Pensions and planning

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PandaBear
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Pensions and planning

Post by PandaBear »

So I have a question about pensions and retirement planning. Currently I have a goal of saving 25% of my gross income (I've been doing so for a few years now). However, I never really took my pension into account. That is to say, I save 25% of my gross and then I have the pension. The contributions to my pension come solely from my employer, I don't put anything into it. But I was wondering how to take it into account in relation to my goal? Is it irrelevant?

The reason I ask is because my wife is going to be starting a new job where she will also be eligible for a pension plan--except she will be contributing something like 7 - 8% of her gross into the plan. So basically, what I'm asking is this: if she's already contributing 7% of her gross into the pension, should I count that against the 25% goal or should I not count it at all?
anonenigma
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Re: Pensions and planning

Post by anonenigma »

More savings is better.
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PandaBear
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Re: Pensions and planning

Post by PandaBear »

RIght, more is more, I'm not arguing that point. What I'm wondering is how people work in pensions into their retirement planning. Especially since pensions are, by their very nature, not something you are managing nor do you have any control on the funding level and health of the fund.
trueblueky
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Re: Pensions and planning

Post by trueblueky »

It matters a lot whether the pension is from the federal government or from, say, Detroit or US Steel.
https://www.pbgc.gov/news/press/releases/pr19-09

I would count her 7% contribution toward the desired savings rate if it vests fairly quickly. The details are in the plan. If she leaves in three years, does she get her contributions back?
Reamus294
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Re: Pensions and planning

Post by Reamus294 »

I count my contribution to a pension towards my savings goal. Mine is a cash-balance-hybrid plan, so it grows with interest, and if I leave I could roll it over (even though I'm vested and never will). I have a matching component in mine as well, and as probably expected, I don't count any matching funds towards my savings goal.
anonenigma
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Re: Pensions and planning

Post by anonenigma »

I can't imagine anyone who's in line for a pension who doesn't consider it. It's an income stream.

Keep it simple. Figure your costs in retirement in today's dollars. Subtract projected income from pensions and/or Social Security, also in today's dollars. If those streams will produce less than you will spend, you have to save enough to cover that gap. Multiply the shortfall by 25 if you like the 4% Rule, by 40 if you're more cautious and prefer 2.5%.
SRenaeP
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Re: Pensions and planning

Post by SRenaeP »

anonenigma wrote: Wed Aug 21, 2019 1:44 pm I can't imagine anyone who's in line for a pension who doesn't consider it. It's an income stream.

Keep it simple. Figure your costs in retirement in today's dollars. Subtract projected income from pensions and/or Social Security, also in today's dollars. If those streams will produce less than you will spend, you have to save enough to cover that gap. Multiply the shortfall by 25 if you like the 4% Rule, by 40 if you're more cautious and prefer 2.5%.
I don't count my pension in my ' number', i.e. 25x. I have years to go before I can start drawing my pension and anything can happen in that timeframe. I don't count Social Security either. Because I plan to retire early, I choose to be conservative in my calculations. Any pension and SS I receive will be cushion/risk mitigation in case the 4% SWR fails me over a 30+ year retirement.
Mickey7
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Re: Pensions and planning

Post by Mickey7 »

trueblueky wrote: Wed Aug 21, 2019 1:30 pm It matters a lot whether the pension is from the federal government or from, say, Detroit or US Steel.
https://www.pbgc.gov/news/press/releases/pr19-09

I would count her 7% contribution toward the desired savings rate if it vests fairly quickly. The details are in the plan. If she leaves in three years, does she get her contributions back?
Very solid points +1.

Because your fears might be justified with the strength of the plan or that your wife might leave before fully vesting, I would rather not count it as part of your 25%. Of course if makes your budget somewhat tight there is no reason to adhere to this. A goal is just a goal.
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Tyler Aspect
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Re: Pensions and planning

Post by Tyler Aspect »

Pension an income stream or bond

Pension can be distributed as an income stream after retirement, or be rolled-over to a traditional IRA account at retirement. If you intend to pick the income stream, then it is deferred income. If you intend to pick the rollover option, then you can consider the pension's vested lump-sum value as bond. Check pension's plan document for limitations and exceptions.
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PandaBear
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Re: Pensions and planning

Post by PandaBear »

trueblueky wrote: Wed Aug 21, 2019 1:30 pm It matters a lot whether the pension is from the federal government or from, say, Detroit or US Steel.
https://www.pbgc.gov/news/press/releases/pr19-09

I would count her 7% contribution toward the desired savings rate if it vests fairly quickly. The details are in the plan. If she leaves in three years, does she get her contributions back?
It's not a fed pension, it's a state pension (Washington) unfortunately. And yes, her contributions go back to her if she leaves before she vests (5 years to vest).

