How much is this pension feature worth?

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UserFace
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How much is this pension feature worth?

Post by UserFace »

Hi All,

I am fortunate that my current company offers a DB pension. The base pension formula is pretty standard: Years of Service x high 5 year avg salary X 1.5%, no COLA adjustment, starting at age 65. If I start collecting the pension before 65, it is discounted: Age 60 - 63% of full pension. Age 55 - 42%. Pretty standard.

If I stay at my job for ~2 more years, this discount for collecting the pension early is much improved: Age 60 - 85% of full pension instead of 63%. Age 55 - 60% instead of 42%. Those enhanced rates make collecting the pension early seem like a no-brainer.

My question is, how valuable is this perk? Should I prioritize staying for at least two more years so I qualify? Obviously the value of this perk goes up with the value of my pension and how long I ultimately stay.

For context: I'm 37 and currently have 13 years of service and an average salary of ~160K. I like my job, but it's high stress and will look to to downshift at some point (not sure if this will be 1 year, 5 years, 10 years) and retire before I'm 50.

I appreciate any feedback or suggestions from the group on how I should think about this. Thank you!
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JoeRetire
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Re: How much is this pension feature worth?

Post by JoeRetire »

Decide what's most important and strive to maximize that.

For example, if retiring before 50 is most important, suck it up for a while and skip the downshift part.
I love a good nap. Sometimes it’s the only thing getting me out of bed in the morning.
mchampse
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Re: How much is this pension feature worth?

Post by mchampse »

Do you think you’ll need to collect your pension early? If not, it’s worth nothing. That said, you never know what the future holds so it could be a good insurance policy.
MHA556
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Re: How much is this pension feature worth?

Post by MHA556 »

Sounds like a fair bit of improved payout options for two more years of working there to me.

So at age 60, you get 85% of full value if you work there two more years, versus 63% of full value for the time you have accumulated already. 22% difference, which is substantial.

But you need to add some numbers to this so it makes sense honestly, do some basic math:
Figure out full retirement amounts if you stay there and work to certain ages
Figure out retirement amounts if you stay there but retire early
Figure retirement amounts if you leave at certain age after banking so many years.

Depending on how much the pension might be, and what kind of COLA (if any), I would not want to leave too soon if you have the opportunity to lock in a full or nearly full amount pension benefit. Having a life long guaranteed income stream really makes things a lot easier. Seems like you have put in the majority of the work already, why stop when the finish line is within view.
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Metsfan91
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Re: How much is this pension feature worth?

Post by Metsfan91 »

Based on your post, you'll not be able to collect before turning 55. Thus, Your pension is worth not much right now. It won't be worth much 2 years later either. If you quit or retire from this job (now or 2 years later), your earning stops. Your pension stops growing (your earnings won't be indexed like social security, I assume). Your pension will be calculated 20/25 years later but based on earnings from decades before. With inflation year after year, your future pension will lose buying power.

On the other hand, if you keep on working, you add more to years of service. You earn more year after year. Your pension grows. If are able to work till 50 or until you are able to collect pension, it'll be worth a lot more.
"Know what you own, and know why you own it." — Peter Lynch
chemocean
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Re: How much is this pension feature worth?

Post by chemocean »

The more important question is why are you consider leaving. Are you not having fun at your job? i.e., can you see yourself working there for the rest of your career or is the job tiresome?

Do you pay into the pension fund? If so, 1) can you withdraw your contribution to the DB pension plan, and 2) if you return to the company can you buy back those years. With the old federal government (CSRS), you could do both, although you have to pay interest on the buyback while the funds are out of the pension system.

I was in this situation at about your age with only 17 years of service, and I decided to withdraw my contribution because inflation over the 25 years would dramatically reduce the buying power of the defined benefit when I could eventually retire. I though I could do better in the market. I didn't do a financial analysis at that time (i.e., before computer power allowed for Monte Carlo simulations).
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Stinky
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Re: How much is this pension feature worth?

