Pension calculator

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dogagility
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Pension calculator

Post by dogagility » Sat Mar 09, 2019 8:16 am

Hi Bogleheads,
I'm switching employers this year and trying to determine when to take a pension. I would like to know if there is a calculator for this situation.
The pension basics:
  • I don't have a lump sum choice
  • The company has provided yearly (constant) payout values if I take it now (age 40), at age 50, or at age 60
  • No pension COLA
I will continue to work until age 60, and my current marginal federal tax rate is 35%. I expect this will not change until I retire at age 60.

Question: Is there a future value pension calculator that accounts for federal income tax, any early age withdrawal penalty, inflation, and expected rate of investment return? If so, please provide a link.

Thanks!
Taking "risk" since 1995.

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CAsage
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Re: Pension calculator

Post by CAsage » Sat Mar 09, 2019 12:19 pm

Hmmm. I am guessing that your future income, years to work, federal income tax rates, inflation are all completely unknowable. Perhaps a plain old Present Value calculator to compare those 3 options? Are they single life annuity only? If I were comparing those for myself, the only real comparisons would which of the 3 has the larger payout for your lifespan. You can probably find some PV calculators to compare them, pick an nominal lifespan and see what kind of interest rate the company is using.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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#Cruncher
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Re: Pension calculator

Post by #Cruncher » Sun Mar 10, 2019 4:44 pm

dogagility wrote:
Sat Mar 09, 2019 8:16 am
The company has provided yearly (constant) payout values if I take [a pension] now (age 40), at age 50, or at age 60 … Is there a future value pension calculator that accounts for federal income tax, any early age withdrawal penalty, inflation, and expected rate of investment return?
I don't know what you mean by "early age withdrawal penalty", dogagility, but I have constructed a calculator that does compute the future value, after taxes, of pensions starting at different times. Here is an illustration assuming
  • Annual pensions of $3,200; $5,400; and $10,000 starting at age 40, 50, and 60 respectively.
  • Pension payments received before age 60 are taxed at 35%. Pension payments received after that are taxed at 22%.
  • Net pension payments are invested and grow 4% before taxes.
  • Investment income is also taxed at 35% before age 60 and 22% after.

Code: Select all

Row  Col A  Col B   Col C      Col D    Col E    Col F
  1  Pretax growth rate        4.00%
  2  Age start pension            40       50       60
  3  Annual pension            3,200    5,400   10,000
          -- Tax Rate ---
     Age  Pension  Invest     ------- Grows To -------

