Poll

With a target annual spending of $40k would you prefer 1,000,000 (4% SWR) or a pension of $40k annually indexed for inflation?

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Author Topic: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?  (Read 4934 times)

EngiNerd

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See 2nd Post in regards to new thread title and poll.

I work for a State DOT with a great pension plan and just got a offer to a federal position. State pension plan is 28 years and you get to retire, great by normal standards but pretty slow for people of this forum.  And though I admit I do not aspire for to FIRE asap to near the extent of most here but I really dig MMM's blog and philosophy and most of the people in these forums.  I just posted this over at bogleheads but figured I would get this community's input as well. 

How do you convert participation in a pension plan into current value to compare to a job offer?  Check out my method and please advise.

I just received a job offer and am having trouble comparing the total compensation for the 2 career paths. The issue is that I have 7 years into the DOT pension plan that is vastly superior to the fed's (employee contribution: State=6%, Fed=4.4%; Multiplier x yrs of service x high 3 avg: State=2.2%, FED=1%). I will try to explain my method to calculate and compare the 2 possible career paths. Please provide constructive criticism to my method. Afterwards I'll explain my more subjective pros and cons if anyone cares to read and give me some advice. Please let me know if there is a fairly easy and secure way to share a spreadsheet on this forum as that might be more informative.

Basically because of the grade and step setup of government salary scales I can predict career growth with some confidence. I except to make ~15% ~6% more with my federal salary. So I set up a spreadsheet with each years predicted annual salary for each employer and took the difference (plus the 5% match from TSP) and assuming I invest it all and get a optimistic return of 7% (also not factoring in taxes or inflation to keep things simple) after working X number of years I see what my State Pension value will be compared to my federal pension value plus .04 x the hypothetical portfolio (4% SWR). With those calculations (favoring federal compensation: no taxes and 7% growth assuming no state raises other than promotions, but counting on maxing out the steps in the fed) the state pension value is greater than the fed pension plus 4% SWR out to 20 years. Which is when I would be eligible for full retirement at the state. I was surprised by the results, which leads me to doubt the method, and I am not sure how to calculate the current compensation value of a pension plan so that was the best method I could come up with.

Now for more personal and specific information for those that wish to keep reading. I owe you people a :beer
I currently make 81.5K 85.6K (counter offer)and expect to be promoted (waiting on superiors to retire) to 89.7k 94.1K in 5+/- years and then to 94.2k 98.8K in 7+/- years after that.
I was offered GS-12 step 6: 84.2K with high likelihood of being promoted to grade 13 step 3: 91.5K after 1 year.
Question for FEDS how quickly can a competent good employee expect to move up the steps in a grade?
My wife and I have a ~55-60% savings rate of our gross income (meaning I would be fine without the pensions or I could save nothing and live off the pensions). But I have realized this will change if we upgrade the house, move, and or have kids.   I might not aspire to the RE part of FIRE near as much as I like living efficiently and managing my finances as optimally as possible. Obviously if FIRE was my main goal I would go with the higher salary and match and just forget the pension parts of the retirement.

Pros of accepting.
I like new jobs and the excitement and growth that comes with them. I have changed jobs/duties 2 times in my career thus far and I enjoy the challenge.
I like the adventure and freedom of cutting ties to the pension plan. I realize financially it is great for peace of mind and comfortable retirement. But right now it seems boring and unambitious to pass opportunities because "If I work another 20 years I will receive my pension" The freedom and mobility of taking a 401k with you is appealing.
Possibility of relocation. I would like to try living in other states, a position with the feds makes that possible without even switching employers.
More opportunities for growth.

Cons
Apprehensive about being more a regulator than a doer. I currently design, manage construction, and get my hands dirty. If I accept the position I will be more reviewing and pushing DC's agenda. I think job satisfaction could drop off and some engineering skills will probably suffer.
FEDs seem like they are more likely to be negatively effected by the politics. Government waste seems to be a growing political focal point and it seems like FEDs are more vulnerable to things such as: government shut downs, calls for salary freezes and etc.
If I do not FIRE it will be considerably longer before I can collect a pension. If I stay I can get a pension check at 52, which is still retiring relatively young and gives me the option to stay employed while I raise kids if the wife and I do decide to have some.
I currently work with great people have a good work life balance. On occasion I am called out on travel for unpredictable crises but that can be interesting along with the obvious downsides.