Post by Stinky »

Metsfan91 wrote: Thu Nov 25, 2021 2:52 am Based on your post, you'll not be able to collect before turning 55. Thus, Your pension is worth not much right now. It won't be worth much 2 years later either. If you quit or retire from this job (now or 2 years later), your earning stops. Your pension stops growing (your earnings won't be indexed like social security, I assume). Your pension will be calculated 20/25 years later but based on earnings from decades before. With inflation year after year, your future pension will lose buying power.

On the other hand, if you keep on working, you add more to years of service. You earn more year after year. Your pension grows. If are able to work till 50 or until you are able to collect pension, it'll be worth a lot more.
This is a great post, and the way I’d look at it.

Beyond what metsfan91 said, it sounds like the benefit of staying two more years is just that the early retirement factors are more favorable. It doesn’t sound like the age 65 benefit is changed at all (except for two years more of service).

I had a DB pension. When I was in my 30s, I placed very little value on the pension benefit in my employment decision. However, as I got into my 50s and especially 60s, I recognized the significant value of adding more years of service and avoiding the early retirement cutback factors.

My counsel to OP - don’t let the prospect of a far off pension have a large influence on your employment decision today.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
dbr
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Re: How much is this pension feature worth?

Post by dbr »

During my last five years of employment my pension payment increased at a rate of 12%/year, a compounded increase of 76%. Increase was due to years worked, early retirement penalty, and salary increases over last years. I feel lucky that this also fit my non-financial incentives to continue working or not. For a person taking early retirement forced or voluntary this kind of scheme seems cruel.
ModifiedDuration
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Re: How much is this pension feature worth?

Post by ModifiedDuration »

I would just leave if you want to, take a lump sum, and put it in an equity index fund (especially with the current low interest rates helping to bump up the value of the lump sum).

Otherwise, over the upcoming years inflation would probably really take its toll on these fixed pension figures with no COLA.
rgs92
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Re: How much is this pension feature worth?

Post by rgs92 »

Do whatever you can to maximize it in any way you can. Pensions are priceless and rare, fixed or otherwise.
Stay in the job as long as you can, defer the pension as long as possible, buy pension credits, anything.
There is nothing better than having a pension when your salary stops.
I even suggest to anyone who can to search for and switch to a public sector job to pursue a pension.

It's the next best thing to deferring Social Security, and we all know how valuable that is if you can manage it.

The mantra to follow IMO is income, income, income.
If you have to buy an SPIA on your own, it's mighty expensive, and it seems from the tea leaves that will be the case for the long term (IMHO).
Best of luck to you.
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Ben Mathew
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Re: How much is this pension feature worth?

Post by Ben Mathew »

Assuming inflation rate = 2% and discounting pension payouts using real bond yield of -0.4% to get present value (PV):

Waiting till age 65 for 100% is significantly better than starting pension at age 60 at 63%.

Starting pension at age 60 at 85% becomes better than waiting till age 65, but not by a huge margin. If you assume drawing pension till age 95, the difference is a PV of $804,823 for an age 60 start vs $781,064 for an age 65 start = $23,759:

Image

Here's the spreadsheet if you want to try different assumptions.
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Metsfan91
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Re: How much is this pension feature worth?

Post by Metsfan91 »

Stinky wrote: Thu Nov 25, 2021 10:58 am
Metsfan91 wrote: Thu Nov 25, 2021 2:52 am Based on your post, you'll not be able to collect before turning 55. Thus, Your pension is worth not much right now. It won't be worth much 2 years later either. If you quit or retire from this job (now or 2 years later), your earning stops. Your pension stops growing (your earnings won't be indexed like social security, I assume). Your pension will be calculated 20/25 years later but based on earnings from decades before. With inflation year after year, your future pension will lose buying power.

On the other hand, if you keep on working, you add more to years of service. You earn more year after year. Your pension grows. If are able to work till 50 or until you are able to collect pension, it'll be worth a lot more.
This is a great post, and the way I’d look at it.
Thanks :-)
"Know what you own, and know why you own it." — Peter Lynch
Topic Author
UserFace
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Re: How much is this pension feature worth?

Post by UserFace »

Ben Mathew wrote: Thu Nov 25, 2021 4:55 pm Assuming inflation rate = 2% and discounting pension payouts using real bond yield of -0.4% to get present value (PV):

Waiting till age 65 for 100% is significantly better than starting pension at age 60 at 63%.

