How to calculate if a new job will increase income?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Topic Author
tomwood
Posts: 71
Joined: Mon Dec 10, 2018 9:34 am

Re: How to calculate if a new job will increase income?

Post by tomwood » Wed May 08, 2019 5:18 am

JBTX wrote:
Sat May 04, 2019 5:28 pm
- value of pension - this is a real wild card and is not trivial. If you really can earn $1 million in annuity value pension over 30 years, that is about 40% of cumulative earnings at today's dollars), but I don't know if your numbers are present day or future value numbers. $255k amounts to 10% of cumulative earnings. I just dont how your pension works, and whether the dollars stated are current inflation adjusted dollars or future dollars.

So your pension could be somewhere between $10k and $32k per year. Understanding how that works and the value of it is probably by far the most important variable.
This is the most important variable to me too. Would you be able to help me try to find a closer value for the pension so I can best compare the two jobs? Thank you

delamer
Posts: 7711
Joined: Tue Feb 08, 2011 6:13 pm

Re: How to calculate if a new job will increase income?

Post by delamer » Wed May 08, 2019 11:49 am

tomwood wrote:
Tue May 07, 2019 9:38 pm
delamer wrote:
Tue May 07, 2019 1:43 pm

I am no expert on self-employment. But you can’t take mileage for your commute to a W-2 job.

You can get estimates for an inflation adjusted annuity.
Which potion of inflation am I to estimate? Do I try to adjust for inflation over the next 20-30 years until I’d retire and hypothetically purchase an annuity if I stay in the private sector? Or am I estimating the need for an annuity payout to increase annually to adjust for inflation?
If you’d be willing to help me estimate this inflation id be thankful. Or maybe you can direct me to a website to help?
You’d buy an annuity with an inflation adjustment — you don’t have to estimate what inflation might be,

I think there is a website called “immediate annuities” or something similar that others on the forum have referred to.

Nowizard
Posts: 1915
Joined: Tue Oct 23, 2007 5:33 pm

Re: How to calculate if a new job will increase income?

Post by Nowizard » Wed May 08, 2019 2:40 pm

If it involves a move to another area, be certain to factor in changes in COL.
Tim

JBTX
Posts: 5025
Joined: Wed Jul 26, 2017 12:46 pm

Re: How to calculate if a new job will increase income?

Post by JBTX » Wed May 08, 2019 7:11 pm

tomwood wrote:
Wed May 08, 2019 5:18 am
JBTX wrote:
Sat May 04, 2019 5:28 pm
- value of pension - this is a real wild card and is not trivial. If you really can earn $1 million in annuity value pension over 30 years, that is about 40% of cumulative earnings at today's dollars), but I don't know if your numbers are present day or future value numbers. $255k amounts to 10% of cumulative earnings. I just dont how your pension works, and whether the dollars stated are current inflation adjusted dollars or future dollars.

So your pension could be somewhere between $10k and $32k per year. Understanding how that works and the value of it is probably by far the most important variable.
This is the most important variable to me too. Would you be able to help me try to find a closer value for the pension so I can best compare the two jobs? Thank you
What I would do is go to immediateannuities.com pick an inflation adjusted option and see how they price out. You could argue prices are on the high side but it is a starting point.

Topic Author
tomwood
Posts: 71
Joined: Mon Dec 10, 2018 9:34 am

Re: How to calculate if a new job will increase income?

Post by tomwood » Thu May 09, 2019 12:46 am

delamer wrote:
Wed May 08, 2019 11:49 am
tomwood wrote:
Tue May 07, 2019 9:38 pm
delamer wrote:
Tue May 07, 2019 1:43 pm

I am no expert on self-employment. But you can’t take mileage for your commute to a W-2 job.

You can get estimates for an inflation adjusted annuity.
Which potion of inflation am I to estimate? Do I try to adjust for inflation over the next 20-30 years until I’d retire and hypothetically purchase an annuity if I stay in the private sector? Or am I estimating the need for an annuity payout to increase annually to adjust for inflation?
If you’d be willing to help me estimate this inflation id be thankful. Or maybe you can direct me to a website to help?
You’d buy an annuity with an inflation adjustment — you don’t have to estimate what inflation might be,

I think there is a website called “immediate annuities” or something similar that others on the forum have referred to.
Thanks. It’s tough to know what my salary will be in 20 to 30 years and that’s the number used for the pension, but I’m going to make a guess and could be off by a bit either plus or minus.

Topic Author
tomwood
Posts: 71
Joined: Mon Dec 10, 2018 9:34 am

Re: How to calculate if a new job will increase income?