Code: Select all

  6   41      35%     35%      2,080
  7   42      35%     35%      4,214
  8   43      35%     35%      6,404
  9   44      35%     35%      8,650
 10   45      35%     35%     10,955
 11   46      35%     35%     13,320
 12   47      35%     35%     15,746
 13   48      35%     35%     18,236
 14   49      35%     35%     20,790
 15   50      35%     35%     23,410
 16   51      35%     35%     26,099    3,510
 17   52      35%     35%     28,857    7,111
 18   53      35%     35%     31,688   10,806
 19   54      35%     35%     34,592   14,597
 20   55      35%     35%     37,571   18,487
 21   56      35%     35%     40,628   22,477
 22   57      35%     35%     43,764   26,572
 23   58      35%     35%     46,982   30,773
 24   59      35%     35%     50,284   35,083
 25   60      35%     35%     53,671   39,505
 26   61      22%     22%     57,842   44,949    7,800
 27   62      22%     22%     62,142   50,564   15,843
 28   63      22%     22%     66,577   56,353   24,138
 29   64      22%     22%     71,150   62,324   32,691
 30   65      22%     22%     75,866   68,480   41,511
 31   66      22%     22%     80,729   74,829   50,606
 32   67      22%     22%     85,744   81,375   59,985
 33   68      22%     22%     90,915   88,126   69,656
 34   69      22%     22%     96,248   95,088   79,630
 35   70      22%     22%    101,747  102,266   89,914
 36   71      22%     22%    107,417  109,669  100,519
 37   72      22%     22%    113,264  117,303  111,456
 38   73      22%     22%    119,294  125,175  122,733
 39   74      22%     22%    125,512  133,292  134,362
 40   75      22%     22%    131,924  141,663  146,354
 41   76      22%     22%    138,536  150,295  158,721
 42   77      22%     22%    145,355  159,196  171,473
 43   78      22%     22%    152,386  168,375  184,623
 44   79      22%     22%    159,636  177,840  198,183
 45   80      22%     22%    167,113  187,601  212,166
 46   81      22%     22%    174,823  197,666  226,586 <--
 47   82      22%     22%    182,773  208,045  241,455
 48   83      22%     22%    190,972  218,748  256,789
 49   84      22%     22%    199,426  229,785  272,600
 50   85      22%     22%    208,144  241,166  288,906
 51   86      22%     22%    217,134  252,903  305,719
 52   87      22%     22%    226,405  265,005  323,058
 53   88      22%     22%    235,965  277,486  340,937
 54   89      22%     22%    245,823  290,355  359,374
 55   90      22%     22%    255,988  303,626  378,387
 56   91      22%     22%    266,471  317,311  397,993
 57   92      22%     22%    277,281  331,423  418,210
 58   93      22%     22%    288,428  345,976  439,058
 59   94      22%     22%    299,923  360,982  460,557
 60   95      22%     22%    311,777  376,457  482,726
 61   96      22%     22%    324,000  392,414  505,587
 62   97      22%     22%    336,605  408,870  529,161
 63   98      22%     22%    349,603  425,838  553,471
 64   99      22%     22%    363,007  443,337  578,540
 65  100      22%     22%    376,829  461,381  604,390
Example calculation of values at age 41 and 42:
2,080 = 3200 * (1 - 35%)
4,214 = 2080 * (1 + 0.04 * (1 - 35%)) + 2080

According to the SSA 1980 Cohort Life Table, the life expectancy of a 40-year old man is 40.78 years. I picked the $3,200; $5,400; and $10,000 values so that, with no taxes, the pensions would grow to about the same value by age 81. The little table below shows this along with the three values with constant 35% tax rates, and with the 35% / 22% tax rates used in the big table above. It clearly shows the advantage -- for these assumptions -- of waiting to start the pension at age 60.

Code: Select all

Age start pension         40       50       60
Annual pension         3,200    5,400   10,000
                     -------  -------  -------
 0% tax rates        319,445  320,373  319,692 <-- all 3 about the same
35% tax rates        149,156  164,159  178,583
35%/22% tax rates    174,823  197,666  226,586
If you have Microsoft Excel and wish to use this calculator with your actual pension amounts, you can build it in a few minutes by following these steps:
  • Select All, Copy, and Paste [ * ] the following at cell A1 of a blank Excel sheet:

    Code: Select all

    Pretax growth rate			0.04
    Age start pension			40	50	60
    Annual pension			3200	5400	10000
    	Tax Rate
    Age	Pension	Invest	Grows To
    41	0.35	0.35	=IF($A6<=D$2,0,IF($A6=D$2+1,D$3*(1-$B6),D5*(1+$D$1*(1-$C6))+D$3*(1-$B6)))
    =A6+1	=B6	=C6	=IF($A7<=D$2,0,IF($A7=D$2+1,D$3*(1-$B7),D6*(1+$D$1*(1-$C7))+D$3*(1-$B7)))
  • Format for readability.
  • Copy cells D6:D7 right to column F.
  • Copy cells A7:F7 down to row 65 (or to whatever age you wish).
  • Modify columns B & C for your anticipated marginal tax rates. They need not be the same for pension and investment income. (To duplicate my sample, enter 22% in cells B26 and C26.)
  • If desired, alter the assumed pretax growth rate in cell D1. (I picked 4% since that's the approximate return today of investment grade bonds. You can reflect higher inflation by using a larger growth rate.)
  • Enter your three pension amounts in cells D3, E3, and F3.