Starting pension at age 60 at 85% becomes better than waiting till age 65, but not by a huge margin. If you assume drawing pension till age 95, the difference is a PV of $804,823 for an age 60 start vs $781,064 for an age 65 start = $23,759:

Image

Here's the spreadsheet if you want to try different assumptions.
Wow - that's some fantastic Excel work. Thanks for this analysis - super helpful! Even with different assumptions, while the enhanced early retirement option seems to be worth more, the difference isn't dramatic. Of course, to the point of other posters, this becomes more meaningful as I work more years and the overall value of the pension increases.

Thanks for taking the time to model this!
Topic Author
UserFace
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Re: How much is this pension feature worth?

Post by UserFace »

mchampse wrote: Wed Nov 24, 2021 9:21 pm Do you think you’ll need to collect your pension early? If not, it’s worth nothing. That said, you never know what the future holds so it could be a good insurance policy.
Need to? Probably not - but if the overall expected value is higher to collect early, then I would plan to do so.
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UserFace
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Re: How much is this pension feature worth?

Post by UserFace »

Metsfan91 wrote: Thu Nov 25, 2021 2:52 am Based on your post, you'll not be able to collect before turning 55. Thus, Your pension is worth not much right now. It won't be worth much 2 years later either. If you quit or retire from this job (now or 2 years later), your earning stops. Your pension stops growing (your earnings won't be indexed like social security, I assume). Your pension will be calculated 20/25 years later but based on earnings from decades before. With inflation year after year, your future pension will lose buying power.

On the other hand, if you keep on working, you add more to years of service. You earn more year after year. Your pension grows. If are able to work till 50 or until you are able to collect pension, it'll be worth a lot more.
Really good points. Even if the payout options are better if I stay two more years, the difference is negligible in real terms. The real differentiaator is if I stay longer and add significantly more years of service. Thanks for the perspective!
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UserFace
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Re: How much is this pension feature worth?

Post by UserFace »

chemocean wrote: Thu Nov 25, 2021 9:17 am The more important question is why are you consider leaving. Are you not having fun at your job? i.e., can you see yourself working there for the rest of your career or is the job tiresome?

Do you pay into the pension fund? If so, 1) can you withdraw your contribution to the DB pension plan, and 2) if you return to the company can you buy back those years. With the old federal government (CSRS), you could do both, although you have to pay interest on the buyback while the funds are out of the pension system.

I was in this situation at about your age with only 17 years of service, and I decided to withdraw my contribution because inflation over the 25 years would dramatically reduce the buying power of the defined benefit when I could eventually retire. I though I could do better in the market. I didn't do a financial analysis at that time (i.e., before computer power allowed for Monte Carlo simulations).
Good questions! Right now, I am mostly having fun, but the hours/stress don't seem sustainable to me. Of course I could look for other roles within my company that aren't as intense, and would prioritize staying with my company if I do that. I suppose I am also a bit curious about life in other organizations and other sorts of jobs since I have been doing similar work for a while. The last consideration is that my company is in a VHCOL area and doesn't seem open to remote work. While I have no immediate plans to move, it's certainly on the list of possibilities in the not-too-distant future.

I don't pay anything into the fund, and I don't have the ability to buy back any years. If I leave the company, I have two years to return and continue the years-of-service clock. If I leave for more than two years and return, the clock resets to 0.
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UserFace
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Re: How much is this pension feature worth?

Post by UserFace »

Stinky wrote: Thu Nov 25, 2021 10:58 am
Metsfan91 wrote: Thu Nov 25, 2021 2:52 am Based on your post, you'll not be able to collect before turning 55. Thus, Your pension is worth not much right now. It won't be worth much 2 years later either. If you quit or retire from this job (now or 2 years later), your earning stops. Your pension stops growing (your earnings won't be indexed like social security, I assume). Your pension will be calculated 20/25 years later but based on earnings from decades before. With inflation year after year, your future pension will lose buying power.