Post by tomwood » Thu May 09, 2019 12:47 am

JBTX wrote:
Wed May 08, 2019 7:11 pm
tomwood wrote:
Wed May 08, 2019 5:18 am
JBTX wrote:
Sat May 04, 2019 5:28 pm
- value of pension - this is a real wild card and is not trivial. If you really can earn $1 million in annuity value pension over 30 years, that is about 40% of cumulative earnings at today's dollars), but I don't know if your numbers are present day or future value numbers. $255k amounts to 10% of cumulative earnings. I just dont how your pension works, and whether the dollars stated are current inflation adjusted dollars or future dollars.

So your pension could be somewhere between $10k and $32k per year. Understanding how that works and the value of it is probably by far the most important variable.
This is the most important variable to me too. Would you be able to help me try to find a closer value for the pension so I can best compare the two jobs? Thank you
What I would do is go to immediateannuities.com pick an inflation adjusted option and see how they price out. You could argue prices are on the high side but it is a starting point.
Thank you for helping.
The annuity i would need to purchase will cost roughly $350,000. But am I correct to assume I’d have to pay this in full today and not over time? I might not need to say this, but I don’t have $350,000 so how can I factor this lump sum into an annual salary comparison ?

JBTX
Posts: 5025
Joined: Wed Jul 26, 2017 12:46 pm

Re: How to calculate if a new job will increase income?

Post by JBTX » Thu May 09, 2019 11:54 am

tomwood wrote:
Thu May 09, 2019 12:47 am
JBTX wrote:
Wed May 08, 2019 7:11 pm
tomwood wrote:
Wed May 08, 2019 5:18 am
JBTX wrote:
Sat May 04, 2019 5:28 pm
- value of pension - this is a real wild card and is not trivial. If you really can earn $1 million in annuity value pension over 30 years, that is about 40% of cumulative earnings at today's dollars), but I don't know if your numbers are present day or future value numbers. $255k amounts to 10% of cumulative earnings. I just dont how your pension works, and whether the dollars stated are current inflation adjusted dollars or future dollars.

So your pension could be somewhere between $10k and $32k per year. Understanding how that works and the value of it is probably by far the most important variable.
This is the most important variable to me too. Would you be able to help me try to find a closer value for the pension so I can best compare the two jobs? Thank you
What I would do is go to immediateannuities.com pick an inflation adjusted option and see how they price out. You could argue prices are on the high side but it is a starting point.
Thank you for helping.
The annuity i would need to purchase will cost roughly $350,000. But am I correct to assume I’d have to pay this in full today and not over time? I might not need to say this, but I don’t have $350,000 so how can I factor this lump sum into an annual salary comparison ?
If I recall, the website allows you to price it out as if you are purchasing today, to be used in the future, or as if you were to start receiving payments tomorrow. For the future will be cheaper because you could die in the interim.

First I don't profess to be an expert on this. But as indicated above, the pension benefit will become more valuable in the future. Trying to figure how you would allocate the benefit over you career would be kind of tricky, and depend on what level of probability that you may leave before 30 years.

The fact that the prices quoted are using up front lump sum prices is irrelevant because you aren't buying it. Just trying to determine its value.

My guess is if you leave well before the 30 years the contract option is better. If you stay for the duration the federal employee option is better. Fact is it is so laced with assumptions I wouldn't get too wrapped up.with hypothetical numbers. It really comes down to what fits your long long term career and lifestyle goals.

Topic Author
tomwood
Posts: 71
Joined: Mon Dec 10, 2018 9:34 am

Re: How to calculate if a new job will increase income?

Post by tomwood » Thu May 09, 2019 5:47 pm

JBTX wrote:
Thu May 09, 2019 11:54 am
If I recall, the website allows you to price it out as if you are purchasing today, to be used in the future, or as if you were to start receiving payments tomorrow. For the future will be cheaper because you could die in the interim.
I couldn’t find this option or I’m misunderstanding your suggestion.

If I could get a 5% fixed loan of $350k for 30 years, buy the annuity today which would pay out when I retire, my loan payments over those 30 years total $676k. If the loan is 6% fixed then it costs $755k. It’s not a perfect scenario but would those numbers be good estimates of the value of this pension over the course my working public sector career?

JBTX
Posts: 5025
Joined: Wed Jul 26, 2017 12:46 pm

Re: How to calculate if a new job will increase income?

