hiya! question about how govt pensions impact savings needed.

[shamelessHedon]

Hello all. Briefly, we are young empty nesters. We do not provide financial support to our grown kids.   

I basically have a housewife/retired lifestyle...I do taxes and work here and there for a temp service. 

He collects VA disability,  a military pension, and a hefty (for this region) paycheck from his current government employer.  He will be pension eligible from his current job at age 57 1/2.  Personally I don't think we will need that second income if we make smarter choices.

How do you factor in known pension amounts to your planning?  I've read articles where they equate it to having $X in an annuity but I don't understand how you get from A to B.

I'm also debating the utility of getting a Masters degree. Any thoughts on the math regarding cost and time investment versus actual short earning potential would be appreciated. 

Thanks!

[2527]

Subtract pension, etc, net income from expenses.  4% of investment value should equal or exceed that first figure.

[Cooperd0g]

2527 has it right by the method I would use. The funny thing in that case is for me it means I could roll into retirement with debt if I wanted because my expected pension is almost double my current spending levels. I won't do that of course so I still max out the TSP and my IRA as well as having a taxable account so that I can pay cash for a house when I retire.

The military pension can be enough for people who don't blow all their money. Or at least enough for people who just want to do something fun after like a rafting guide, ski instructor, etc.

[dude]

How do you factor in known pension amounts to your planning?  I've read articles where they equate it to having $X in an annuity but I don't understand how you get from A to B.

Thanks!

Scott Burns over at www.assetbuilder.com always recommends this website for calculating the value of an annuity (e.g., to calculate what it would cost to buy various annuities for a specified monthly payout):

http://www.immediateannuities.com/immediate-annuities/?sce=hc

It's a good way to get an idea of the value of a public pension.

[Heart of Tin]

What are the survivor benefits on his pensions? You should consider the possibility that you will outlive him by a few decades. Also, if you price the second pension like an annuity, you need to account for the time between now and when his second pension kicks in at 57 1/2 by discounting the value of the annuity/pension to today's money. If you're pretty far from that second pension, using the "subtract pension from expenses minus net income and divide by 4%" rule will come up with a figure that is too low to use immediately. You would need to realize that the net worth calculated by this 4% rule is what you need when he turns 57 1/2 and that the calculated net worth assumes that you will receive the full amount of the pension every year. Low survivor benefits or a significant amount of time until he turns 57 1/2 could make this calculation pretty useless.

[PantsOnFire]

Also don't be surprised if the "cost" of the pension goes up.  Congress has been toying with the idea of increasing our contribution requirement for the same benefit. 

http://www.npr.org/2013/12/10/249993553/pensions-become-less-certain-for-government-workers

[shamelessHedon]

Appreciate the input.

The survivor benefit is only about half of pension amount. It is a concern we are dealing with now through life insurance but I plan to fund a roth in my name.  I'm 8 years younger but he is healthier.

I forgot that he does contribute to a tsp.   Also he is 45.


I've been delegating the money handling to him for a few years.  Time to get back into actively managing things, I think.  Tonight isn't good, as I have to sing at a nursing home, but I think this weekend I'm going to sit down and ask a bunch of questions.

[Boz86]

The current budget deal whacks pretty hard at military retirement. Cost of living adjustments cut by 1% very year. That's a pay reduction after inflation.

http://capwiz.com/moaa/issues/alert/?alertid=63026006

[hybrid]

My wife is a postal carrier and will likely retire from the USPS in 2016 at age 62 with 28 years of service.  Her pension equals 1.1% of her pay multiplied by years served (about 31%).

Two thoughts here.  It's a wonderful source of (not-quite) guaranteeed income, and our goal is to reduce our expenses so much that the hefty reduction in our monthly income will be offset by a much smaller list of liabilities.  Combined with SS and a 401K it's a sweet gig.  Surely makes all those years in the elements worthwhile.  We absolutely have it factored in on the asset side of the balance sheet.

The second thought is if you are one of the few that is still eligible for a pension, pay close attention to how well funded those pensions are.  Note the recent developments in Detroit and Chicago.  Pensioners in Detroit are about to get a very big haircut in their pensions.  The same may happen in Illinois, and other states like NJ and CA are in similar straits.  That's why I call it (not-quite) guartanteed income.  If you are planning on it being there I would be very mindful that some pensions are much safer than others.  The PO should be just fine being under the Federal umbrella, even though they are bleeding cash at the moment, but you just never know....

[thelamb]

2527 has it right: 

Subtract pension, etc, net income from expenses.  4% of investment value should equal or exceed that first figure.

If you follow the rule of 25 (multiply yearly expenses by 25 to get total amount needed) you would first take expenses, subtract the pension, then multiply by 25.  Say expenses per year were $40k, you would want to have $1m.  Now, if you have a pension that gives you $10k/yr, you do $30k * 25 and your number is reduced to $750k.  The same would apply with social security. 

Based on some of the other responses about pensions being reduced, etc, if that's a possible reality, I personally would try to be more conservative and ignore the pension completely when calculating.