Assuming our pensions are solvent by the time we retire, they should cover all our expenses. Of course, I'm not sure if 30-35 years from now the pension funds will be what they are now. It is the solvency issue that vexes me. I've read documents claiming the Washington pension fund is underfunded, others that say it's well funded, and honestly I don't know what is closer to the truth.
Mako
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Re: Pensions and planning

Post by Mako »

Pensions are tough to account for because you don't want to assume they will be there, because if they aren't you will be woefully unprepared. Private pensions can be cut with no warning. Government pensions can succumb to political pressures. And even if they aren't cut completely their benefits can be cut. At the same time, it would be foolish to just ignore them, and suddenly you are way richer in retirement then you planned to be...which is great, but maybe you could have enjoyed your working years a little more. Also, I think it is pretty rare for someone with a pension to end up with nothing, at the very least people usually get some sort of lump sum pay out or a reduction in benefits if they are cut.

I am 40 and work for the Federal government, planning to retire from there. If the pension remains the same as it is now, it will pay for something like 70 or 80% of my planned retirement expenses. Like I said, it is tough to assume it will all be there (Esp since this administration's plan has always been to cut it as much as possible, and we will certainly have more administrations and Congresses like that. Your state probably will too.), though it is likely more reliable than some state or private pensions. I also don't want to assume I will get nothing as that's unlikely.

Personally, I don't find % of income savings rate all that helpful. I thought of it like that more in my 20s, but at that point I mostly disregarded the pension because it was so nebulous (would it be cut? would I even stay with the government?). At this point, less than 20 years to retirement, I can see my savings are X, my expected retirement expenses are Y, so I have X/Y times what I need...this tells me I already have enough if I get a full pension, and that I am well on my way even if it is halved. So I save and set my asset allocation based on those facts. I save less than I used to, so I am accounting for the pension, but I don't have strict rules about it. This was maybe a long winded and wishy washy post, but that's all I can do with this subject...
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bengal22
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Re: Pensions and planning

Post by bengal22 »

I do retirement sense check this way.

Expected retirement income(SSA, pension) minus expected retirement expense. The balance is what I have to fund from my portfolio. For me pension is an important number. When I turn 70.5 and start doing RMDs I will throw that into the equation.
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delamer
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Re: Pensions and planning

Post by delamer »

Are the pensions in addition to Social Security or do they replace it?

The point being that the more sources of retirement income you have, the less dependent you are on any one source.

If you expect to have a pension and SS benefits, then the need to save is less than if you’ll just have a pension.

Whether you count your wife’s pension as part of your savings is less important than having a well-thought out savings plan reflecting the totality of your expected retirement income.

Of course, if you are in your 30’s, it can be hard to look that far ahead.
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Edie
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Re: Pensions and planning

Post by Edie »

I do it both ways. I know I am saving 20% in my 401a separate from the pension, and then to make me feel a little better about "how little I take home", I remember that it's almost 33% when I add in my portion of pension contributions.

I'm hoping to use the pension as a floor of income, but things change. When I first joined this board, I knew, absolutely, I wasn't ever leaving my job. The work I do is important and valuable, not just to me, but to my family, friends and neighbors (not counting the multitudes of people I will never meet who also benefit from my work). The past year, however, has seen two new supervisors come in, and a valued coworker leave. The future isn't as certain. My pension vests in another year, and I may start looking elsewhere, which would make me sad as I really value/enjoy/am challenged by the work I do, but I can make a lot more money if I go back to the private sector, and if there has been no change in the immediate supervisor front, maybe not that sad after all.
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Wiggums
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Re: Pensions and planning

Post by Wiggums »

anonenigma wrote: Wed Aug 21, 2019 1:14 pm More savings is better.
My employer paid into my pension too. I agree that more savings is better. I was never sick in my life until age 56. Luckily I could retire because of my pension and savings.

