Calculating the value of a teacher's pension

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berg
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Calculating the value of a teacher's pension

Post by berg »

Trying to calculate the value of a Mass. teacher's pension. As we plan, I think it is important to understand the value there. Currently 11% is deducted toward the pensions, with a full 80% payout at age 58.

My wife will have worked 37 years at retirement, and at current salary and conservative growth rates, in the 37 years she will have contributed between $9500 - $10,000 per year.

A compound interest calculator shows that $10k per year @ 6% is $1.3 million. At current conservative salary growth rates, if she gets 80%, I'd expect that to be between $83k and $93k annually. At a 3% withdrawal rate, that puts the value of her pension if it was savings at between $2.8 and $3.1 million.

Would it be fair to say the value of her pension in addition to her contributions is between $1.5-1.8 million? Said another way -- the value of her pension is close to a 100% match on her 11% contribution, since the estimated value is nearly double what she would do on her own.

Is my logic sound? As we discuss finances, we theoretically talk of the "value" of her pension as a teacher, but I think it would be helpful to try to put some numbers against it as well.
jwtietz
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Re: Calculating the value of a teacher's pension

Post by jwtietz »

don't forget the contributions that the local district and the state has made into her fund. All three contribute a percentage.
bigred77
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Re: Calculating the value of a teacher's pension

Post by bigred77 »

Will she also be eligible for SS. That's the biggest gripe I have about my wife's teacher pension plan: she gets a pension, but no SS.

In her case she would be better off with SS and a 6% match in a 401k type vehicle.
pshonore
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Re: Calculating the value of a teacher's pension

Post by pshonore »

Does all 11% go toward pension? In CT, the contribution is 7.25% of which 6% goes to pension and 1.25% into a health care fund for retired teacher where the Retirment Board effectively pays 2/3 of Medigap premiums. Full benefit available at any age with 35 yrs of service (so effectively age 57)
Full benefit is 2% per service year.
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berg
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Re: Calculating the value of a teacher's pension

Post by berg »

jwtietz wrote:don't forget the contributions that the local district and the state has made into her fund. All three contribute a percentage.
Right - this is where I was saying, essentially she is getting a 100% match, even though she isn't explicitly in 401k type vehicle.
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berg
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Re: Calculating the value of a teacher's pension

Post by berg »

bigred77 wrote:Will she also be eligible for SS. That's the biggest gripe I have about my wife's teacher pension plan: she gets a pension, but no SS.

In her case she would be better off with SS and a 6% match in a 401k type vehicle.
She is not - but she also doesn't contribute to SS. I haven't done the calculations with SS, but 80% of salary at age 58 for putting in 11% per year sounds like a good deal to me...
pshonore
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Re: Calculating the value of a teacher's pension

Post by pshonore »

bigred77 wrote:Will she also be eligible for SS. That's the biggest gripe I have about my wife's teacher pension plan: she gets a pension, but no SS.

In her case she would be better off with SS and a 6% match in a 401k type vehicle.
Higher paid folks usually wind up with 30% max of final salary SS, up to the earnings limit and that's at FRA. I think I would prefer the 80% in my 50's. I know in CT teachers do not contribute to SS and therefore cannot get any spousal or survivor benefit (assuming their pension is used for GPO).
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ruralavalon
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Re: Calculating the value of a teacher's pension

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berg wrote:Trying to calculate the value of a Mass. teacher's pension. As we plan, I think it is important to understand the value there. Currently 11% is deducted toward the pensions, with a full 80% payout at age 58.

My wife will have worked 37 years at retirement, and at current salary and conservative growth rates, in the 37 years she will have contributed between $9500 - $10,000 per year.

A compound interest calculator shows that $10k per year @ 6% is $1.3 million. At current conservative salary growth rates, if she gets 80%, I'd expect that to be between $83k and $93k annually. At a 3% withdrawal rate, that puts the value of her pension if it was savings at between $2.8 and $3.1 million.