Sorry for the long rambling but wasn't sure how to cut it down. Thanks again!

Edited to show new details of counter offer
« Last Edit: October 01, 2017, 11:27:55 AM by EngiNerd »

EngiNerd

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #1 on: September 28, 2017, 05:29:53 PM »
Well that got no interest.  Let me ask a more general question.  Say you have analyzed your annual expenses and you and your significant other have decided that with $40k of annual spending you can live the best life imaginable.  Would you rather have $1,000,000 and abide by the 4% SWR or a pension value of $40k a year with annual cost of living adjustments to keep up with inflation.  I could see the pension as being easier and maybe more secure depending on the agency/company but with the 4% you are more likely to actually have the principle grow will be capable of passing the $ on to heirs or charities of your choice. 

MDM

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #2 on: September 28, 2017, 08:47:12 PM »
Well that got no interest.  Let me ask a more general question.  Say you have analyzed your annual expenses and you and your significant other have decided that with $40k of annual spending you can live the best life imaginable.  Would you rather have $1,000,000 and abide by the 4% SWR or a pension value of $40k a year with annual cost of living adjustments to keep up with inflation.  I could see the pension as being easier and maybe more secure depending on the agency/company but with the 4% you are more likely to actually have the principle grow will be capable of passing the $ on to heirs or charities of your choice.
As stated ("with $40k of annual spending you can live the best life imaginable"), the pension, because there is no upside to you if you could spend more.

Personally, the lump sum, because I believe the 4% WR is close to "worst case" and the likely achievable WR is higher.

SwordGuy

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #3 on: September 28, 2017, 09:00:40 PM »
With a pension, when you die (or possibly you and your spouse), the pension is gone.

With a $1M nest egg, it's still around for your heirs or charities you like to enjoy.


Finances_With_Purpose

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #4 on: September 29, 2017, 02:23:55 AM »
$1M.  Not even close.  Which state?  Have you checked out how well your state's pension is funded?  How rosy their assumptions about returns are?  What they're even allowed to invest in?  Pretty hard to hit that 7-8% when you're stuck investing in AAA-rated bonds. 

And how old are you?  28 years is a long time for the fund to worsen.

Who governs the pension?  Who sets the rules?  Who decides upon investments?  Politicians?  Unelected bureaucrats?  (Though either can go wrong in its own way.)  How many people currently employed are pension-eligible?  (I.e., how many can flood it with claims if/when the pension fund sinks some - which will push it towards collapse.) 

I suspect if you're younger, those pension benefits are going to turn out less valuable and more expensive than they seem today.  (One state I looked at recently has been consistently raising mandatory contribution percentages, and yet the funds still aren't in amazing shape, although they're salvageable.) 

See some of John Mauldin's letters re: public pensions - he quotes great sources.  Also, Michael Lewis wrote a book (referral link) on pensions/government that's a fun read/listen.

I'd go with money in the bank any day, especially these days.  At least you know (with some reasonable risk mitigation) that it'll actually be there - and won't cost you more and more. 

I'm not fearful about it, but I want to remain savvy, and pension issues have a big impact on my own decision about whether to jump into government employment.  Personally, I heavily discount the expected future value of any government pension. 

Best of luck to you! 

former player

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #5 on: September 29, 2017, 04:45:36 AM »
You will be fine financially whichever route you take - neither option is close to jeopardising your financial future.

I have seen people stay in their jobs "for the pension".  They make themselves and everyone around them miserable.  Not worth it.  On the other hand, if you are happy at work a pension is a nice bit of security for the future.

I have a mixture of work pension (which is essentially the investment equivalent of an index-linked government bond), rental income, investments and in due course social security pension.  I could probably live off any one of them, which puts me well over the "financially secure" benchmark.  You are heading the same way.   I do think there is something to be said for diversifying beyond just stock market investments, even if those stock market investments are themselves diversified in the form of index funds, so the answer to your poll is "it depends".

