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Present day value of Defined Benefit Pension (Thought exercise)

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  • Present day value of Defined Benefit Pension (Thought exercise)


    Hello Folks,

    Weird question but was hoping I could get some input of estimating/calculating the present day value of my companies defined benefit pension. I'm doing this because I'd like to include this in my total yearly compensation in case I decide to look for another job and am negotiating compensation. There are alot of smart/analytical/helpful people here so I figured it would be a good place to get some feedback


    I'm currently 39 y/o and have been with my company for ~ 12 years. The Defined Benefit Pension Plan (DBPP) formula for my company is

    Years of Service X .015 X (average of last 5 years of salary). I am able to start receiving payments when I turn 65 (in 2045). My current salary is ~ 155K

    So this is how I calculated the "present day" yearly value of the DBPP. Please me know if you see any flaws in my thought process....


    I "pretended" that I am turning 65 in 2020 and have 12 years of service and will be retiring and then calculated the yearly benefit

    12 X .015 X 155K = $27,900

    I know I need to factor in inflation and see how much "buying power" $27,900 will have in 25 years. I'm assuming a 3% yearly inflation rate. I used an online inflation calculator: (https://www.buyupside.com/calculator...ationjan08.htm)

    Which tells me the $27,900 I would have gotten if I was 65 and retiring this year will be worth about $13,325 of buying power in today's dollars in 25 years. This means my "present day value" of my DBPP is ~$13,325 a year.

    Does this make sense? Is my logic flawed?

    Thanks in advance!


















    Badxmojo
    Member
    Last edited by Badxmojo; 01-21-2020, 05:51 PM.

  • #2
    I remember seeing this but he lost me so I cannot really vouch for it. I do not have access to a pension so I did not really try. But I liked other of his posts. Let me know if helpful/accurate
    How to value a pension like an actuary. Easy and accurate!

    Comment


    • #3
      So pensions when you separate early is hard if they do NOT have a COL attached to them during the interim years. We are in that boat with our old VA and Kaiser pensions. Neither have an inflation marker tagged to them.

      If still working, ones salary naturally increases, so the last 5 (or 3 years in our cases) tend to be the highest earning unless move to part-time at the end.

      Luckily -- 1. inflation has been flat for the past 5 years; so pension erosion is minimal. 2. can take early election but penalty is between 4.4 and 5.5%. If future inflation spikes, will draw those pensions as early as 55 -- only 8 short years away -- minimizing the erosion of inflation if it does spike. 3. new job has pension -- so the clock restarts.

      This is the whole part of the golden handcuffs of jobs with good pension plans.

      Comment


      • #4
        Originally posted by StarTrekDoc View Post
        So pensions when you separate early is hard if they do NOT have a COL attached to them during the interim years. We are in that boat with our old VA and Kaiser pensions. Neither have an inflation marker tagged to them.

        If still working, ones salary naturally increases, so the last 5 (or 3 years in our cases) tend to be the highest earning unless move to part-time at the end.

        Luckily -- 1. inflation has been flat for the past 5 years; so pension erosion is minimal. 2. can take early election but penalty is between 4.4 and 5.5%. If future inflation spikes, will draw those pensions as early as 55 -- only 8 short years away -- minimizing the erosion of inflation if it does spike. 3. new job has pension -- so the clock restarts.

        This is the whole part of the golden handcuffs of jobs with good pension plans.


        I hear you. I'm also a kaiser employee! You are right there doesn't appear to be an inflation marker. That being said do my numbers make sense?

        I'm being conservative... so I'm assuming no COL adjustment and that's why I'm factoring in the 3% yearly inflation. I just want to be able to say to another prospective employer during salary negotiations..."Yeah my salary is 155K , but I'm getting "X" added to my 403B yearly and ~ "Y" for my retirement pension for a total yearly compensation of "Z" "


        Comment


        • #5
          Originally posted by Lordosis View Post
          I remember seeing this but he lost me so I cannot really vouch for it. I do not have access to a pension so I did not really try. But I liked other of his posts. Let me know if helpful/accurate
          I've read it twice.. and honestly don't understand it much. I think it assumes that you are working at the same company until 65 and then taking the benefit. I'm trying to calculate how much is it worth in today present value.

          Any thoughts on my calculations? Does it make sense?

          Comment


          • #6
            Include the pension default risk. What are the current assets and liabilities? What is the assumed return? How well funded is your company pension program?
            I don't know how to find this info, either, but just a reminder that Enron, Lehman, others have defaulted.

            Comment


            • #7
              Originally posted by jz- View Post
              Include the pension default risk. What are the current assets and liabilities? What is the assumed return? How well funded is your company pension program?
              I don't know how to find this info, either, but just a reminder that Enron, Lehman, others have defaulted.

              Thanks for your feedback...I think you make good points...I definitely can't solely count on the pension which is why I'm trying to also max out 403B, IRA and After Tax contributions. My understanding is that the pension fund is currently > 100% funded and even during the last recession the lowest it went down to was like 80%.

              I get that these are things I need to factor, but I think those are more geared towards what I can "expect/factors I should consider" when for 65 instead of calculating the "present day value". And honestly if I had that information I wouldn't really know what to do with it with regards to incorporating it into my equation or even creating a new one.

              Comment


              • #8
                I think there's a 'cashout' option calculation too that you can request. I'm just not sure of the formula they do for this.

                Comment


                • #9
                  At least where I am Kaiser breaks down your total compensation including how much they are putting towards pension. Can’t you access that info online and use that? Seems like it would be harder to argue with that than a self done estimation.

                  Comment


                  • #10
                    Originally posted by Badxmojo View Post



                    I hear you. I'm also a kaiser employee! You are right there doesn't appear to be an inflation marker. That being said do my numbers make sense?

                    I'm being conservative... so I'm assuming no COL adjustment and that's why I'm factoring in the 3% yearly inflation. I just want to be able to say to another prospective employer during salary negotiations..."Yeah my salary is 155K , but I'm getting "X" added to my 403B yearly and ~ "Y" for my retirement pension for a total yearly compensation of "Z" "

                    Your logic seems ok to me on the assumption that what you are trying to do is figure out the purchasing power of the benefit. But that is not how I would present it for your purposes (salary negotiations). Rather, I’d be looking at the present value of the pension/series of payments that would generate your current pension number.

                    Comment


                    • #11
                      Originally posted by StarTrekDoc View Post
                      I think there's a 'cashout' option calculation too that you can request. I'm just not sure of the formula they do for this.
                      Yeah you can do a cashout.. but you would have to wait to find out what the amount is until you actual retire.

                      Comment


                      • #12
                        Originally posted by EH View Post
                        At least where I am Kaiser breaks down your total compensation including how much they are putting towards pension. Can’t you access that info online and use that? Seems like it would be harder to argue with that than a self done estimation.

                        You know I remember a few years ago that actually was available. For some reason when our plan changed they no longer showed that and that section was blank. I was one of the only people who noticed that it changed. I called up HR got routed to California and got a whole run around. Eventually no one could give me an answer as far as why it changed. The only answer I got was that a separate company is in charge of updating the information on that website and they were not sure when that would occur.

                        Comment


                        • #13
                          Originally posted by Larry Ragman View Post

                          Your logic seems ok to me on the assumption that what you are trying to do is figure out the purchasing power of the benefit. But that is not how I would present it for your purposes (salary negotiations). Rather, I’d be looking at the present value of the pension/series of payments that would generate your current pension number.
                          Yeah make sense. I wish this info was readily available

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