Would it be fair to say the value of her pension in addition to her contributions is between $1.5-1.8 million? Said another way -- the value of her pension is close to a 100% match on her 11% contribution, since the estimated value is nearly double what she would do on her own.

Is my logic sound? As we discuss finances, we theoretically talk of the "value" of her pension as a teacher, but I think it would be helpful to try to put some numbers against it as well.
What is her current age, and about how many years is she from full retirement age?

What asset allocation (stock/bond mix) do you currently use in your investing?

In my opinion it's better not to count the value of a defined benefit pension in your planning or asset allocation until fairly near retirement. There are many unpredictable changes that can significantly alter the calculation. The pension plan might change, perhaps drastically. The employee might change employers, become ill or disabled and might never vest, or not accumulate enough years for the full benefit. All of that is in addition to the issue of salary changes and in addition to the usual imponderable factors of rates of return and inflation. In short if she is far from retirement, then you don't have a concrete number for any part of the calculation.

In general a 3% portfolio withdrawal rate is likely reasonable for a retirement at age 58. In general a 6% nominal rate of return is likely not a realistic expectation in my opinion. That might be a realistic expectation for a rate of return on stocks, but not on an overall portfolio.
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BL
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Re: Calculating the value of a teacher's pension

Post by BL »

Is there also some type of COLA? That is a big help, even though that can easily change somewhat. It would be hard to calculate if variable. MN has changed COLA but it is still there currently at 1.5% I believe (1 % for public employees now.). They eliminated it a couple years to improve funding, but restored some of it a year or so ago. Most current MN workers also pay into SS now.
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berg
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Re: Calculating the value of a teacher's pension

Post by berg »

ruralavalon wrote:
berg wrote:Trying to calculate the value of a Mass. teacher's pension. As we plan, I think it is important to understand the value there. Currently 11% is deducted toward the pensions, with a full 80% payout at age 58.

My wife will have worked 37 years at retirement, and at current salary and conservative growth rates, in the 37 years she will have contributed between $9500 - $10,000 per year.

A compound interest calculator shows that $10k per year @ 6% is $1.3 million. At current conservative salary growth rates, if she gets 80%, I'd expect that to be between $83k and $93k annually. At a 3% withdrawal rate, that puts the value of her pension if it was savings at between $2.8 and $3.1 million.

Would it be fair to say the value of her pension in addition to her contributions is between $1.5-1.8 million? Said another way -- the value of her pension is close to a 100% match on her 11% contribution, since the estimated value is nearly double what she would do on her own.

Is my logic sound? As we discuss finances, we theoretically talk of the "value" of her pension as a teacher, but I think it would be helpful to try to put some numbers against it as well.
What is her current age, and about how many years is she from full retirement age?

What asset allocation (stock/bond mix) do you currently use in your investing?

In my opinion it's better not to count the value of a defined benefit pension in your planning or asset allocation until fairly near retirement. There are many unpredictable changes that can significantly alter the calculation. The pension plan might change, perhaps drastically. The employee might change employers, become ill or disabled and might never vest, or not accumulate enough years for the full benefit. All of that is in addition to the issue of salary changes and in addition to the usual imponderable factors of rates of return and inflation. In short if she is far from retirement, then you don't have a concrete number for any part of the calculation.

In general a 3% portfolio withdrawal rate is likely reasonable for a retirement at age 58. In general a 6% nominal rate of return is likely not a realistic expectation in my opinion. That might be a realistic expectation for a rate of return on stocks, but not on an overall portfolio.
This is a great point. We are saving without necessarily counting on this as a major part of our portfolio, maxing our retirement accounts. She is 27 years from retirement However, I was trying to come up with an estimate, of the value of this pension.

As we are about to have our second child and discussing various working options, we both think it is important to consider the value of this pension and how that might impact our lifestyle in the future. She plans to continue to work, but if she were to get a salary doing some part time work at 50% of her pay, that doesn't factor in this pensions (for what it's worth, she isn't planning to do that and enjoys teaching, but helpful to consider as we discuss our finances).
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ruralavalon
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Re: Calculating the value of a teacher's pension

Post by ruralavalon »

berg wrote:
ruralavalon wrote: What is her current age, and about how many years is she from full retirement age?

