### Author Topic: How would you value your pension with the 4% rule?  (Read 1746 times)

#### chasesfish

• Magnum Stache
• Posts: 3081
• Age: 37
• Location: Texas
##### How would you value your pension with the 4% rule?
« on: April 05, 2014, 01:57:45 PM »
I haven't used this in my ER math because its so far out, but I'd like some suggestions on how to utilize the pension in my ER calculations.  I've viewed this as insignificant in the past, but as my years of service and income are growing, the numbers start to at least be four figures/mo.

Here is the example I'm playing with

ER 4 years from now.

Options:  Start collecting pension 19 years after ER, ~ \$1150/mo
Start collecting pension 29 years after ER, ~ \$2300/mo

There's no COLA, also not much risk in the pension going away, industry is regulated to death.  Would you present value the future payments back to today, or just view it as an added safety net?

#### warfreak2

• Handlebar Stache
• Posts: 1140
• Location: UK
##### Re: How would you value your pension with the 4% rule?
« Reply #1 on: April 05, 2014, 02:14:20 PM »
If you don't know it already, calculate your life expectancy. (Mine is about 83!). You're going to need a spreadsheet and an estimated inflation rate. Calculate the total inflation-adjusted amount for both of those pension options, assuming you collect until your life expectancy. (Don't forget that inflation eats away for another ten years before the second option begins!). Then just pick the option which gives you the higher total.

I don't think calculating the pension's value and applying the 4% rule is going to make sense.

#### Cassie

• Walrus Stache
• Posts: 5641
##### Re: How would you value your pension with the 4% rule?
« Reply #2 on: April 05, 2014, 02:45:56 PM »
when we looked at when to start collecting the pension we just figured out at what age we would break even by waiting & then how long we had to live to make it pay off to wait. When my hubby did both calculations it was better for us to take our pensions early however we do have Cola's.

#### warfreak2

• Handlebar Stache
• Posts: 1140
• Location: UK
##### Re: How would you value your pension with the 4% rule?
« Reply #3 on: April 05, 2014, 02:54:28 PM »
Yeah, the point is working out whether the break-even date is within your life expectancy. Unfortunately you can't just take the obvious "break even 39 years after ER" answer, because while on that date you will have received the same total number of dollars, the "wait" option means more of your dollars will have been received later, when they have a lower worth due to inflation.

#### RadicalPersonalFinance

• Stubble
• Posts: 166
##### Re: How would you value your pension with the 4% rule?
« Reply #4 on: April 05, 2014, 03:00:22 PM »
You need to run it as a cash flow and then, if you want it to be part of your asset mix, simply reduce the portfolio drain by the amount that the pension throws off in income.

You can do it by hand if you want--just run two cash flow periods. Run the cash flow for period A: ER date to Pension Start Date. Then, run the cash flow for period B: pension start date to life expectancy.

Then, discount both sets of cashflows to today and you'll have your necessary portfolio value to retire.

You can obviously do a present value calculation but there's no connection between the PV number and the 4% rule.  4% rule is purely an estimate of flows from a portfolio value, not a guaranteed pension payment.

If the math is tough for you and you don't want to get any professional advice just reduce your living expenses by the amount of the pension income and re-run your 4% analysis.