How do you account for a defined benefit pension in your planning?

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Contango1025
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How do you account for a defined benefit pension in your planning?

Post by Contango1025 » Tue May 22, 2018 1:15 pm

I have a corporate role (Age 32) with a gross annual comp of $130K and my wife is a teacher (Age 32) and earns $80K. We live in a HCOL area of NJ. She does not participate in a 403B as we are instead contributing into my 401K and plan to do so until I'm maxed out, which should start this year.

As a teacher, she has a pension and based on a review of her contract and estimates of when she would want to work until will have around 75% income replacement. When I think about the Fidelity retirement factors (i.e. having 3X your salary at age 40) should I be using our household income or just mine? I'm inclined to say just mine as her pay period pension contributions are funding the defined benefit at retirement. I was curious how others in a similar situation with one spouse who has a pension and one doesn't measures whether they are on track or not.

I know there are likely surrounding variables I haven't mentioned, mainly whether a particular pension will even be funded and would be curious to hear any thoughts around that as well.

Thanks!

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Pajamas
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Re: How do you account for a defined benefit pension in your planning?

Post by Pajamas » Tue May 22, 2018 1:24 pm

Contango1025 wrote:
Tue May 22, 2018 1:15 pm

I know there are likely surrounding variables I haven't mentioned, mainly whether a particular pension will even be funded and would be curious to hear any thoughts around that as well.
Here's a fairly recent commentary on that:

http://www.njspotlight.com/stories/17/1 ... taxpayers/

here are some other considerations:

http://www.njpp.org/wp-content/uploads/ ... -Final.pdf

At your age I would not be counting heavily on your wife's pension in my retirement planning simply because there is a lot of time for things to change. A lot of teachers have worked for the same system until retirement in the past but that is probably less true now than before. Even if the pension benefit at retirement could be determined with absolutely certainty and were without risk, you should consider the possibility that your wife might not stay employed by the system for the rest of her working years.

NoVa Lurker
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Re: How do you account for a defined benefit pension in your planning?

Post by NoVa Lurker » Tue May 22, 2018 1:30 pm

Very roughly - in retirement, you will be looking for income streams to cover your expenses.

Pension income is the first source to cover your retirement expenses. For example, if your retirement expenses will be $40k/year and your pension income from the DB pension is $40k/year, then you literally need no retirement savings. If you project annual retirement expenses at $100k and pension income is $40k, then you need to cover $60k with your "private" retirement savings.

As you say, there are lots of variables. One of the most important is whether the pension is adjusted for inflation / cost of living. If not, you can just account for that with simple math - the value in real terms will go down by whatever you estimate is the relevant inflation factor - say, 3% per year.

There are other variables that you can't do much about -- as you suggest, there is the question of whether the pension is well-funded, so that you can fully rely on it. A final variable is whether the pension benefits will be reduced before your wife retires - she may be grandfathered in for prior contributions, but later contributions may provide reduced benefits.

david
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Re: How do you account for a defined benefit pension in your planning?

Post by david » Tue May 22, 2018 2:02 pm

Contango1025 wrote:
Tue May 22, 2018 1:15 pm
I have a corporate role (Age 32) with a gross annual comp of $130K and my wife is a teacher (Age 32) and earns $80K. We live in a HCOL area of NJ. She does not participate in a 403B as we are instead contributing into my 401K and plan to do so until I'm maxed out, which should start this year.
Sock away as much as you can.
Contango1025 wrote:
Tue May 22, 2018 1:15 pm
As a teacher, she has a pension and based on a review of her contract and estimates of when she would want to work until will have around 75% income replacement. When I think about the Fidelity retirement factors (i.e. having 3X your salary at age 40) should I be using our household income or just mine? I'm inclined to say just mine as her pay period pension contributions are funding the defined benefit at retirement. I was curious how others in a similar situation with one spouse who has a pension and one doesn't measures whether they are on track or not.

I know there are likely surrounding variables I haven't mentioned, mainly whether a particular pension will even be funded and would be curious to hear any thoughts around that as well.

