Estimating future pension

[berg]

There is no perfect formula, but want to try to generally estimate my wife's pension value in future dollars. At a certain point she maxes out on experience increases and it is just tied to the overall contract % increase which has generally lagged inflation (e.g. 0.75 to 1.5% for many years, with high inflation recently they were able to negotiate 2% per year for 3 years).

She can retire in 20 years. So the formula I use is, calculating 1% increase per year for her salary on average. Then I calculate average inflation at 3%. So basically, in real dollars she loses 2% per year compounding.

To use round numbers, say she makes $100,000 now in 2023 dollars. At -2% real, her final salary in 20 years is worth about $67,000 in 2023 dollars. Now maybe she only lags inflation by 1% on average, that would have her closer to $82,000.

Either way, curious if this logic seems sound for estimating a pension this far off.

[seugene]

Your math checks out, but you are estimating her future salary, not her future pension, as your post title suggests. Her future pension will be X% of the final salary, or somesuch formula. You need to check out that formula, in order to estimate per pension. Her pension website might also have tools / calculators that might provide some estimates and / or guidance.

[berg]

Your math checks out, but you are estimating her future salary, not her future pension, as your post title suggests. Her future pension will be X% of the final salary, or somesuch formula. You need to check out that formula, in order to estimate per pension. Her pension website might also have tools / calculators that might provide some estimates and / or guidance.

Yup! As of this moment it is a generous 80% (knock on wood it holds).

So in this case 80% or $82,000 = $65,600.

I guess the other thing to consider is that it is not an inflation adjusted pension. So will continue the lose value. After ten years it’s like $48k in todays dollars. After 20 years it’s like $36k (assuming 3% inflation).

[123]

You can request a (free) copy of the complete pension plan document from the employer and it will tell you how to calculate it. Using the method and some proforma calculations you can estimate fairly closely, subject to your assumptions about earnings.

Since inflation is an unknown if you calculate in present-day dollars you'll have the best estimate in today's world.

[seugene]

[...] it is not an inflation adjusted pension. So will continue the lose value. After ten years it’s like $48k in todays dollars. After 20 years it’s like $36k (assuming 3% inflation).

Hopefully, she and / or you will be able to supplement with distributions from retirement accounts. To keep your retirement lifestyle level in real (after-inflation) terms from year to year in retirement, you'd need to take lower real distributions in earlier years and higher real distributions later in retirement, to compensate for the real loss of the pension income.

[2pedals]

It seems kind of crazy to try to project a pension 20 years in advance. Many pension plans are frozen before employers even get to earn them.

[Admiral]

Your math checks out, but you are estimating her future salary, not her future pension, as your post title suggests. Her future pension will be X% of the final salary, or somesuch formula. You need to check out that formula, in order to estimate per pension. Her pension website might also have tools / calculators that might provide some estimates and / or guidance.

Yup! As of this moment it is a generous 80% (knock on wood it holds).

So in this case 80% or $82,000 = $65,600.

I guess the other thing to consider is that it is not an inflation adjusted pension. So will continue the lose value. After ten years it’s like $48k in todays dollars. After 20 years it’s like $36k (assuming 3% inflation).

Most people get raises over time, get promoted, etc. So your math is likely way off.

If the pension is not vested, put it out of your mind and start calculating when it is vested. Or just count on the lump sum if she separates. When my spouse's pension vested it was $13k per year. It's now over $50k. Things change.

[berg]

Your math checks out, but you are estimating her future salary, not her future pension, as your post title suggests. Her future pension will be X% of the final salary, or somesuch formula. You need to check out that formula, in order to estimate per pension. Her pension website might also have tools / calculators that might provide some estimates and / or guidance.

Yup! As of this moment it is a generous 80% (knock on wood it holds).

So in this case 80% or $82,000 = $65,600.

I guess the other thing to consider is that it is not an inflation adjusted pension. So will continue the lose value. After ten years it’s like $48k in todays dollars. After 20 years it’s like $36k (assuming 3% inflation).

Most people get raises over time, get promoted, etc. So your math is likely way off.

If the pension is not vested, put it out of your mind and start calculating when it is vested. Or just count on the lump sum if she separates. When my spouse's pension vested it was $13k per year. It's now over $50k. Things change.

She is vested in her pension. She is a public school teacher who has reached the max pay scale and is not on a career path for a promotion. Obviously with pensions, things can change, but trying to estimate how it might play out. I am targeting an early retirement myself (or at least downshifting to considerably less income) 6 to 10 years before her retirement, so trying to do our best to have a target number in mind for our portfolio.

[carolinaman]

Your math checks out, but you are estimating her future salary, not her future pension, as your post title suggests. Her future pension will be X% of the final salary, or somesuch formula. You need to check out that formula, in order to estimate per pension. Her pension website might also have tools / calculators that might provide some estimates and / or guidance.

Yup! As of this moment it is a generous 80% (knock on wood it holds).

So in this case 80% or $82,000 = $65,600.

I guess the other thing to consider is that it is not an inflation adjusted pension. So will continue the lose value. After ten years it’s like $48k in todays dollars. After 20 years it’s like $36k (assuming 3% inflation).

Non COLA pensions do lose purchasing power as inflation increases. There is definite benefit to working longer with a non COLA pension, assuming her salary continues to increase. Once she stops working, her pension begins to decline.

There are 2 big unknowns in your projections: her salary progression and inflation, and perhaps a third unknown with a very rich 80% of salary benefit. I am guessing you are taking a conservative approach in your projections, which may or may not be realistic. I suggest doing multiple projections to see what the benefit will be in different scenarios.

Also, I have a non COLA govt pension. I also have SS, and saved a lot as well. SS and my savings have really helped me a lot as I have lost more than 30% of purchasing power of my pension. If possible, I recommend saving for retirement as well.

[berg]

Your math checks out, but you are estimating her future salary, not her future pension, as your post title suggests. Her future pension will be X% of the final salary, or somesuch formula. You need to check out that formula, in order to estimate per pension. Her pension website might also have tools / calculators that might provide some estimates and / or guidance.

Yup! As of this moment it is a generous 80% (knock on wood it holds).

So in this case 80% or $82,000 = $65,600.

I guess the other thing to consider is that it is not an inflation adjusted pension. So will continue the lose value. After ten years it’s like $48k in todays dollars. After 20 years it’s like $36k (assuming 3% inflation).

Non COLA pensions do lose purchasing power as inflation increases. There is definite benefit to working longer with a non COLA pension, assuming her salary continues to increase. Once she stops working, her pension begins to decline.

There are 2 big unknowns in your projections: her salary progression and inflation, and perhaps a third unknown with a very rich 80% of salary benefit. I am guessing you are taking a conservative approach in your projections, which may or may not be realistic. I suggest doing multiple projections to see what the benefit will be in different scenarios.

Also, I have a non COLA govt pension. I also have SS, and saved a lot as well. SS and my savings have really helped me a lot as I have lost more than 30% of purchasing power of my pension. If possible, I recommend saving for retirement as well.

Thanks! Great to hear from someone who is living through it! My wife is not eligible for SS.

We are big savers (IRA, 401k, 403b, 457) and then some. Obviously better to oversave and evaluate in the future. But suddenly 10 years doesn't sound that far in the scheme of things for early retirement for me and trying to be conservative, but not make it impossible in our projections.

[Mike Scott]

The pension website and/or documents almost certainly have a calculator or at a minimum the formula for estimating future pension value. It will likely get more accurate as you get closer to collecting the pension.