When I have a difficult decision to make, I try to work out which route I will regret the least.


EngiNerd

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #6 on: September 29, 2017, 05:51:14 AM »
Thanks for the input so far!  Right now the poll is 11 to 3 in favor of the portfolio vs pension. I voted for the portfolio as well.  Basically because what MDM stated that 4% is worst case, usually you end up with some principle left and often times more principle.  I was basically trying to feel out the weak points of my method of comparing the compensation packages, which is different than the poll but that comparison does assume 4% SWR is equal to the pension.  Both jobs have mandatory pension participation.  The DOT's is obviously superior: contribute 6% for a 2.2% multiplier is 1.6 times better than contributing 4.4% for a 1% multiplier. And obviously the 5% match makes up some of that but how to best compare the 2 I am not sure.  And surprisingly the answer is not easily found on google. 

EngiNerd

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #7 on: September 29, 2017, 06:02:24 AM »
$1M.  Not even close.  Which state?  Have you checked out how well your state's pension is funded?  How rosy their assumptions about returns are?  What they're even allowed to invest in?  Pretty hard to hit that 7-8% when you're stuck investing in AAA-rated bonds. 

And how old are you?  28 years is a long time for the fund to worsen.

Who governs the pension?  Who sets the rules?  Who decides upon investments?  Politicians?  Unelected bureaucrats?  (Though either can go wrong in its own way.)  How many people currently employed are pension-eligible?  (I.e., how many can flood it with claims if/when the pension fund sinks some - which will push it towards collapse.) 

I suspect if you're younger, those pension benefits are going to turn out less valuable and more expensive than they seem today.  (One state I looked at recently has been consistently raising mandatory contribution percentages, and yet the funds still aren't in amazing shape, although they're salvageable.) 

See some of John Mauldin's letters re: public pensions - he quotes great sources.  Also, Michael Lewis wrote a book (referral link) on pensions/government that's a fun read/listen.

I'd go with money in the bank any day, especially these days.  At least you know (with some reasonable risk mitigation) that it'll actually be there - and won't cost you more and more. 

I'm not fearful about it, but I want to remain savvy, and pension issues have a big impact on my own decision about whether to jump into government employment.  Personally, I heavily discount the expected future value of any government pension. 

Best of luck to you!

This is very true, my state, AR, has been ranked roughly around 20 in pension health in the last few years but I admit I never took the time to really understand the "health" metrics and what usually happens as pensions start to fail.  Do they raise state contributions (basically using tax dollars) do they raise employee contributions and fees, cut benefits and etc etc.  So maybe it is a little foolish to think the DOT's compensation is better because the current pension is better, when I am still 20 years away from receiving any benefit from it.

Thanks for adding more considerations. 

coffeefueled

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #8 on: September 29, 2017, 09:14:19 AM »
On your GS pay scale question - promotion possibilities are different with every agency/job, but I think a within grade step increase is a pretty standard HR formula across the board. As long as you are meeting the performance standards for your position then you increase a step each year for steps 1-4, every two years for steps 5 - 8, longer than that for later steps.

boarder42

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #9 on: September 29, 2017, 12:21:19 PM »
With a pension, when you die (or possibly you and your spouse), the pension is gone.

With a $1M nest egg, it's still around for your heirs or charities you like to enjoy.

this - so much this. the 4% rule is extremely conservative and your money will likely grow exponentially more than the likelihood of failure. 

this question is basically Annuity or control your own money.

EngiNerd

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #10 on: September 29, 2017, 01:25:04 PM »
With a pension, when you die (or possibly you and your spouse), the pension is gone.

With a $1M nest egg, it's still around for your heirs or charities you like to enjoy.

this - so much this. the 4% rule is extremely conservative and your money will likely grow exponentially more than the likelihood of failure. 

this question is basically Annuity or control your own money.

I agree but how would you quantitatively compare two offers where one has a better pension program and the other has a 5% match? 

Laura33

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #11 on: September 29, 2017, 01:40:34 PM »
With a pension, when you die (or possibly you and your spouse), the pension is gone.

