Calculating value of a pension

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LunaLauren
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Calculating value of a pension

Post by LunaLauren »

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
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David Jay
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Re: Calculating value of a pension

Post by David Jay »

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 inflation-protected 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...
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Bronko
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Re: Calculating value of a pension

Post by Bronko »

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

Post by willthrill81 »

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%, inflation-adjusted, as the discount rate, the net present value would be $295,743.
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Stinky
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Re: Calculating value of a pension

Post by Stinky »

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 your pension plan offers a lump sum option, their offer will be the lump sum value.

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

Post by willthrill81 »

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...
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.

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.
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aristotelian
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Re: Calculating value of a pension

Post by aristotelian »

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.
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Oicuryy
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Re: Calculating value of a pension

Post by Oicuryy »

You could use the Society of Actuaries' annuity factor calculator.
https://afc.soa.org/

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galawdawg
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Re: Calculating value of a pension

Post by galawdawg »

Bronko wrote: Fri Nov 20, 2020 11:26 am You could try going to immediate annuities .com and entering portfolio values to see what would net you $1300.
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.

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grabiner
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Re: Calculating value of a pension

Post by grabiner »

While inflation-adjusted 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 inflation-adjusted 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

Post by AlwaysLearningMore »

grabiner wrote: Fri Nov 20, 2020 2:34 pm While inflation-adjusted 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 inflation-adjusted 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.)
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 4-page PDF of their annuity product.)
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David Jay
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Re: Calculating value of a pension

Post by David Jay »

galawdawg wrote: Fri Nov 20, 2020 1:40 pm
Bronko wrote: Fri Nov 20, 2020 11:26 am You could try going to immediate annuities .com and entering portfolio values to see what would net you $1300.
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.

Image
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% (417-435).
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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