You should look into RMDs and SS to what your post retirement income will look like. You might want to see if Roth makes sense for you.

You’re doing great. Keep it up.
decapod10
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Re: Pensions and planning

Post by decapod10 »

PandaBear wrote: Wed Aug 21, 2019 12:27 pm So I have a question about pensions and retirement planning. Currently I have a goal of saving 25% of my gross income (I've been doing so for a few years now). However, I never really took my pension into account. That is to say, I save 25% of my gross and then I have the pension. The contributions to my pension come solely from my employer, I don't put anything into it. But I was wondering how to take it into account in relation to my goal? Is it irrelevant?

The reason I ask is because my wife is going to be starting a new job where she will also be eligible for a pension plan--except she will be contributing something like 7 - 8% of her gross into the plan. So basically, what I'm asking is this: if she's already contributing 7% of her gross into the pension, should I count that against the 25% goal or should I not count it at all?
I have the same problem as well. If our pension holds up, we will hardly need any of our retirement savings as it will be approximately 50% of our highest income. If it does not, then of course that's the issue.

The way I see it, there are a couple of important numbers to consider. I don't know your pension works the same as mine, but you can see how much pension that we have currently earned (if we were to quit today), which is an important number. Then, there is the pension that you would expect if you worked until retirement. Our pension is PBGC insured, will also helps me feel better that we will get at least something (though not necessarily everything).

I would try to break things up into various scenarios:

1. You work until retirement. You retire and get full pension.

2. Something happens where your pension gets frozen to your current level as of today (8/2019). You work until retirement but get the "partial" pension.

3. You work until retirement and get no pension.

4. If you want, you can include other scenarios if you want (disabled, lose job, whatever). I think this depends in part how stable your job is and whether you have disability/life insurance, etc.

I tend to model things so that if the pension disappears (#3), we may need to decrease our retirement spending, but we will be able to cover the essentials and live "ok". If #2 happens, then we can live close to our current standard of living, or maybe just a slight cut back. Then #1 of course everything is fine.

I use FireCalc or similar calculators to run simulations (I use the Monte Carlo function) in the above scenarios.

It's not perfect, but at least I feel like it gets me in the ballpark and I feel I can spend a little more if I'm comfortable with what I'm seeing.
Reamus294
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Re: Pensions and planning

Post by Reamus294 »

I provided an answer earlier, but I think it all depends on what your savings goal is based on. The strength of the retirement plan wouldn't change how I look at a savings goal percentage, unless the plan is severely underfunded (under 60%). The slightly underfunded plans should allow you to pull out your contributions and interest if you left. However, it would change how conservative my estimates are about what I would receive when I retire, which could cause me to increase my savings goal. As an example, my plan is about 85-90% funded and trending in the right direction. Washington has several retirement plans, and their strength depends on multiple issues, but if I had to narrow it down to one thing I would look at the funded ratio. What is and isn't considered in the funding ratio is becoming more standardized in the pension world but can vary. Page 177 of their CAFR has these funded percentages.

https://www.drs.wa.gov/administration/a ... R-2018.pdf

To calculate my future needs in retirement (15-20 years away), I calculate my expected expenses, then subtract my my expected pension (somewhat conservative-75%), then subtract expected social security (really conservative-40%). This provides the expenses to figure the 25-35x on. As I get closer to retirement, I will increase those conservative numbers and hopefully by pleasantly surprised. I am also trying to overestimate my expenses but that is hard to do being 15-20 years out.
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cashboy
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Re: Pensions and planning

Post by cashboy »

here is what did, fwiw,

during my 'savings years' i did NOT include pension as part of my savings % rate goal.
to me, it was similar to Social Security - which i also did NOT include in my savings % rate goal.

i considered 'saving' and 'future income streams' as two different things at that point in time.

your savings % rate you have direct control over; pension and SS not so much...
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Oldschool
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Re: Pensions and planning

Post by Oldschool »

Pretend the pension doesn’t exist. Spend within your means. Invest every dime left over each month according to you AA (IRA, 457, 401, Roth).
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