Author Topic: Valuing FERS Pension (or any other defined benefit) When Comparing Job Offers  (Read 1023 times)

mrigney

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All you fellow feds,

I work in a pretty hot job market and have begun to be contacted by companies and recruiters. Not really looking to leave my current position. Actually just got a promotion (and am not liking the new position nearly as much as the old one), but am always willing to entertain offers. Currently on track to FIRE ~10 years from now. Got a little bit of a late start to the FIRE game, but have been furiously making up ground (thanks partly to the market over the last few years, but also aggressive saving). I'm wondering how you other feds value your FERS pension when comparing job offers?

For example, I just hit 5 years of creditable service (mid 30s, so not a lifer) and am a GS-14 (near the bottom of the payband, not the top). It's easy enough for me to calculate what my FERS pension would be if I left service today (~$5,500/yr). Then, use whatever method you like to equate that to a 401k balance (use the 4% rule and divide by 0.04, use FV, whatever). However...the value of that pension is dependent on the # of years I work. So if I stay 5 more years, it's worth something like $300,000 ($12,000/yr * 25). If I stay 10 more years, it's worth more.

Obviously, one way to do it would be to say that I contribute 4.4% of each paycheck to FERS (yeah, all you old timers who only contribute 0.8% have it good). But FERS is worth more than that 4.4%, I think.

So how would you go about comparing an offer from a company w/o a defined benefit portion?

Bramjam

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Hi mrigney,

I wondered the same thing a couple years ago and ended up making a spreadsheet that gives me a rough proxy of present value. Each row in the spreadsheet represents another year in the federal workforce, and I've set it up to calculate the present value of a nest egg equivalent , along with the amount that the nest egg equivalent increases each year.

I assume I'll start taking a deferred annuity at age 62, and also that annual inflation will be 2% until withdrawals start. Factoring in inflation is important; with a deferred annuity, inflation is a big factor fore anyone who FIREs early and has a big gap between their final earnings years and the year they start receiving the deferred annuity.

For each row in the spreadsheet, I: (1) Figure out the projected annuity for a given salary history and number of years worked, using the FERS high-three formula; (2) I figure out how much it would decrease for inflation between my current age and age 62 (the deferred withdrawal age under FERS), assuming annual inflation of 2% ; (3) Figure out the nest egg equivalent by multiplying the amount of the PV by 20 (I do 20 rather than 25 because I assume a life expectancy of 81, which would provide 20 years of withdrawals); (4) I then figure out how much the PV nest egg equivalent goes up for each year spent working.

This last piece is what I would use if I were thinking about switching jobs. It shows, for example, that this year the PV of my pension will increase about $30,000. So in order for a private sector job to be attractive, it would need to give me at least 30k more than my current salary.

Cheers,
JB

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My simple comparison would be that any offer must be more than my salary plus the governments contribution to my pension.  (plus comparing other benefits).  I'm paid through the NCF and on the bottom of my pay stub there is a line that shows what the "G" paid into my retirement for the pay period.

mcneally

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For example, I just hit 5 years of creditable service (mid 30s, so not a lifer) and am a GS-14 (near the bottom of the payband, not the top). It's easy enough for me to calculate what my FERS pension would be if I left service today (~$5,500/yr). Then, use whatever method you like to equate that to a 401k balance (use the 4% rule and divide by 0.04, use FV, whatever). However...the value of that pension is dependent on the # of years I work. So if I stay 5 more years, it's worth something like $300,000 ($12,000/yr * 25). If I stay 10 more years, it's worth more.
This drastically overstates the value of the pension. $5,500 / .04 is what it will be worth, in nominal terms, in ~25 years.

Assumptions for the following calc: age 35, $100k salary, currently 5 years in, 2.5% inflation, 4% real investment returns, deferred pension starts at 62

Current pension value: 100k x 5% = $5,000 nominal pension / 1.025 ^27 = $2,566 pension in 2020 dollars / .04 SWR = 64,175 future value in 2020 dollars / 1.04^27 = 22,256 net present value
(in other words if these assumptions were guaranteed, ignoring longevity risk, desire to leave money to heirs, etc. you should be indifferent between the pension and a investment account of that amount)

One year later that changes to: 100k x 6% = 6,000 / 1.025^26 =3,156 pension in current dollars / .04 SWR = 78,935 future value in current dollars / 1.04^26 = 28,471 net present value
« Last Edit: January 10, 2020, 09:41:51 PM by mcneally »

Beach_Stache

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What I typically do is calculate what my pension would be if I stay 30 years and have a pension and what that pension would be worth (pension*25) in total, and then those gap years, what it would take to match that pension just by investing.  So if I retired now after 12 years and my pension would be around $14k/year (*25 = $350k worth) and then if I retired after 30 years and my pension would be around $35k (*25 = $875k worth) then that gap is $525k.  If I invested $1200/month for 18 years at 7% that would be around $525k, so in order to leave I'd need to make around $15k more per year, plus make sure I get the 5% TSP match.  I haven't even calculated the medical and other benefits yet.  So really, rough estimate I say that I'd need to make $30k more/year.  I'll be at 30 years at age 58 so at this point I'm looking to do that and retire w/an immediate pension but lately I've been looking at a lot more private sector jobs so not sure if I'll make it.  I'm also not sure if my math and assumptions are way off.  Good luck!

Peachtea

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Iím a GS-14, five years in, on FERS Further Revised, 4.4% contribution, almost 30 years old. I consider FERS to be negative value and would not consider it at all when comparing jobs. If I could opt out now, I would and stick that 4.4% in my brokerage account.

I hope to be FIRE in 6 years, and even if getting to FIRE takes longer, I canít see continuing to work for the gov much more than that. When I ran the numbers, only after ~20+ years of service did it break even and closer to 25 years to make more sense to keep the pension (deferred annuity) vs rolling my pension contributions into my TSP when leaving. I calculated this by figuring out my contributions for x years of service, then put that into an investment calculator at 6 or 7% for the remaining years until I would otherwise start the deferred annuity to see that total value. Then I calculated the annuity (using the pay scale to see what my high 3 would be at that many years of service) and x25. Compare that value to TSP rollover value. Since I canít imagine staying for 20+ years of service the pension is useless to me. Itís not even tax-deferred.