With a $1M nest egg, it's still around for your heirs or charities you like to enjoy.

this - so much this. the 4% rule is extremely conservative and your money will likely grow exponentially more than the likelihood of failure. 

this question is basically Annuity or control your own money.

I agree but how would you quantitatively compare two offers where one has a better pension program and the other has a 5% match?

I wouldn't, because I would not rely on the pension to be around in another 20 years.  Pension accounting rules allow for projections that are FAR too rosy, and when the company/state/city discovers that it can't meet its obligations, it is way too easy for them to break their promises.

The promise of some theoretical pension in 20 years counts for precisely 0 in my estimate of the value of a job.  If it's there, it's a bonus, but I'm not going to let it affect my job choice or FIRE plans.

boarder42

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #12 on: September 29, 2017, 01:43:53 PM »
With a pension, when you die (or possibly you and your spouse), the pension is gone.

With a $1M nest egg, it's still around for your heirs or charities you like to enjoy.

this - so much this. the 4% rule is extremely conservative and your money will likely grow exponentially more than the likelihood of failure. 

this question is basically Annuity or control your own money.

I agree but how would you quantitatively compare two offers where one has a better pension program and the other has a 5% match?

i dont want someone else controlling my money and when i'm retiring.  i want to control my money so i can control what i need when i need it and my tax burden both before and during retirement. 


MDM

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #13 on: September 29, 2017, 01:49:03 PM »
I agree but how would you quantitatively compare two offers where one has a better pension program and the other has a 5% match?
Project your after-tax (i.e., spendable) income in retirement for each option.

The answer will be as good as the assumptions made on tax rates, investment returns, pension provider solvency, etc.

ETA: Estimating withdrawal tax rates is not an exact science, but here is one approach.

Finances_With_Purpose

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #14 on: September 29, 2017, 01:55:25 PM »
$1M.  Not even close.  Which state?  Have you checked out how well your state's pension is funded?  How rosy their assumptions about returns are?  What they're even allowed to invest in?  Pretty hard to hit that 7-8% when you're stuck investing in AAA-rated bonds. 

And how old are you?  28 years is a long time for the fund to worsen.

Who governs the pension?  Who sets the rules?  Who decides upon investments?  Politicians?  Unelected bureaucrats?  (Though either can go wrong in its own way.)  How many people currently employed are pension-eligible?  (I.e., how many can flood it with claims if/when the pension fund sinks some - which will push it towards collapse.) 

I suspect if you're younger, those pension benefits are going to turn out less valuable and more expensive than they seem today.  (One state I looked at recently has been consistently raising mandatory contribution percentages, and yet the funds still aren't in amazing shape, although they're salvageable.) 

See some of John Mauldin's letters re: public pensions - he quotes great sources.  Also, Michael Lewis wrote a book (referral link) on pensions/government that's a fun read/listen.

I'd go with money in the bank any day, especially these days.  At least you know (with some reasonable risk mitigation) that it'll actually be there - and won't cost you more and more. 

I'm not fearful about it, but I want to remain savvy, and pension issues have a big impact on my own decision about whether to jump into government employment.  Personally, I heavily discount the expected future value of any government pension. 

Best of luck to you!

This is very true, my state, AR, has been ranked roughly around 20 in pension health in the last few years but I admit I never took the time to really understand the "health" metrics and what usually happens as pensions start to fail.  Do they raise state contributions (basically using tax dollars) do they raise employee contributions and fees, cut benefits and etc etc.  So maybe it is a little foolish to think the DOT's compensation is better because the current pension is better, when I am still 20 years away from receiving any benefit from it.

Thanks for adding more considerations.

Sure!  Yeah, it is complicated.  I love thinking about such things and reading about them (I'm more of an EconNerd than an EngiNerd). 

The short of it is that pensions are a risky bet.  Tons have gone under.  Many more will.  Many currently assume a 7-8% return on investment indefinitely, even though they're basically confined to buying bond-like investments.  And have some decent overhead.  You can do the math: it's not going to end well.  And politicians have a tendency to kick the can down the road on solutions - but that's particularly awful with compound interest, where it's hard to ever get caught up.  (And that's one problem that's common to both sides of the political aisle.) 

