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How to value a pension in retirement planning?

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  • How to value a pension in retirement planning?

    Hi everyone, I am evaluating a job that offers a pension to its physicians (Kaiser) and am trying to evaluate how to account for this in my retirement planning.  I have been told that their pensions are fully funded so there is a decreased likelihood to be insolvent.  Any thoughts/ideas on the security of Kaiser's pension and how people account for it in their retirement planning (can afford to save less, etc).  Thanks!

  • #2
    I deal with this issue as my wife has a pension in her corporate job. Like most, she has the ability to take a lump sum of the value of that pension when she retires, and that value is updated monthly. I include it in our net worth calculation, as it could be considered the equivalent of an IRA.

    Yearly, I also run through the model provided by the company that allows you to plug in various retirement dates, dates when you expect to start receiving the pension, and others, and calculate your monthly draw.

    These two pieces of information, which I expect will be provided to you in some fashion, will allow you to account for the pension in your retirement projections. Best of all, if you are doing well saving in other areas (401k, Backdoor Roth, taxable, HSA, etc.), you can ignore it and just be happy that it is there when you get there.

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    • #3
      You could plug it into a financial calculator.  PV of an annuity.

      It's a bigger guess though as to real value the further you are from retirement.  Inflation, solvency, rules, your personal plans, etc.  Only when you get close does it become more of a reality.

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      • #4
        I know the military pension adjusts for inflation, which is one reason I'm considering it. I'll be at 12 years when I have to decide to stay or quit.

        I'd figure to divide the annual amount by your withdrawal rate. If a pension paid me $40,000 annually, I'd think it'd be akin to having an additional $1,000,000 in my portfolio (assuming 4% withdrawal)...right?

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        • #5




          I know the military pension adjusts for inflation, which is one reason I’m considering it. I’ll be at 12 years when I have to decide to stay or quit.

          I’d figure to divide the annual amount by your withdrawal rate. If a pension paid me $40,000 annually, I’d think it’d be akin to having an additional $1,000,000 in my portfolio (assuming 4% withdrawal)…right?
          Click to expand...


          Not exactly...

          While it may play that role in your portfolio. If you die in the second month of your retirement, your spouse/heirs do not get to keep the $995,000 (or whatever) that you did not spend.

          Even if you die in year 50 of retirement, there are is a reasonable probability that there would be money left from the $1,000,000, maybe even more than $1,000,000 if your sequence of returns works out right, and your heirs will not get that money either.

          But I guess in either of those cases, you will be dead, so it will not matter much to you.

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          • #6
            Kaiser has one of the best pensions and it's fully funded.   That wasn't always true.  Back in the 90s they were months away from insolvency.    Their CEO is phenomenal.   That said, unless you're a governement entity, pensions are not guaranteed; nor their DCP ----which is sweet, but definitely a risk proposition.

            Remember this, the salary and benefits is one thing; but if you don't like your job, you're not going to be happy.  Match up the job, the environment in which it practices, and work/life balance --- then compare and negotiate from there.   Otherwise, you'll find yourself switching in 1-5 years and starting all over again.   This rings true with Kaiser - the attrition rate is high because young folk don't understand or fully buy into the Kaiser model.   It's a great company and does what it does well.

            The other thing about pension is retirement timing or early separation.  We have a fed pension and kaiser pension from prior separations.  They don't have COLA.  My UC does in case of early separation and deferred retirement benefits.

            So for FIRE calculations, there's early vs deferred.  We run both scenarios and range from healthy to doomsday situations on them.

            I good general rule of thumb is what mentioned:  $40,000 pension = $1M assets without factor of inheritance.   You can modify to single life to step down to dual life depending on your situation and calculate from there too.

             

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            • #7
              I don't know if I agree with that.  Presumably DMFA has life insurance.  And that military pension kicks in as early as his mid 40's.  If he dies 2 months into retirement then the life insurance kicks in, which was never factored into the net worth or retirement calculation.  If he dies later then he doesn't benefit from the insurance but benefits from the years (decades) of inflation-adjusted pension benefits invested monthly.  This speaks to the need to plan for what insurance value protects your family's needs and also the need to place value on your pension (if receiving it during your earning years).  In either situation the heirs benefit.

               

              Regarding the original question, Bernstein had some advice about this.  He likens a pension to a bond issued by your former employer.  Same thing for social security.  He says that it wouldn't be a bad idea to go more heavy in stocks because you already have "bonds" in these pensions.  As for the valuation, it depends on how many years you reasonably expect to receive it and if it's adjusted for inflation.  Long fixed duration would be valued like a consul (PMT/r) where he suggests r is 6%.  If it's adjusted for inflation then it's PMT/(r-infl), or maybe PMT/(0.06-0.02).  This might be more reasonable for a military pension, which is longer in duration.  But if you start getting it at 65 then you'd have to do the discounting by hand and assume X years of living.  I'm not sure I equate something like this to a bond since you presumably no longer have insurance to protect that income, and it won't be passed to your spouse on death - unlike a bond fund that would.  True, your household spending just declined if you die, but if you went stock heavy following Bernstein's suggestion your spouse now has a more volatile portfolio.  Not sure I agree with Bernstein 100% on this point for the older pensioner.