Post by JBTX » Thu May 09, 2019 10:05 pm

$225k gets you roughly $30k a year, cpi adjusted each year, starting 25 years down the road. I suspect that is future dollars. The cost to get $30k per year, in today's dollars(or roughly $50k per year in future dollars), in 25 years, is probably between $350k and $400k



https://www.immediateannuities.com/clie ... 66fc89.pdf

If you are 65, it would take about $700k to get $30k per year inflation adjusted annuity.

https://www.immediateannuities.com/clie ... 0a6a0d.pdf



All this assumes your $30k per you quoted is in today's dollars, not future inflated dollars.

And both of these assume you work 20+ years in the fed job.


$400k divided by 25 of working years is $16000 per year. Compared to $85k income that is just under 20% of annual salary benefit.

$700k /25 yrs = $28,000 per year.

I think the lower $400k is probably a more reasonable estimation, since the benefit is so far out into the future.

Note I am merely taking the theoretical value and straight line allocating it over 25 years. In actuality you don't earn it straight line, it is back end loaded. You earn more of your benefit toward the end of the term

If you really want to go full egg head on it, you could probability weight it. The probability that you work that long with that employer is less than 100%.

Ultimately if you work until retirement at this job, you are guaranteed an inflation adjusted income (well mostly, pension plans can become underfunded and could theoretically change), but the odds are less than 100% that you will make it that long and earn much of that benefit.

If you work as a contractor, you will make more, and presumably put that in a retirement account. The value of the amount you have at retirement (and the amounts you may SWR in retirement) could vary greatly depending on how the markets do. But you are (near) 100% guaranteed that whatever that market value is, it is yours, because you earn it as you go and it is portable.

Realistically these are just mental gymnastics. It really gets down to what you want to do and your long term career goals. It seems unlikely that you will work 25-30 years as a contractor anyway. Your stability down the road is probably less than that of a government employee.

Topic Author
tomwood
Posts: 71
Joined: Mon Dec 10, 2018 9:34 am

Re: How to calculate if a new job will increase income?

Post by tomwood » Sat May 11, 2019 7:41 am

JBTX wrote:
Thu May 09, 2019 10:05 pm

$400k divided by 25 of working years is $16000 per year. Compared to $85k income that is just under 20% of annual salary benefit.

$700k /25 yrs = $28,000 per year.

I think the lower $400k is probably a more reasonable estimation, since the benefit is so far out into the future.
I understand this to be a theoretical exercise, but would this imply a private sector job will result in more money so long as it results in $16k extra to save each year? This doesn’t factor any compound interest, so even assuming t-bills, it might require closer to $14k per year.
Am I correctly understanding your math?



JBTX wrote:
Thu May 09, 2019 10:05 pm

Realistically these are just mental gymnastics.
I know there are too many variables with my question but I am appreciative of your help and typing this great information to help me make a decision with many unknown components

JBTX
Posts: 5025
Joined: Wed Jul 26, 2017 12:46 pm

Re: How to calculate if a new job will increase income?

Post by JBTX » Sat May 11, 2019 11:04 am

tomwood wrote:
Sat May 11, 2019 7:41 am
JBTX wrote:
Thu May 09, 2019 10:05 pm

$400k divided by 25 of working years is $16000 per year. Compared to $85k income that is just under 20% of annual salary benefit.

$700k /25 yrs = $28,000 per year.

I think the lower $400k is probably a more reasonable estimation, since the benefit is so far out into the future.
I understand this to be a theoretical exercise, but would this imply a private sector job will result in more money so long as it results in $16k extra to save each year? This doesn’t factor any compound interest, so even assuming t-bills, it might require closer to $14k per year.
Am I correctly understanding your math?



JBTX wrote:
Thu May 09, 2019 10:05 pm

Realistically these are just mental gymnastics.
I know there are too many variables with my question but I am appreciative of your help and typing this great information to help me make a decision with many unknown components
Yes and yes, I think.

$30k per year seems like a fairly low payout for a govt pension after 30 years.

Topic Author
tomwood
Posts: 71
Joined: Mon Dec 10, 2018 9:34 am

Re: How to calculate if a new job will increase income?

Post by tomwood » Sun May 12, 2019 3:26 pm

JBTX wrote:
Sat May 11, 2019 11:04 am

$30k per year seems like a fairly low payout for a govt pension after 30 years.
The new federal pension equation is the average of your 3 highest years salaries times the number of years worked, all divided by 100.

If I’m at 83k to start, and the salary increases annually to keep pace with inflation, plus some raises along the way, I thought $100k was a reasonable number for my highest salary. So 100k x 30 / 100 = $30k

Since I will receive annual salary increases based on inflation for the next 30 years, would you suspect my income to finish above 100k? What’s a typical percentage representing inflation annually in the USA ?

