Calculating value of a pension

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Calculating value of a pension
In 90 days, I will be eligible for a COLA adjusted pension in the amount of $1300/month.
Also at that time, I will turn 60.
How do I calculate what the lump sum value is to me of that pension?
Thanks
Also at that time, I will turn 60.
How do I calculate what the lump sum value is to me of that pension?
Thanks
Re: Calculating value of a pension
There is no absolute way to calculate the value because no one knows how valuable the COLA will be in the future. You can't even directly compare to an annuity because Principle has stopped selling their inflationprotected annuity.
The closest I can get is a 2% fixed escalator SPIA, I get a value (amount to purchase a $1300/mo, 2% fixed escalator, age 60) of $425,000. If lifetime inflation is low, your value will be similar, if lifetime inflation is high, your value could be much more...
The closest I can get is a 2% fixed escalator SPIA, I get a value (amount to purchase a $1300/mo, 2% fixed escalator, age 60) of $425,000. If lifetime inflation is low, your value will be similar, if lifetime inflation is high, your value could be much more...
Prediction is very difficult, especially about the future  Niels Bohr  To get the "risk premium", you really do have to take the risk  nisiprius

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Re: Calculating value of a pension
You could try going to immediate annuities .com and entering portfolio values to see what would net you $1300.
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 willthrill81
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Re: Calculating value of a pension
This is a textbook case for using the net present value equation.
The answer depends greatly on two factors: how long you expect to draw the pension and the discount rate you wish to use.
If you expected to draw this pension for 22 years, the approximate life expectancy according to the SSA for a 60 year old male, and assumed a discount rate of zero (i.e. equal to inflation), the net present value of the pension would be $327,600. If you used 1%, inflationadjusted, as the discount rate, the net present value would be $295,743.
The answer depends greatly on two factors: how long you expect to draw the pension and the discount rate you wish to use.
If you expected to draw this pension for 22 years, the approximate life expectancy according to the SSA for a 60 year old male, and assumed a discount rate of zero (i.e. equal to inflation), the net present value of the pension would be $327,600. If you used 1%, inflationadjusted, as the discount rate, the net present value would be $295,743.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Re: Calculating value of a pension
If your pension plan offers a lump sum option, their offer will be the lump sum value.LunaLauren wrote: ↑Fri Nov 20, 2020 11:09 am In 90 days, I will be eligible for a COLA adjusted pension in the amount of $1300/month.
Also at that time, I will turn 60.
How do I calculate what the lump sum value is to me of that pension?
Thanks
If it doesn’t offer such an option, it is a theoretical, irrelevant number. In that case, your pension has value to you only as a monthly income.
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 willthrill81
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Re: Calculating value of a pension
That seems awfully expensive to me. If we assumed that the OP would live to his life expectancy as noted by the SSA and used a discount rate equal to the current 30 year TIPS yield, the NPV of the pension would be $337,242. Of course, the annuity provider has overhead and profit to cover, but neither of those should come to nearly $90k in this instance.David Jay wrote: ↑Fri Nov 20, 2020 11:26 am The closest I can get is a 2% fixed escalator SPIA, I get a value (amount to purchase a $1300/mo, 2% fixed escalator, age 60) of $425,000. If lifetime inflation is low, your value will be similar, if lifetime inflation is high, your value could be much more...
Perhaps some of the discrepancy is because the market is assuming somewhat lower than 2% inflation over the next 30 years, 1.86% right now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Calculating value of a pension
Using the 4% rule (which is inflation adjusted withdrawal), your portfolio starting value would need to be $390K to support that spending amount. Since the pension is guaranteed, I would perhaps value it a little higher. Maybe $450k?
If you are trying to use the valuation to determine how much you need to retire, I think it would be easier to subtract the pension from the expenses that you need to cover from your portfolio.
If you are trying to use the valuation to determine how much you need to retire, I think it would be easier to subtract the pension from the expenses that you need to cover from your portfolio.
Re: Calculating value of a pension
Money is fungible 
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Re: Calculating value of a pension
And if you click on the "Find advanced calculator options here" link, you can price immediate annuities with various cost of living adjustments.
For example, an immediate annuity producing $1300/mo for a 60 yr old female with a 2% COLA would cost between $417k and $435k.
Re: Calculating value of a pension
While inflationadjusted annuities are hard to find at retail, they do exist elsewhere. For example, the US government's TSP allows you to withdraw your TSP as an inflationadjusted annuity; you could go to tsp.gov and compare the rate. (The rate offered to TSP investors would probably be better than the retail equivalent.)

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Re: Calculating value of a pension
Per TSP web site site: "The annuity interest rate index is 1.543% for annuities purchased in November 2020 and 1.475% for annuities purchased in October 2020." https://tinyurl.com/y36tv7a2 (Linked to page that also has a 4page PDF of their annuity product.)grabiner wrote: ↑Fri Nov 20, 2020 2:34 pm While inflationadjusted annuities are hard to find at retail, they do exist elsewhere. For example, the US government's TSP allows you to withdraw your TSP as an inflationadjusted annuity; you could go to tsp.gov and compare the rate. (The rate offered to TSP investors would probably be better than the retail equivalent.)
Re: Calculating value of a pension
And that is a great feature of SPIA annuities  transparent pricing and easy comparison. Which leads to competitive policies, a range of purchase prices of just over 4% (417435).galawdawg wrote: ↑Fri Nov 20, 2020 1:40 pmAnd if you click on the "Find advanced calculator options here" link, you can price immediate annuities with various cost of living adjustments.
For example, an immediate annuity producing $1300/mo for a 60 yr old female with a 2% COLA would cost between $417k and $435k.
Prediction is very difficult, especially about the future  Niels Bohr  To get the "risk premium", you really do have to take the risk  nisiprius