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              • #8
                When a pension is "fully funded" it just means that it's making its required contributions.  It doesn't necessarily mean that if the company folded tomorrow, a 40 year old will collect her full pension when she turns 65 in 25 years.   To be able to pay its obligations, a pension depends on continuing contributions.

                If you want a good handle on the actual value each year of the pension, ask to see an annual description of benefits for a doctor in your specialty, or ask people in your future department if they can tell you the value of the employee contribution to their pension.    Kaiser gives them to the doctors each year.  They list the value of the benefits, and specifically list the cost of corporate pension contributions.   Note that there's a 401k contribution, as well as the true pension contribution.

                The Northern Ca pension is not indexed to inflation.  Also, if you earn more than the IRS qualified limit ( around 250k per year) your pension is paid partly as a lump sum at age 65 and fully taxed as income ( Taxes can be just over 50% ).  It's complicated.  When you turn 65, you have various actuarially neutral options, including a 5 year payout into an IRA, which some people choose. I would guess that the pension is worth about 14% +/- of your income.   It's more valuable to people who end up living paycheck to paycheck.  If you're reading this website, you can probably do it on your own.

                Other benefits to consider:

                I believe that their 401k has no fees other than the cost of underlying funds.  You can get a total market index fund from Blackrock for about 2 to 4 basis points.  You can also invest your money at no extra cost via Fidelity.

                You also get lifetime health benefits for you and your spouse.  The only out of pocket costs are $5 rx copays.  There are separate coverage riders for fertility and psych treatment and a few other areas.  Also, delta dental and chiropractic are  provided via separate plan.   After retirement, they reimburse all out of pocket medicare expenses, including your monthly premiums ( although you will have to pay income tax on those reimbursements).  Also coverage for your kids until age 26, whether you're still working or even if you're retired.

                However, the "golden handcuffs" mean you will have to work until 60 to get the benefits.

                These benefits are only a good deal if you like the job.  Like all jobs, your work environment will vary depending on the specific hospital, department, hospital chief, department chief, and colleagues.  Within a given specialty, your call schedule and workload, patient mix, case mix, etc will vary from hospital to hospital.   Some people love working for Kaiser.  Others hate it passionately.   I think it's definitely a good deal for primary care.  For specialists, it varies.  It's certainly a great place to start out, but if you stay too long, you end up staying for the benefits.  If you like it, and like the administration in your facility, it can be great.  Others hate it, but are stuck counting the days until retirement.

                Note that each Kaiser medical group has a different structure and different benefits.  In other words, Southern California (SCPMG) and Northern California (TPMG) are different entities with different retirement plans.

                 

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                • #9




                  I know the military pension adjusts for inflation, which is one reason I’m considering it. I’ll be at 12 years when I have to decide to stay or quit.

                  I’d figure to divide the annual amount by your withdrawal rate. If a pension paid me $40,000 annually, I’d think it’d be akin to having an additional $1,000,000 in my portfolio (assuming 4% withdrawal)…right?
                  Click to expand...


                  Those of us paying into social security for the max for 35 years actually have another million in bonds (by the above thinking like Bernstein).  Right now the 70 yearly ss payment is around 40k if it doesn't get cut of course.

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                  • #10
                    Every Kaiser is different and separate. Some are prolly more solvent than others. Personally feel that you cannot absolutely count on it, esp since you won't know if you're going to stay there forever anyway.

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                    • #11
                      I wouldn't count it in your asset allocation.

                      I would use it to decrease the amount you need from your portfolio.
                      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                      • #12
                        I also have a state sponsored pension plan at my new job. 8% of my pre-tax income is going to pension. 7 yrs to be vested. 3% increase yearly, so after 30yrs could retire at 90% of the average of 3 highest annual incomes.

                        I have a question- would you guys still save and invest 20% of your income in addition to this pension plan? Or maybe 10-15% range?

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                        • #13
                          Last year i saw was 2014 of Northern Kaiser and they were about 98% funded for all obligations -  a mild dip due some market fluctuations.  So, it's quite flush compared to min contributions to obligations.  The perks are tremendous -- truly golden handcuffs once you run the initial gauntlet if you wish to remain with the group.

                          @Cmarai - We have a good pension, but pushing 25% savings .  since state sponsored, like for a Defined Contribution plan to utilize sweeping into a Roth IRA and as a governmental 457b plan.  90% is NICE.  that's how Cali used to be before pension reform.

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                          • #14
                            Someone above mentioned that the pension disappears if you die a day after you start to receive it, therefore don't count it in your portfolio / net worth - well, it depends.  For instance for my pension plan (NY State PEF), once one is vested (now 10 years minimum employment), you start to receive it at age 62 - right before then, you get to choose between several options, some of which allow for a lower pension, but if you die, your spouse continues to receive it.  So it depends.  A lot of complex math and a bit of a guessing game.

                            My philosophy is to feel good about having something extra that will likely come my way some day, but I am not counting on it, not because I don't think it will be there, but because I want to save max that I can anyway and it helps me to "forget" about it, in terms of disciplining myself.

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                            • #15
                              IRS limit is 270k for 2017.  (265k in 2016).

                               

                              "Also, if you earn more than the IRS qualified limit ( around 250k per year) your pension is paid partly as a lump sum at age 65 and fully taxed as income ( Taxes can be just over 50% )"

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