On the other hand, if you keep on working, you add more to years of service. You earn more year after year. Your pension grows. If are able to work till 50 or until you are able to collect pension, it'll be worth a lot more.
I had a DB pension. When I was in my 30s, I placed very little value on the pension benefit in my employment decision. However, as I got into my 50s and especially 60s, I recognized the significant value of adding more years of service and avoiding the early retirement cutback factors.

My counsel to OP - don’t let the prospect of a far off pension have a large influence on your employment decision today.
This seems like a good way of looking at it. I can see how in your 50s and 60s, it would be important to recognize the significant value of additional years. Since it is around the corner for me, how would you look at it in your 40s? The years are worth a bit, but not too much, however staying with your company leaves open the future opportunity for significant pension. Sort of hard to wrap your mind around in terms of actual decision-making.
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UserFace
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Re: How much is this pension feature worth?

Post by UserFace »

dbr wrote: Thu Nov 25, 2021 11:07 am During my last five years of employment my pension payment increased at a rate of 12%/year, a compounded increase of 76%. Increase was due to years worked, early retirement penalty, and salary increases over last years. I feel lucky that this also fit my non-financial incentives to continue working or not. For a person taking early retirement forced or voluntary this kind of scheme seems cruel.
Well said! I definitely feel somewhat of the "golden handcuff" thing now, realizing how much additional value the pension would be worth if I stayed those extra years. I guess that's the main goal organizations have for keeping these pensions around - reducing turnover for employees at all levels.
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Ben Mathew
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Re: How much is this pension feature worth?

Post by Ben Mathew »

UserFace wrote: Fri Nov 26, 2021 5:31 pm Wow - that's some fantastic Excel work. Thanks for this analysis - super helpful! Even with different assumptions, while the enhanced early retirement option seems to be worth more, the difference isn't dramatic. Of course, to the point of other posters, this becomes more meaningful as I work more years and the overall value of the pension increases.

Thanks for taking the time to model this!
Sure thing. I'm not sure if this was obvious, but the real dollars are in age 60 future dollars. If you want to change real dollars to today's dollars, change the formulas in the real payout columns to deflate nominal dollars by [age minus 37 years] instead of [age minus 60 years].
absolute zero
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Re: How much is this pension feature worth?

Post by absolute zero »

I haven’t read the responses, but one thing to consider is that in some cases an increase in early retirement benefits may be a total illusion if, in both cases, it makes more sense to collect the pension at 65.

To use an extreme example, imagine that the plan provided 20% of full pension if retiring at 55, but if you stay two more years that number jumps up to 30% of full pension. In this example, the “benefit” that’s realized after two more years is completely worthless because in both cases you should claim at 65.

My pension has a similar “adjustment” that you described, and to understand the value of that adjustment I had to first answer the following question. What’s the “breakeven” percentage at age 55 and age 60? In other words, what’s the percentage of full pension at (for example) age 55 for which you should be totally ambivalent between claiming the pension at age 55 vs waiting until age 65.

I priced annuities on the internet and did some Excel work and here was my conclusion: at age 55, the “breakeven” rate is 58% of full pension and at age 60 the breakeven rate is 75% of the full pension. As long as you assume 100% of pension at age 65, these numbers should be directly relevant to your situation too.

So now let’s go back to your specific event in two years.

(1) Your age 55 benefit goes from 42% to 60%. Since it doesn’t make any sense to claim at 55 (compared to 65) unless you exceed 58% of full pension, the value of this increase from 42% to 60% is marginal. You can basically view it as an increase from 58% to 60%, since in the first case (42%) you would have chosen to claim at age 65.

(2) Your age 60 benefit increases from 63% to 85%. This one is more valuable, since the breakeven is at 75%. So the benefit is basically an increase from 75% of full pension at age 60 to 85% instead. You can divide 85 by 75 = 1.13 to understand the magnitude of this benefit. Essentially what will happen in two years is that the present value of your pension will increase by 13% the moment that you cross that threshold.

This is nothing to sneeze at, but keep in mind that by staying an additional two years your pension’s present value will increase by 15% even without this extra perk (assuming your salary is unchanged then 2 years divided by 13 years is 15%). So you can kind of think of it in that way - if you stay 2 more years, you get an increase in your pension’s present value that’s (roughly) equal to 4 years worth of service.

Hope that’s helpful.
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