Author Topic: Pension considerations when considering a new job  (Read 1371 times)

msinca

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Pension considerations when considering a new job
« on: April 04, 2019, 10:07:32 AM »
Hello there.  I've been a long time reader of MMM but this is my first question so forgive me if its already been asked and answered.  Sorry for the long post...

I currently work for a county in CA which has a defined benefit pension (70% of salary at age 65).  I've been working there for about 14 years and have about 11 more to go before I can start collecting the pension in 2030.  Based on my current salary and what I expect to be earning at retirement, that yearly pension payment should be around $150K per year.   

I have recently been offered another job in another state to work for a company with no pension.  The proposed salary ($225K) is much higher than my current salary ($150K).  All the other benefits are comparable (vacation, medical, 401K, etc...).  There is a relocation package so I don't think I will lose any money there.  I also know the cost of living in the other state will be less than CA but let's keep that out of the equation for now.  I also realize that my annual raises might make that $75K difference even larger in the future but, again, let's ignore that for easy of calculations.  Lastly, I like my current job and location but I also think I'll like the new job so ignore any 'qualitative' considerations for now.

I'm trying to figure out whether this is a good financial move.  Here's what I came up with (which is probably wrong):

Value of Pension (Using Excel Present Value formula):
If I assume 150K from Age 65 to 85 (20 yrs), with a conservative discount rate of 5%, the present value at 65 is $1.87M.  If I bring that back to current value (today 2019) that is about $1.092M. 

Present Value of Extra Salary:
Assume $75K extra for the next 11 years.  Present value is $623K. 

At first, I thought maybe the move was a bad idea because the difference between them is about $470K (1.092M - 623K) in favor of staying in CA with the pension.  I realize there are plenty of other factors like cost of living, housing appreciation,..etc.. but I'm just trying to understand the pure financial implications on retirement of this move.

But then I realized I need to calculate the value of returns on the extra $75K/year might have to my retirement portfolio (assuming I didn't spend it all).  But I wasn't sure about this part or how to do that properly.  And this got so hairy, I thought I was maybe doing this all wrong in the first place. 

Am I doing this right?  Any help from fellow members would be much appreciated.

Wolfpack Mustachian

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Re: Pension considerations when considering a new job
« Reply #1 on: April 04, 2019, 10:50:36 AM »
I don't have time to parse the numbers right now, but I will give you a personal anecdotal side of this that may or may not be worth anything. I left a company that had an environment that was challenging. I did not have pension. I know people that have stayed simply because of the pension. They're a lot more stressed than I am. If it's even close money-wise, money that you can invest is worth a lot more to me than a pension that requires working at a place where it could become difficult.
« Last Edit: April 04, 2019, 02:52:17 PM by Wolfpack Mustachian »

merince

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Re: Pension considerations when considering a new job
« Reply #2 on: April 04, 2019, 02:05:12 PM »
A pension is a promise made by the employer to pay you a certain amount at a certain time in the future. Many people enjoy their pensions. Many have been burned (automotive industry for example) and their payout amounts have been reduced/disappeared.

Your wife/kids/family will not be able to access your pension if you kick the bucket before you start collecting it. They can access a 401K or a savings account.

Don't get super focused on the value of the pension vs the value of the salary increase - you are not accounting for the risk of your pension disappearing or you kicking the bucket before collecting.

Kayad

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Re: Pension considerations when considering a new job
« Reply #3 on: April 05, 2019, 01:09:20 AM »
I think your current calculation omits the current vested value of the pension.  Surely there is some vested benefit after 14 years (?!)  If you were to leave today, what would be the pension payout at age 65?  Subtract that number from the 150k you would get after 11 more years, and that is the opportunity cost of changing jobs.

Regarding compounding of 75k in savings, if you were to invest 100% in the stock market, the historic rate of return for the 20th century is ~10%.  So you could apply that, or jump down the rabbit hole of trying to estimate likely rate of return for the next decade given current valuations.  Or you could just shave a few points off for a conservative ballpark number, say 6 or 7%.

The potential for raises in a private sector job would in most fields to be a huge benefit to the move; omitting that skews your comparison significantly.  On the other side of the ledger, you are not accounting for taxes on that 75k.



beltim

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Re: Pension considerations when considering a new job
« Reply #4 on: April 05, 2019, 09:12:18 AM »
Merince's point about heirs being able to access a 401k is a good one.
Kayad's point about the current vested value of your pension is crucial.

I'm confused about your discount rate of 5% - this seems way too high to just be inflation, and way too low to be investment returns plus inflation.  It could be just investment returns, but then I don't understand why you applied a discount rate to the salary difference.  Could you explain why you chose that number?

Additionally, at these income levels, you really need to think about taxes.  A 75K difference in gross salary at that income in California is more like $42-50k after taxes depending on your marital status and other income.

msinca

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Re: Pension considerations when considering a new job
« Reply #5 on: April 05, 2019, 04:34:12 PM »
@Kayad / @beltim

Both great points on the additional taxes and current value of pension - I totally forgot about that.  I used 5% rate because I'm assuming that there will be some sort of market correction in the next 11 years (we've been on a very long bull market already).  But, that probably shouldn't have been the rate I used from age 65-85. 

When I factor in the current value of contributions to the pension, it seems more of a wash between moving or staying which leads me to some of the other comments about risks of pension, stress, inheritance, etc...

Thanks for the comments - this was helpful info.

chasesfish

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Re: Pension considerations when considering a new job
« Reply #6 on: April 06, 2019, 04:28:31 PM »
Fun stuff to read, I also work at a company where people hang around to hit pension numbers or certain restricted stock milestones.

How's the tax situation in the "other" state?  Did you factor that in?

I think you're getting close in your analysis, my recommendation if you want the job is ask for a signing bonus to help offset the pension accrual you're giving up.  Kick-starting a taxable investment account with $100,000 helps the math, that's a signing bonus equal to about 40% of the first year's pay.   Not outlandish

Reynolds531

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Re: Pension considerations when considering a new job
« Reply #7 on: April 07, 2019, 06:12:49 PM »
If it's been a while since you worked in the private sector you have to consider job security. Is the government job not far more secure?