Also, pensions face legal hurdles.  In some states, they're required to honor their deals, especially if/when someone retires.  Some courts will force pensions to go insolvent rather than break promises, and the pensioners will often push them over the cliff.  (This happened a while back in Illinois, for example.)  You'll notice, too, that tons of potential pensioners tend to retire immediately whenever there's a pension crisis looming - because it's their best way to lock in those benefits.  And ironically, that sinks the fund much further and much faster.  (The City of Dallas recently had a situation like that, until they actually froze retirements.  And they're still in trouble.)   So a fund that looks half-decent can tank VERY quickly once there's any perceived stress.  Like, say, a stock market.  Except it can go total zero.

There are plenty of people around who planned on a pension and now have nothing.  See Vallejo, CA, Detroit, and, in all likelihood, entire states soon (CT, IL, KY, CA - I'm looking at you). 

As Laura33 said, I'd put the expected value of a pension at 20 years at precisely $0.  Make other plans.  If it works out, then great!  Plus, you can adjust expectations once you're much much closer to actual retirement/FIRE.  If it doesn't work out - and many won't - you won't be left eating bread crumbs.  Or fuming with anger at politicians who - surprise, surprise - lied to everyone.  For years. 

I'd rather bet on my 401(k) than on politicians being honest. 

YttriumNitrate

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #15 on: September 29, 2017, 02:08:02 PM »
FEDs seem like they are more likely to be negatively effected by the politics. Government waste seems to be a growing political focal point and it seems like FEDs are more vulnerable to things such as: government shut downs, calls for salary freezes and etc.
Growing up in the DC area, it was really easy to tell who was a new Fed and who was a seasoned pro during a shutdown. While the newbies were moping about, polishing their resumes, and scrimping in case their jobs never came back. The seasoned pros had big smiles and were quickly planning vacations within driving distance since they knew shutdowns were just part of political game, their jobs were secure, and shutdown days are just magical bonus paid vacation days. The more things change, the more they stay the same.
« Last Edit: September 29, 2017, 02:10:22 PM by YttriumNitrate »

Laura33

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #16 on: September 29, 2017, 02:15:13 PM »
FEDs seem like they are more likely to be negatively effected by the politics. Government waste seems to be a growing political focal point and it seems like FEDs are more vulnerable to things such as: government shut downs, calls for salary freezes and etc.
Growing up in the DC area, it was really easy to tell who was a new Fed and who was a seasoned pro during a shutdown. While the newbies were moping about, polishing their resumes, and scrimping in case their jobs never came back. The seasoned pros had big smiles and were quickly planning vacations within driving distance since they knew shutdowns were just part of political game, their jobs were secure, and shutdown days are just magical bonus paid vacation days. The more things change, the more they stay the same.

Ooooh, I missed that part of the OP.  The answer is no, the feds are no more likely to deal with this than anyone else; it is just more likely to make national news when it happens.  My SIL used to work for the state's Public Defender's office.  For a period of years, they had salary freezes, hiring freezes, and then furloughs -- i.e., where they lost @2 weeks of pay over the course of the year and so were supposed to not work on specified days, except of course they had exactly the same caseload (or more, as people quit while the hiring freeze continued).  Years.

Any government position is likely to get caught in the political crossfire at some point.  At least the feds have the entire country to tax to make up budget shortfalls.

FLBiker

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #17 on: September 29, 2017, 02:35:27 PM »
Thanks for this!  Years ago, we converted my wife's pension plan into a portfolio plan (where we work we can choose) and I sometimes wonder if that was the right call.  Reading this thread helped. :)  We did it for the reasons above (lack of control over how the money was invested, lack of faith in the state's long term economic health, incompatibility with retiring early / relocating).

EngiNerd

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #18 on: September 30, 2017, 07:26:50 AM »
I wouldn't, because I would not rely on the pension to be around in another 20 years.  Pension accounting rules allow for projections that are FAR too rosy, and when the company/state/city discovers that it can't meet its obligations, it is way too easy for them to break their promises.

The promise of some theoretical pension in 20 years counts for precisely 0 in my estimate of the value of a job.  If it's there, it's a bonus, but I'm not going to let it affect my job choice or FIRE plans.