What asset allocation (stock/bond mix) do you currently use in your investing?

In my opinion it's better not to count the value of a defined benefit pension in your planning or asset allocation until fairly near retirement. There are many unpredictable changes that can significantly alter the calculation. The pension plan might change, perhaps drastically. The employee might change employers, become ill or disabled and might never vest, or not accumulate enough years for the full benefit. All of that is in addition to the issue of salary changes and in addition to the usual imponderable factors of rates of return and inflation. In short if she is far from retirement, then you don't have a concrete number for any part of the calculation.

In general a 3% portfolio withdrawal rate is likely reasonable for a retirement at age 58. In general a 6% nominal rate of return is likely not a realistic expectation in my opinion. That might be a realistic expectation for a rate of return on stocks, but not on an overall portfolio.
This is a great point. We are saving without necessarily counting on this as a major part of our portfolio, maxing our retirement accounts. She is 27 years from retirement However, I was trying to come up with an estimate, of the value of this pension.

As we are about to have our second child and discussing various working options, we both think it is important to consider the value of this pension and how that might impact our lifestyle in the future. She plans to continue to work, but if she were to get a salary doing some part time work at 50% of her pay, that doesn't factor in this pensions (for what it's worth, she isn't planning to do that and enjoys teaching, but helpful to consider as we discuss our finances).
I am glad to see that you are maxing your retirement accounts.

For some of the important inputs about valuing her pension you could use:
1) a 3% withdrawal rate;
2) an 80/20 stock/bond asset allocation;
3) a 2% rate of inflation;
4) a 5% expected nominal rate of return (6% stocks, 3% bonds???), wiki article "Historical and expected returns".
Still there are many unpredictable variables that make the valuation of her pension problematic.

In more general planning you might find this calculator helpful: "Firecalc.
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celia
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Re: Calculating the value of a teacher's pension

Post by celia »

berg wrote:Trying to calculate the value of a Mass. teacher's pension. As we plan, I think it is important to understand the value there.
Why do you want to know the value? If she (and you) die within a few years of starting the pension, she will get very little. If she lives to 100, she will get much more than she put in.

You don't count it as an asset, do you? In retirement, it is a source of income that covers all or most of her expenses, thus needing to take less from other accounts to live off of.

So, why do you want to calculate the value?
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Re: Calculating the value of a teacher's pension

Post by jimb_fromATL »

One thing to consider is that the pension is guaranteed (within the reliability of the pension plan funding) but you have no guarantee of earning enough between now and retirement or after retirement to guarantee how much you can withdraw from your own retirement fund.

Probably the nearest comparison for the value of the pension is the value of a SPIA (Single Premium Immediate Annuity). It's more like a pension in that it gives a guaranteed income for life. You'll never run out of money, but like a pension, it has no residual value when the recipient (and beneficiary if included) dies.

Probably the biggest difference is that because of the actuarial statistics, the SPIA --like a pension fund-- can pay out more than you could safely withdraw from your own retirement investment funds.

For example, immediateannuities.com shows that a female age 58 can get a little over 5% of the purchase price as a guaranteed payout from a SPIA … varying a tiny fraction depending on whether it's a joint account and whether there are any 'period certain' payments guaranteed.

Assuming her pension also has COLA increases, it is worth even more because typical SPIAs do not include similar increases.

What this would seem to mean in your research and calculations is that for that $1,300,000 you estimated, she could buy a SPIA that would pay out about $65,000 per year.

If that $9500 or so per year is 11% of her pay now, then in perhaps 37 years at maybe .56% inflation/COLA she'll be making about $106,250. A pension of 80% of that would be $85,000 per year.

If she wanted to use a safe withdrawal rate of 3% she'd need to have $2,833,333 in a retirement plan of her own.