    * If you have trouble pasting, try "Paste Special" and "Text".

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Topic Author
dogagility
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Joined: Fri Feb 24, 2017 6:41 am

Re: Pension calculator

Post by dogagility » Thu Mar 14, 2019 4:44 pm

#Cruncher wrote:
Sun Mar 10, 2019 4:44 pm
I have constructed a calculator that does compute the future value, after taxes, of pensions starting at different times. Here is an illustration assuming
Thanks, NumberCruncher. Just what I was looking for! What I meant by the penalty was I believe there would be a 10% penalty on the pension each year if the pension was taken prior to age 65.
:beer
Taking "risk" since 1995.

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Fieldsy1024
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Re: Pension calculator

Post by Fieldsy1024 » Fri Mar 15, 2019 9:52 am

I have 10 years of a pension so hopefully when I retire at 55, that 95 dollars per month x 10 is 950. At age 55 its 10% penalty, 8 % at 56, 6 at 57 etc.

10% of that pension after taxes might get me 2 thanks of gas.

I'd lose almost 100 bucks a month pre tax.

Our pensions were frozen and the company added a lot to their contribution.

ralph124cf
Posts: 2370
Joined: Tue Apr 01, 2014 11:41 am

Re: Pension calculator

Post by ralph124cf » Fri Mar 15, 2019 1:45 pm

dogagility wrote:
Thu Mar 14, 2019 4:44 pm
#Cruncher wrote:
Sun Mar 10, 2019 4:44 pm
I have constructed a calculator that does compute the future value, after taxes, of pensions starting at different times. Here is an illustration assuming
Thanks, NumberCruncher. Just what I was looking for! What I meant by the penalty was I believe there would be a 10% penalty on the pension each year if the pension was taken prior to age 65.
:beer
The 10% penalty only applies for a defined contribution plan that where you did not pay tax on the money that was deposited into the plan. Any annuity plan like you describe will not have the 10% penalty for early withdrawal.

Ralph

inbox788
Posts: 6663
Joined: Thu Mar 15, 2012 5:24 pm

Re: Pension calculator

Post by inbox788 » Sat Mar 16, 2019 4:09 pm

dogagility wrote:
Sat Mar 09, 2019 8:16 am
I'm switching employers this year and trying to determine when to take a pension. I would like to know if there is a calculator for this situation.
The pension basics:
  • I don't have a lump sum choice
  • The company has provided yearly (constant) payout values if I take it now (age 40), at age 50, or at age 60
  • No pension COLA
I will continue to work until age 60, and my current marginal federal tax rate is 35%. I expect this will not change until I retire at age 60.

Question: Is there a future value pension calculator that accounts for federal income tax, any early age withdrawal penalty, inflation, and expected rate of investment return? If so, please provide a link.
What percentage of your retirement income is this pension? I'm surprised about the lack of lump sum choice. It would be bothersome for all to deal with a small monthly payment for the rest of your life. If it's a trivial amount, a buyout simplifies things, and if you invest it, may ultimately turn out better. If it's enough to cover some basic expenses (rent, food, or car payment), keeping it might save you from buying an annuity later.

What are the payout values? Are they fair market value? Compare to market rates of annuities and/or estimate return rates.

With such a high tax bracket, why bother asking? The pension is likely growing at bond like rates or better, so count it towards your bond allocation. Unless you need the cash to spend right now, paying more taxes and taking bigger risk to get higher returns doesn't make sense. Just adjust your AA if you want more risk.