$1M.  Not even close.  Which state?  Have you checked out how well your state's pension is funded?  How rosy their assumptions about returns are?  What they're even allowed to invest in?  Pretty hard to hit that 7-8% when you're stuck investing in AAA-rated bonds. 

And how old are you?  28 years is a long time for the fund to worsen.

Who governs the pension?  Who sets the rules?  Who decides upon investments?  Politicians?  Unelected bureaucrats?  (Though either can go wrong in its own way.)  How many people currently employed are pension-eligible?  (I.e., how many can flood it with claims if/when the pension fund sinks some - which will push it towards collapse.) 

I suspect if you're younger, those pension benefits are going to turn out less valuable and more expensive than they seem today.  (One state I looked at recently has been consistently raising mandatory contribution percentages, and yet the funds still aren't in amazing shape, although they're salvageable.) 

See some of John Mauldin's letters re: public pensions - he quotes great sources.  Also, Michael Lewis wrote a book (referral link) on pensions/government that's a fun read/listen.

I'd go with money in the bank any day, especially these days.  At least you know (with some reasonable risk mitigation) that it'll actually be there - and won't cost you more and more. 

I'm not fearful about it, but I want to remain savvy, and pension issues have a big impact on my own decision about whether to jump into government employment.  Personally, I heavily discount the expected future value of any government pension. 

Best of luck to you!

This is very true, my state, AR, has been ranked roughly around 20 in pension health in the last few years but I admit I never took the time to really understand the "health" metrics and what usually happens as pensions start to fail.  Do they raise state contributions (basically using tax dollars) do they raise employee contributions and fees, cut benefits and etc etc.  So maybe it is a little foolish to think the DOT's compensation is better because the current pension is better, when I am still 20 years away from receiving any benefit from it.

Thanks for adding more considerations.

Sure!  Yeah, it is complicated.  I love thinking about such things and reading about them (I'm more of an EconNerd than an EngiNerd). 

The short of it is that pensions are a risky bet.  Tons have gone under.  Many more will.  Many currently assume a 7-8% return on investment indefinitely, even though they're basically confined to buying bond-like investments.  And have some decent overhead.  You can do the math: it's not going to end well.  And politicians have a tendency to kick the can down the road on solutions - but that's particularly awful with compound interest, where it's hard to ever get caught up.  (And that's one problem that's common to both sides of the political aisle.) 

Also, pensions face legal hurdles.  In some states, they're required to honor their deals, especially if/when someone retires.  Some courts will force pensions to go insolvent rather than break promises, and the pensioners will often push them over the cliff.  (This happened a while back in Illinois, for example.)  You'll notice, too, that tons of potential pensioners tend to retire immediately whenever there's a pension crisis looming - because it's their best way to lock in those benefits.  And ironically, that sinks the fund much further and much faster.  (The City of Dallas recently had a situation like that, until they actually froze retirements.  And they're still in trouble.)   So a fund that looks half-decent can tank VERY quickly once there's any perceived stress.  Like, say, a stock market.  Except it can go total zero.

There are plenty of people around who planned on a pension and now have nothing.  See Vallejo, CA, Detroit, and, in all likelihood, entire states soon (CT, IL, KY, CA - I'm looking at you). 

As Laura33 said, I'd put the expected value of a pension at 20 years at precisely $0.  Make other plans.  If it works out, then great!  Plus, you can adjust expectations once you're much much closer to actual retirement/FIRE.  If it doesn't work out - and many won't - you won't be left eating bread crumbs.  Or fuming with anger at politicians who - surprise, surprise - lied to everyone.  For years. 

I'd rather bet on my 401(k) than on politicians being honest.

