliest I can start drawing on the pension is age 55. (I am 33 right now).

Out of curiosity, just in case you don't want to work until age 51 and can save up enough in other funds to retire earlier -- since you are "100% vested," can you not resign earlier and defer your pension until you reach the proper age? For example, I have a pension too, and I've resigned 9 years before my minimum retirement age. In my case, I can defer the retirement, and still collect once I reach that age (at a lesser amount, of course, than if I had continued working those additional 9 years). If you look at the terms of your pension, this option may be available to you as well.

Or, is the best way to use the monthly payment to offset my future income needs and figure I'm drawing down a lesser fraction of my portfolio value each year (so basically forecast my retirement income needs as being roughly half)?

Yes, as mary w said, it's best to subtract your monthly pension payment from your budgeted expenses, then determine how much you'll need (if any) from other income sources. If you are retiring before you start receiving your payments, then you'll need to find enough other sources of income to cover that period (essentially coming up with "two" retirements, with income sources for each period). And don't forget Social Security when you're older, if you've paid in and accrued enough credits to receive benefits.

missj

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Re: How to properly value and calculate my ER age with a pension?
« Reply #4 on: August 17, 2014, 03:56:55 PM »


Out of curiosity, just in case you don't want to work until age 51 and can save up enough in other funds to retire earlier -- since you are "100% vested," can you not resign earlier and defer your pension until you reach the proper age? For example, I have a pension too, and I've resigned 9 years before my minimum retirement age. In my case, I can defer the retirement, and still collect once I reach that age (at a lesser amount, of course, than if I had continued working those additional 9 years). If you look at the terms of your pension, this option may be available to you as well.

That's a great question that I was asking myself earlier.  I don't really know the answer.  When I go on the pension forecasting website it says my present monthly value is $500 something...I don't really know what that refers to though, since I can't actually "retire" until 51. 

I came up with the age of 51 on my own by using our rule of 75.  so years of service + age must = 75. *unless you are already 65 then you can retire at any time but you're not vested in pension plan until after 5 years of service.  Perhaps if I quit now (with only 6 years of service) I would have to wait until age 65 to draw it because I wouldn't have met the rule of 75?  I don't really understand.  Or perhaps I would get NOTHING (in which case what was the point of being vested after 5 years? maybe that vesting is only a factor for older workers who won't meet the rule of 75 before reaching age 65....?)

The other considerations with meeting our minimum retirement age have to do with benefits.  If we retire in a benefit eligible status (as opposed to just quitting) we get 70% paid medical insurance benefits and we get our unused sick time rolled over at 80% face value into a health savings account which we can use to pay our portion of the 30% premiums tax free; so maybe THAT is where age 51 matters?  I definitely won't get any of those other perks if I retire before age 51.
« Last Edit: August 17, 2014, 04:04:24 PM by missj »

SnackDog

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Re: How to properly value and calculate my ER age with a pension?
« Reply #5 on: August 18, 2014, 08:24:43 AM »
When you do your forecast, pick your retirement age and include the lump sum in your savings.  You should plan to take the lump sum, by the way, unless you really require the guaranteed safety of the monthly payments (assuming your employer never changes the plan or goes bankrupt).

rubybeth

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Re: How to properly value and calculate my ER age with a pension?
« Reply #6 on: August 18, 2014, 10:37:36 AM »
That's a great question that I was asking myself earlier.  I don't really know the answer.  When I go on the pension forecasting website it says my present monthly value is $500 something...I don't really know what that refers to though, since I can't actually "retire" until 51. 

You'll likely have to ask your employer how this works. There are lots of reasons you'd want to know this info., but especially for early retirement. I also have a pension option very similar to yours, but I could quit today and defer taking payments until age 55 or later, and my pension's website will give me estimates for various ages. I can also estimate my payment if I work to age 45 and then start taking payments at 55, 60, 65, etc.

goodwalkspoiled

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Re: How to properly value and calculate my ER age with a pension?
« Reply #7 on: August 18, 2014, 02:23:42 PM »
Suggest you get someone in HR, or the pension plan custodian to give you the formula / figures, and age thresholds.  Then you can plug that data into a spreadsheet and generate 'what if' and 'how long to work' scenarios.   

One rule of thumb says:  In retirement, "Guarateed income = guaranteed expenses."  In other words, Pension + Social Security + annual 401K withdrawals should cover all normal living expenses, which are guaranteed to occur.  Beyond the basics, any windfalls, investment income (divs and capital gains) etc. are available for discretionary spending (vacations, travel, entertainment, etc.) - in the good years.  In down years, don't spend.  In better years, there's more available for those things.  Budget next year's discretionary spending based on this year's actual returns.

SailAway

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Re: How to properly value and calculate my ER age with a pension?
« Reply #8 on: August 18, 2014, 06:44:04 PM »
I think my pension is a similar set-up to yours. Is there a website where you can get more info? My employer has annual retirement informational meetings that I can attend and ask questions. Does yours? Do you get a quarterly statement?

I think to get a handle on this you first need more info about your pension. Can you talk to your HR person at least? Just say you're doing some retirement planning and have some questions. My pension administrator has a 1-800 number but I tried that once and it was beyond a waste of my time.

missj

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Re: How to properly value and calculate my ER age with a pension?
« Reply #9 on: August 18, 2014, 09:09:08 PM »
The website is pretty good, that is where I got a lot of those figures I quoted, by plugging in various ages and seeing what came out.

Where I need more info is the specifics of ages etc. 

When I try to call the number it says "experiencing unusually high call volume" it has said that every time i've tried over the last 2 months (I've probably tried to call 5 times or so)