Assuming they still pay the same 5% payout, she'd need $1,700,000 to buy a SPIA that could start out guaranteeing the same initial amount as the pension.

An average of $10,000 contributions earning 6% would take about 37 years to grow to the $1,300,000 you mention.

So it looks to me like she'd need to invest $22,263 per year at 6% to have the $2,833,333 in . years, or $13,358 per year to have $1,700,000 in years.

Seems to me that makes the pension look like a pretty good deal.

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ruralavalon
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Re: Calculating the value of a teacher's pension

Post by ruralavalon »

Congratulations on the second child :) .
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Re: Calculating the value of a teacher's pension

Post by dm200 »

bigred77 wrote:Will she also be eligible for SS.
That's the biggest gripe I have about my wife's teacher pension plan: she gets a pension, but no SS.
In her case she would be better off with SS and a 6% match in a 401k type vehicle.
School systems often do this because, financially, it is a net benefit to the teachers. On a net basis, she is probably ahead. The "math" of the two retirement systems diverge, based on income (within the SS 'contribution' range). The teacher retirement systems tend to be more linear in the ratio of "contributions" to benefits, while the SS retirement systems pays the lowest income recipients much more in relation to "contributions" (taxes) than the middle and high end of income. Within the SS tax (contribution) range, teachers would be towards the upper area - and so would receive a lower "return".

This is, in my opinion, "cherry picking" and such teachers/employees are not, in my opinion, paying their fair share of the subsidy of lower income workers. I favor eliminating all such exemptions of participating in the SS retirement system.
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Re: Calculating the value of a teacher's pension

Post by pshonore »

celia wrote:
berg wrote:Trying to calculate the value of a Mass. teacher's pension. As we plan, I think it is important to understand the value there.
Why do you want to know the value? If she (and you) die within a few years of starting the pension, she will get very little. If she lives to 100, she will get much more than she put in.

You don't count it as an asset, do you? In retirement, it is a source of income that covers all or most of her expenses, thus needing to take less from other accounts to live off of.

So, why do you want to calculate the value?
Depends on the plan. In CT, all your contributions go into your own separate account and are credited with a "competitive interest rate". If you leave teaching you can take those funds. When you retire there are several survivor options. In one option you get 100% of your benefit with no survivor option. If you die, they reduce your account balance by 25% of what you received in pension benefits and pay the balance to your estate.
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Re: Calculating the value of a teacher's pension

Post by dm200 »

When it comes to "pensions" and related matters, it seems to me that there are some conflicting goals/objectives often involved. One the one hand is a lifetime (or joint life) guarantee of monthly income. On the other hand is having resources to be left to heirs. You can't max it out BOTH ways.

The SS retirement system is all about lifetime income (and spousal survivor benefit).
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Re: Calculating the value of a teacher's pension

Post by Artsdoctor »

A lot can happen in 27 years, when you say she will be retirement age.

This is probably an exercise in futility. Her contributions can increase, benefits can decrease, and you didn't mention if she will have a COLA (and if she does, the COLA can change or even be eliminated, perhaps). You also didn't mention if there are any survivor benefits.

This is a stream of income, and I would treat it as such.
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berg
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Re: Calculating the value of a teacher's pension

Post by berg »

Thanks all!

I appreciate all the opinions on different calculations! :D At the end of the day, I'm not trying to calculate like an exact science.

Just looking to illustrate the value to my wife. I handle the finances, but she was curious. She knows in theory that her pension as currently laid out is a good deal, but I wanted to help her understand a bit with real numbers. She wants to continue teaching, but one of her coworkers recently decided to stay home. Of course this is a personal choice, not just a financial one. But she was interested in illustrating the value of her choice beyond just her paycheck, but her pension as well. Like I said, I think her and a lot of her coworkers understand the pension is a great benefit, but don't realize that if they were saving on their own, the value at the end would be $1.5-$2million.
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dm200
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Re: Calculating the value of a teacher's pension