Maybe I am just experiencing sunk cost fallacy, I have 7.5 years in to the better pension of the career options, but saying they count for 0 seems like faulty logic to me.  Obviously I agree with investing outside of that, in fact this year is our first year of filling all tax advantaged vehicles and putting a good chunk to work in taxable account.  So I am not just spending everything and thinking I can do that because I will have a pension in 20 years.  BUT just because a pension has flaws in its projections does not mean it is not a form of compensation.  I am not as knowledgeable on the subject as you guys but I am almost positive that a small percentage of employees promised some sort of pension plan are left out to dry.  How long have pension plans been flawed, probably a long while but the vast majority of employees still get benefits.  From my familiarity with state and federal pensions changes are made to the contributions, benefits, and etc to new employees and current retirees and participants were grandfathered in.  I would think that the pension plan that currently has the best benefit to the employee is likely to remain superior.  Obviously the more generous pension has more room to be adjusted before it is inferior.

Maybe the FIRE mentality is a bias against pension plans.  And completely understandable.  Pension plans are not great for FIRE, but that does not mean they are all doomed to fail. 
« Last Edit: September 30, 2017, 07:47:10 AM by EngiNerd »

EngiNerd

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Laura, Finances with purpose, does the above seem true to you?  Just like the trinity study shows a 95% success rate of the 4% SWR, we don't focus on that 5% that fail.  I would think, making up statistics I know, that pension failures are along those same lines.  Any direct evidence or thoughts? 

Interest Compound

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If you're going to compare a pension to $1,000,000, don't use the 4% rule. That's not an apples-to-apples comparison, because the Pension draws your money down to $0 (you have nothing left when you die), whereas the 4% rule will very likely grow your money 10x over your investment horizon.

Compare the pension against something like a Variable Percentage Withdrawal (VPW):

http://www.bogleheads.org/wiki/Variable_percentage_withdrawal

VPW intends to draw your portfolio down to $0, this is what it typically looks like:


EngiNerd

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If you're going to compare a pension to $1,000,000, don't use the 4% rule. That's not an apples-to-apples comparison, because the Pension draws your money down to $0 (you have nothing left when you die), whereas the 4% rule will very likely grow your money 10x over your investment horizon.

Compare the pension against something like a Variable Percentage Withdrawal (VPW):

http://www.bogleheads.org/wiki/Variable_percentage_withdrawal


That's true, if I wanted to just pick one number for a comparison of is pension value greater than or less than swr x times portfolio of matching and extra income plus smaller pension.  I assume 6 would be more correct than 4 but 8 is probably too high? 

MDM

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That's true, if I wanted to just pick one number for a comparison of is pension value greater than or less than swr x times portfolio of matching and extra income plus smaller pension.  I assume 6 would be more correct than 4 but 8 is probably too high?
6% is a reasonable assumption if you want to use ~50% chance of withdrawal rate success over 30 years for comparison.  The more you want to compare "guaranteed" success to a pension, the more 4% becomes correct.

Dragonswan

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You need to consider health insurance benefits as part of the equation.  What does your state offer when you retire?  The Feds let you keep your insurance at the rate working feds get and you get a huge selection of of plans. Even the dental coverage plans are reasonable.  No one knows what will become of the ACA but we all know it's expensive.  Also, once medicare kicks in, you don't need to purchase part C & D coverage because you still have the FED insurance (some plans even offer to pay the part B medicare premium).  It's easy to overlook or downplay the financial benefit of health insurance when you're young and virtually invincible, but as you grow older and it gets harder and more expensive to maintain your health, you see the value more clearly. Just something to think about. 

Retire-Canada

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I'll take $1M. I'd rather manage my own money. The pension plan can fail, be mismanaged, reduce benefits, etc.. So it's not a sure thing. At least with my own money I can control how it's invested.

Laura33

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Laura, Finances with purpose, does the above seem true to you?  Just like the trinity study shows a 95% success rate of the 4% SWR, we don't focus on that 5% that fail.  I would think, making up statistics I know, that pension failures are along those same lines.  Any direct evidence or thoughts?

Do some reading.  Check out the PBGC website (the agency that insures private pensions).  Pensions can fail when companies go bankrupt, or when the plan is terminated because they have finally acknowledged that they are underfunded and can't cover all the benefits they have guaranteed.  The PBGC guarantees private pensions, and most people get something, but many don't get what they were anticipating. 