Thanks!
Is she vested? If she is vested, I would consider the yearly income stream based on the currently vested portion. And I would do so from a reduction of the amount of money you need to get from investments, rather than calling it an investment itself. For example, what is the value of social security at age X? It is better to think of it as another pension that reduces the amount you need to pull from investments rather than as a thing to value. Both could be reduced by the likelihood of actually receiving them. Similarly, if you own a home and expect to live in that home "forever," the house wouldn't be part of your assets but instead would also reduce the expenses needed in retirement (rather than paying rent).

For these reasons, the multiples of salary by a particular age are not particularly meaningful insofar as they don't get you to save more. It is more helpful to think about needed expenses in retirement. Most of these rules of thumb make assumptions about your expenses in retirement based on your salary. This is problematic because your actual needs may be more or less. For example, if you are a large saver, and never really lived on a large percentage of your income your needs in retirement will likely be less. It also makes assumptions based on the date of your expected retirement which may differ based on your wants or needs.

Having an idea of how much you'll need and how much you save (and have already saved) will be a bigger help than an arbitrary metric like X by year Y. Because at the end of the day you have no clue the underlying assumptions and it could mean you are saving more or less than you need regardless of whether you meet the metric or not.

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CyclingDuo
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Re: How do you account for a defined benefit pension in your planning?

Post by CyclingDuo » Tue May 22, 2018 2:15 pm

Contango1025 wrote:
Tue May 22, 2018 1:15 pm
I have a corporate role (Age 32) with a gross annual comp of $130K and my wife is a teacher (Age 32) and earns $80K. We live in a HCOL area of NJ. She does not participate in a 403B as we are instead contributing into my 401K and plan to do so until I'm maxed out, which should start this year.

As a teacher, she has a pension and based on a review of her contract and estimates of when she would want to work until will have around 75% income replacement. When I think about the Fidelity retirement factors (i.e. having 3X your salary at age 40) should I be using our household income or just mine? I'm inclined to say just mine as her pay period pension contributions are funding the defined benefit at retirement. I was curious how others in a similar situation with one spouse who has a pension and one doesn't measures whether they are on track or not.

I know there are likely surrounding variables I haven't mentioned, mainly whether a particular pension will even be funded and would be curious to hear any thoughts around that as well.
For the sake of the exercise at Fidelity, we are in the camp that believes you should use the multiple of the entire household salary incomes - not just one spouse or the other. Keep in mind, that multiple assumes several things....

• Retiring at FRA of 67 and funding retirement through age 92
• Assumes no pension income
• Assumes claiming SS at age 67
• Plan to maintain your pre-retirement lifestyle
* Assumes you are currently saving 15% for retirement

It's a simple guide for your journey. In the case of a pension, and Social Security income streams - you could also project what your expenses are going to be (hard to do at your young ages, but it gets easier to "guess" when you get in your 50's) and the multiple of 25x the need for your expenses beyond the income streams will provide offers clarity. A higher multiple if you retire earlier.

At your income levels ($210K gross income), do you not have enough cash flow to max out your 401k, and also have your wife contribute something to her voluntary 403b plan as well? Yes, she is contributing to her DB with a mandatory contribution, but why not take advantage of the 403b and have some pre-tax money taken out which could lower your taxes as well right now?

I assume the answer is the HCOL plus servicing student loan debt may be preventing you from being able to max your 401k and have her contribute something to her 403b right now. Maybe that will change as time goes on. Speaking in retrospect at our current ages of 56/60, my wife was only contributing to her DB (7% plus her employer's 8%) the past ten years. We have been able to max out her 403b the past 2 years (and her 457b this year as well) now that we are empty nesters. I wish we could have put something in her 403b/457b ten years ago as well, but we were not able to due to raising two children and saving for their college funds taking first priority. If we could go back in time, I would have had her slip a little something in there (even if it was only $100 - $250 a paycheck). In other words, the sooner you can get a little something in there, the more power of time & compounding you'll have if you can swing it in your monthly budget.

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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