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dogagility
Posts: 638
Joined: Fri Feb 24, 2017 6:41 am

Re: Pension calculator

Post by dogagility » Sun Mar 17, 2019 5:09 am

inbox788 wrote:
Sat Mar 16, 2019 4:09 pm
What percentage of your retirement income is this pension?
Fairly small considering the effect of inflation for 20 years and the lack of a COLA.
inbox788 wrote:
Sat Mar 16, 2019 4:09 pm
I'm surprised about the lack of lump sum choice.
It is what it is.
inbox788 wrote:
Sat Mar 16, 2019 4:09 pm
if you invest it, may ultimately turn out better.
That's what I plan to do. Take the pension now and invest the money.
inbox788 wrote:
Sat Mar 16, 2019 4:09 pm
What are the payout values?
Per year: about 14K now, 24K in 10 years, and 48K in 20 years.
inbox788 wrote:
Sat Mar 16, 2019 4:09 pm
With such a high tax bracket, why bother asking?
Because I don't like leaving money on the table.

The decision has been made to start taking the pension now and invest the check each month until I retire. Another factor was not having complete trust in the solvency of the pension over time.
Taking "risk" since 1995.

inbox788
Posts: 6663
Joined: Thu Mar 15, 2012 5:24 pm

Re: Pension calculator

Post by inbox788 » Sun Mar 17, 2019 12:20 pm

dogagility wrote:
Sun Mar 17, 2019 5:09 am
Fairly small considering the effect of inflation for 20 years and the lack of a COLA.
When dealing with small effects, even if there are small benefits, I've found giving them up for simplicity is often worth it. Since you can't pull it all out, it doesn't matter right now, but if you're lucky, they will make a fair buy out offer when they realize it's costing them to send you a small check each month and maintain compliance with all the regulations.
Per year: about 14K now, 24K in 10 years, and 48K in 20 years.
Are these frozen numbers or are contributions still being made?

One way to look at this is to take the 24k in 10 years ~ $240k vs the additional $24k you get in 20 years. In both cases, you get $24k in 20 year, so the difference or choice you have is to get $240k over 10 years (about $40k interest at 3%) or $24k in 20 years. Today, a 60 year old male can use $280k to buy a $1400 lifetime annuity (vs $2000 or 43% more).

With $140k+25k interest, a 50 year old male can get a little over $700/month. ($8500/year vs 10k or about 17% more)

https://www.calculatestuff.com/financia ... 01#results

https://www.immediateannuities.com/
Another factor was not having complete trust in the solvency of the pension over time.
That's a good reason to pull out sooner, but is there something unusually risky about your company? Aren't all pensions these days guaranteed by the PBGC? https://www.pbgc.gov/about/faq/pg/gener ... about-pbgc

It's not always about leaving money on the table, but about risk management. Either choice is a good choice. If you're considering an annuity later in life, the pension looks like a good safe return vs taking risk to achieve higher returns (taxes and market returns can significantly change actual results; I'm guessing around 5% adjusted for any tax effects is about break even). Some folks like to compare to their overall AA portfolio return, but I like to compare to stock and bond returns separately and consider it all as part of the AA decision. Personally, if the figures check out, I'd consider taking money out of a 3% bond fund to invest in equities and hold on to the pension. Anyway, the benefits of investing come by taking the money out early while those of the pension come later, so the only conclusion is to make a decision now and stick with it, and don't change course half way (you're only getting about 4% the first decade and 6% the latter).

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#Cruncher
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Re: Pension calculator

Post by #Cruncher » Sun Mar 17, 2019 5:09 pm

dogagility wrote:
Sun Mar 17, 2019 5:09 am
inbox788 wrote:
Sat Mar 16, 2019 4:09 pm
What are the payout values?
Per year: about 14K now, 24K in 10 years, and 48K in 20 years.
...
The decision has been made to start taking the pension now and invest the check each month until I retire.
Did you run your options through my calculator from this post above, dogagility? If so, what tax rates did you assume? Using the 35% and 22% before and after age 60 from my illustration, you'd need a pretax growth rate of almost 8% for investing $14,000 starting age 40 to grow to the same value at age 81 as $48,000 starting age 60.