JBTX
Posts: 5025
Joined: Wed Jul 26, 2017 12:46 pm

Re: How to calculate if a new job will increase income?

Post by JBTX » Sun May 12, 2019 7:39 pm

tomwood wrote:
Sun May 12, 2019 3:26 pm
JBTX wrote:
Sat May 11, 2019 11:04 am

$30k per year seems like a fairly low payout for a govt pension after 30 years.
The new federal pension equation is the average of your 3 highest years salaries times the number of years worked, all divided by 100.

If I’m at 83k to start, and the salary increases annually to keep pace with inflation, plus some raises along the way, I thought $100k was a reasonable number for my highest salary. So 100k x 30 / 100 = $30k

Since I will receive annual salary increases based on inflation for the next 30 years, would you suspect my income to finish above 100k? What’s a typical percentage representing inflation annually in the USA ?
It has been running around 2% or so for last 20 years. It was much higher in the 1970s and 1980s.

Topic Author
tomwood
Posts: 71
Joined: Mon Dec 10, 2018 9:34 am

Re: How to calculate if a new job will increase income?

Post by tomwood » Mon May 13, 2019 8:22 am

JBTX wrote:
Sun May 12, 2019 7:39 pm
tomwood wrote:
Sun May 12, 2019 3:26 pm
JBTX wrote:
Sat May 11, 2019 11:04 am

$30k per year seems like a fairly low payout for a govt pension after 30 years.
The new federal pension equation is the average of your 3 highest years salaries times the number of years worked, all divided by 100.

If I’m at 83k to start, and the salary increases annually to keep pace with inflation, plus some raises along the way, I thought $100k was a reasonable number for my highest salary. So 100k x 30 / 100 = $30k

Since I will receive annual salary increases based on inflation for the next 30 years, would you suspect my income to finish above 100k? What’s a typical percentage representing inflation annually in the USA ?
It has been running around 2% or so for last 20 years. It was much higher in the 1970s and 1980s.
With 2% inflation annually for 30 straight years, the pension would be just over $45k per year, not counting any raises. With raises and inflation it will be in the $55-$60k range I assume. Which basically doubles all my previous posts. Does that sound closer to what you’d expect ?

Topic Author
tomwood
Posts: 71
Joined: Mon Dec 10, 2018 9:34 am

Re: How to calculate if a new job will increase income?

Post by tomwood » Wed May 15, 2019 9:06 am

JBTX wrote:
Sun May 12, 2019 7:39 pm
tomwood wrote:
Sun May 12, 2019 3:26 pm
JBTX wrote:
Sat May 11, 2019 11:04 am

$30k per year seems like a fairly low payout for a govt pension after 30 years.
The new federal pension equation is the average of your 3 highest years salaries times the number of years worked, all divided by 100.

If I’m at 83k to start, and the salary increases annually to keep pace with inflation, plus some raises along the way, I thought $100k was a reasonable number for my highest salary. So 100k x 30 / 100 = $30k

Since I will receive annual salary increases based on inflation for the next 30 years, would you suspect my income to finish above 100k? What’s a typical percentage representing inflation annually in the USA ?
It has been running around 2% or so for last 20 years. It was much higher in the 1970s and 1980s.
The inflation is only a factor with my income increases which is going to be the way my pension is decided. But the pension does not increase with inflation the years im retired. I don’t think. Is that an issue?

delamer
Posts: 7711
Joined: Tue Feb 08, 2011 6:13 pm

Re: How to calculate if a new job will increase income?

Post by delamer » Wed May 15, 2019 1:17 pm

tomwood wrote:
Wed May 15, 2019 9:06 am
JBTX wrote:
Sun May 12, 2019 7:39 pm
tomwood wrote:
Sun May 12, 2019 3:26 pm
JBTX wrote:
Sat May 11, 2019 11:04 am

$30k per year seems like a fairly low payout for a govt pension after 30 years.
The new federal pension equation is the average of your 3 highest years salaries times the number of years worked, all divided by 100.

If I’m at 83k to start, and the salary increases annually to keep pace with inflation, plus some raises along the way, I thought $100k was a reasonable number for my highest salary. So 100k x 30 / 100 = $30k

Since I will receive annual salary increases based on inflation for the next 30 years, would you suspect my income to finish above 100k? What’s a typical percentage representing inflation annually in the USA ?
It has been running around 2% or so for last 20 years. It was much higher in the 1970s and 1980s.
The inflation is only a factor with my income increases which is going to be the way my pension is decided. But the pension does not increase with inflation the years im retired. I don’t think. Is that an issue?
Once you receive your pension, there will be an annual increase in the monthly amount based on the change in the CPI.

Post Reply