Post by dm200 »

berg wrote:Thanks all!
I appreciate all the opinions on different calculations! :D At the end of the day, I'm not trying to calculate like an exact science.
Just looking to illustrate the value to my wife. I handle the finances, but she was curious. She knows in theory that her pension as currently laid out is a good deal, but I wanted to help her understand a bit with real numbers. She wants to continue teaching, but one of her coworkers recently decided to stay home. Of course this is a personal choice, not just a financial one. But she was interested in illustrating the value of her choice beyond just her paycheck, but her pension as well. Like I said, I think her and a lot of her coworkers understand the pension is a great benefit, but don't realize that if they were saving on their own, the value at the end would be $1.5-$2million.
Yes - early, regular saving/investing (especially if tax advantaged) can really build up over the years.

As pointed out, a lot can change in 27 years - so precision is not possible. As was the case with federal government employees in the mid 1980's, exemption from SS may end or be phased out. As pension providers go, public employees (including public schools) are much more secure than private employers.

One advantage (in my opinion) of teaching is that it is more conducive for a break of a few years to stay home with young children - then return later. They can, to a great extent, pick up where they left off.

As far as the SS exemption, as best I understand, if there is a two employee couple (one subject to SS and one not), that is probably a "net" benefit financially over time. Where the SS exemption may not be a net benefit is with a one employee couple, the non-employed spouse would not get the SS spousal benefit.
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Re: Calculating the value of a teacher's pension

Post by wolf359 »

berg wrote:Thanks all!

I appreciate all the opinions on different calculations! :D At the end of the day, I'm not trying to calculate like an exact science.

Just looking to illustrate the value to my wife. I handle the finances, but she was curious. She knows in theory that her pension as currently laid out is a good deal, but I wanted to help her understand a bit with real numbers. She wants to continue teaching, but one of her coworkers recently decided to stay home. Of course this is a personal choice, not just a financial one. But she was interested in illustrating the value of her choice beyond just her paycheck, but her pension as well. Like I said, I think her and a lot of her coworkers understand the pension is a great benefit, but don't realize that if they were saving on their own, the value at the end would be $1.5-$2million.
I suggest you also keep an eye out on the health of the teacher's pension system. There was a Pew Study of public pension systems in 2010, and Massachusetts did not fare all that well (http://www.masslive.com/news/index.ssf/ ... ssach.html). The State of Massachusetts ran their own study after that which was a bit more optimistic (http://www.massbudget.org/report_window ... _3_11.html), but it still acknowledged that perhaps their projected long-term returns (discount rate) is optimistic and they are underfunded. (Massachusetts projects that they will get 8.25% total return over the long term. Pew thinks this is unrealistic given that they are not 100% stocks and interest rates are so low.)

The Massachusetts report also discusses "reforms" that make (or will make) the pension system more sustainable. Those reforms may reduce benefits.

27 years is a long time. There's also been a bull market since 2010. Things can change. (However, I first started watching this general issue because Warren Buffet warned about underfunded state pensions in his 2014 Berkshire Hathaway letter to shareholders, so it is still current. He warned it will have an impact for a decade.)

At the very least, it's worth keeping an eye on it if you're relying on it. Have a fallback plan if the pension fails or they change the rules.
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Re: Calculating the value of a teacher's pension

Post by Infidel447 »

One way to look at a pension is figure out how much it will roughly pay your wife per month, and then try to figure out how much money you--or she--would have to save on her own to come close to that monthly income. For example, if your pension pays 2k/month=24k/yr. At 3% interest you would have to save and stash away 800k and invest wisely to match that income.(3x8=24). Of course if you guesstimate you can earn 5% or so, that brings the dollar amount you would need to save and invest a good bit. However, your wife's pension comes with very little risk as compared to an individual investor trying to imitate it in the open market, obviously. It's an amazing benefit to have on your side. In other words, treat your wife well, lol. Obviously the math above is very unsophisticated. There are better ways of valuing a pension, I'm sure, but if you try to imagine how hard a private sector employee will have to work and the risks they will have to take to try to match the value of her pension, it should give you an appreciation of its value.
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