Code: Select all

Row  Col A               Col B   Col C       Col D      Col E      Col F
  1  Pretax growth rate  7.96%
  2  Start at age                               40         50         60
  3  Annual amount                          14,000     24,000     48,000
                       --- Tax Rate --
     Age               Pension  Invest   ----------- Balance -----------
  6   40                   35%     35%           0          0          0
  7   50                   35%     35%     115,393          0          0
  8   60                   22%     22%     306,493    197,816          0
  9   81                                 1,533,165  1,467,593  1,533,464
Taxes have a big effect. If there were none, a growth rate of less than 4.7% would be sufficient.

Code: Select all

Row  Col A               Col B   Col C       Col D      Col E      Col F
  1  Pretax growth rate  4.69%
  2  Start at age                               40         50         60
  3  Annual amount                          14,000     24,000     48,000
                       --- Tax Rate --
     Age               Pension  Invest   ----------- Balance -----------

  6   40                    0%      0%           0          0          0
  7   50                    0%      0%     173,563          0          0
  8   60                    0%      0%     448,043    297,537          0
  9   81                                 1,656,140  1,607,120  1,656,193
The tables above are from a spreadsheet that produces the same result as the one in my post above, except in a condensed form. To use it follow these steps:
  • Select All, Copy, and Paste [1] the following at cell A1 of a blank Excel sheet:

    Code: Select all

    Pretax growth rate	0.0796
    Start at age			40	50	60
    Annual amount			14000	24000	48000
    	-- Tax Rate ---		
    Age	Pension	Invest	----------  Balance ----------
    40	0.35	=B6	0	0	0
    50	0.35	=B7	=IF($A6>=D$2,FV($B$1*(1-$C6),$A7-$A6,-D$3*(1-$B6),-D6,0),0)
    60	0.22	=B8
    81
  • Format for readability.
  • Copy the formula in cell D7 right to column F and then down to row 9. [2]
  • Enter your anticipated tax rates in cells B6:C8.
  • Enter in cell A9 the age to consider the pensions will last.
  • Enter your anticipated pretax growth rate in cell B1.
  1. If you have trouble pasting, try "Paste Special" and "Text".
  2. The formula uses the Excel FV function.

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Topic Author
dogagility
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Re: Pension calculator

Post by dogagility » Sun Mar 17, 2019 5:47 pm

#Cruncher wrote:
Sun Mar 17, 2019 5:09 pm
Did you run your options through my calculator from this post above, dogagility?
#Cruncher, Yes, I did run the excellent calculator you provided and came up with the same numbers you did. I realize there may be more money at later years by not beginning the pension until 60. Given health and other factors, I'm comfortable taking the pension sooner rather than later.
I VERY MUCH appreciate all the time/effort you put into helping me see the effects of different scenarios. :beer
Taking "risk" since 1995.

inbox788
Posts: 6663
Joined: Thu Mar 15, 2012 5:24 pm

Re: Pension calculator

Post by inbox788 » Sun Mar 17, 2019 6:44 pm

#Cruncher wrote:
Sun Mar 17, 2019 5:09 pm
Taxes have a big effect. If there were none, a growth rate of less than 4.7% would be sufficient.

Code: Select all

Row  Col A               Col B   Col C       Col D      Col E      Col F
  1  Pretax growth rate  4.69%
  2  Start at age                               40         50         60
  3  Annual amount                          14,000     24,000     48,000
                       --- Tax Rate --
     Age               Pension  Invest   ----------- Balance -----------

  6   40                    0%      0%           0          0          0
  7   50                    0%      0%     173,563          0          0
  8   60                    0%      0%     448,043    297,537          0
  9   81                                 1,656,140  1,607,120  1,656,193
I haven't studied these in detail, but it's interesting to note that it's close to the 5% estimate I came up with using 3% return plus SPIA purchasing power comparison. Also, the middle result at age 81 is slightly inferior, but supports the choices to make the decision take out now to invest or wait till age 60 and maximize the pension (which are further improved if returns are lower, taxes higher, or better longevity). The middle road is the worst one right now.

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