But the PBGC does not cover public pension plans.  Because these plans are depending on state legislatures for funding, they are very susceptible to the "promise now, tax later" mentality, and many states/municipalities that have had revenue issues/political changes are running into problems.  There has been a lot of writing over the past few years about how various public plans are underfunded based on too-rosy projections -- things like Finances With Purpose noted:  projecting the amount needed to cover benefits based on 7-8% returns, even though the fund itself is restricted to investing in bonds.  Other pensions have gotten into trouble by investing in derivatives and such and getting burned in the crash.  Here is one article about a current very real issue in CA:  https://www.nytimes.com/2016/10/10/business/dealbook/1-6-million-bill-tests-tiny-town-and-bulletproof-public-pensions.html?mcubz=3&_r=0.  Finances With Purpose also pointed you to some more detailed reading on the topic.

Tl;dr:  At this point, I'd spend less time trying to figure out the exact way to account for the value of a state pension and more time trying to figure out whether that pension is likely to be around when you need it.

Acastus

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A $1 million 'stache is worth more than a 40k pension, because it will buy more than a 40k pension. At age 65, you can get about 6.5% payout, or 65k. At age 50, it is only about 50k, still better. Plus, you can mix and match, with some stache and some pension, so you can still make large purchases if you need to.

Finances_With_Purpose

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #27 on: December 02, 2017, 05:24:18 PM »
Laura, Finances with purpose, does the above seem true to you?  Just like the trinity study shows a 95% success rate of the 4% SWR, we don't focus on that 5% that fail.  I would think, making up statistics I know, that pension failures are along those same lines.  Any direct evidence or thoughts?

Sorry, I didn't see this - was out of town almost that whole month, and didn't check regularly.  I'm glad to see that Laura answered, though, and I agree with her.

To your point, yes, it's worth more than $0, but you have to add a tremendous risk premium due to the fact that you won't get any real return from it for decades.  For future decision-making purposes, you treat it as though it's worth zero.  Your current investment in it changes the math a little, but also, be very, very wary of the sunk cost problem.  If you wouldn't make the investment today, then you probably shouldn't continue pouring resources into it.

If you're still interested, here are some pieces you could read as a start: here, here and here.  There are tons more there, complete with more data, charts, examples, etc.  Here's another recent example.  There's plenty more about that online.

Beyond that, I'll add that we're at the early stages of public pensions.  Used to, private employers offered generous defined-benefit pensions.  As those went away, public pensions became huge.  But we're really facing this large-scale pension setup (complete with the legal parameters surrounding them, such as limits on what they can invest in) now at this scale for the first time in American history.

With that said, the fundamentals really don't look good.  Consider that governments have limited options, all of which will face enormous backlash: raise taxes significantly (he uses examples where a city could bail out by doubling taxes), fees, or slash services and layoff employees.  The politicians and bureaucrats who set these things up are usually long gone by the time these problems arise - it's somebody else's problem. 

I would recommend, like Laura, to do your own research on the pensions and assumptions at the places you're considering.  Or, at the very least, realize that you're taking a decent risk there. 

At least in the 5% of cases you cite, the person drew down the amount, had time to adjust, and could see what was happening.  With a pension, it's all out of your hands, subject to the whims of bureaucracies and politicians. 

lhamo

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #28 on: December 02, 2017, 06:30:53 PM »
Re: likelihood of a quick promotion after moving to federal service, I am only familiar with the situation at the State Department (which I used to work with as a contractor), but at least there the number of GS-13 positions were VERY limited -- people seemed to get stuck at GS-12 for several years.   

soccerluvof4

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #29 on: December 03, 2017, 05:18:28 AM »
I'll take $1M. I'd rather manage my own money. The pension plan can fail, be mismanaged, reduce benefits, etc.. So it's not a sure thing. At least with my own money I can control how it's invested.


100% this! ^

former player

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Re: Target Annual Spending 40k. What's better 1000k (4% SWR) or Pension of 40k?
« Reply #30 on: December 03, 2017, 05:25:25 AM »
I'll take $1M. I'd rather manage my own money. The pension plan can fail, be mismanaged, reduce benefits, etc.. So it's not a sure thing. At least with my own money I can control how it's invested.


100% this! ^
The UK state has always paid all its debts for several hundred years.  I think my pension with it is about as sure a thing as exists.