How much is a pension worth compared to retirement savings.

[Harpy Eagle]

I found this article today about how to factor in a pension for retirement planning.

Helping retirement plan participants understand their net worth - Journal of Accountancy

Two easy mistakes seen in retirement planning involve valuation of pensions and improper net-worth comparisons.

www.journalofaccountancy.com

A good rule of thumb is that the retiree would need $18,000 in retirement savings for every $1,200 per year ($100 per month) of earned pension income. In applying this rule, the amount of earned pension income an employee has at any point in time is based on the employer's pension formula, the employee's current earnings, and the time spent on the job to date.

...

As an example, examine how much an earned pension income of $30,000 would add to a person's net worth. A defined benefit plan income of $30,000 annually is $2,500 per month, which is 25 times $100. Therefore, it follows that funding such a pension benefit with a 401(k)-style defined contribution plan would require retirement savings of at least $450,000 (25 × $18,000). Consequently, the defined benefit plan adds $450,000 to net worth.


What do you all think of this formula?

I get pretty close to the same numbers when I just calculate how much a pension will have paid if I live to be 85. So I feel the formula is pretty good.

 

[Donald H]

The first question that comes to mind:

Can the majority of Americans afford to save a hundred dollars, or to the point, hundreds of thousands of dollars?

 

[Harpy Eagle]

The first question that comes to mind:

Can the majority of Americans afford to save a hundred dollars, or to the point, hundreds of thousands of dollars?

Great question, start a thread about that topic.

For this one, stay on topic

 

[Polishprince]

The first question that comes to mind:

Can the majority of Americans afford to save a hundred dollars, or to the point, hundreds of thousands of dollars?

Not under Sleepy Joe they can't.

 

[Rambunctious]

I receive approximately 60% of my pay I received as a Marine twice a month... not sure how that will effect... if any.... when I file for SSI... I need to look into this...

 

[Harpy Eagle]

I receive approximately 60% of my pay I received as a Marine twice a month... not sure how that will effect... if any.... when I file for SSI... I need to look into this...

Pensions, annuities, investment income, interest, veterans benefits, or other government or military retirement benefits are not counted as income for the income cap for SSI.

My Marine Corps retirement is 50% of my base pay as an E7 when I retired as I got out right at 20 (well 20 and a month to make sure they did not mess up the math)

 

[Rambunctious]

Pensions, annuities, investment income, interest, veterans benefits, or other government or military retirement benefits are not counted as income for the income cap for SSI.

My Marine Corps retirement is 50% of my base pay as an E7 when I retired as I got out right at 20 (well 20 and a month to make sure they did not mess up the math)

yep I just saw this...

 

[Andrew_Jackson_FTW]

The first question that comes to mind:

Can the majority of Americans afford to save a hundred dollars, or to the point, hundreds of thousands of dollars?

Many can’t

 

[initforme]

There seems to be a concerted effort to get rid of pensions into things less dependable.

 

[Harpy Eagle]

There seems to be a concerted effort to get rid of pensions into things less dependable.

That has been going on for a few decades.

 

[initforme]

Anything to keep a labor force laboring.

 

[WorldWatcher]

There seems to be a concerted effort to get rid of pensions into things less dependable.

Which is sad really. There are a couple of things:

#1 Defined Benefit plans get a bad rap. There is nothing wrong with Defined Benefit plans (commonly called Pensions). The bad part is that employers have to be willing to define the benefit structure and then fund those benefits now, based on future expected expenses. The problem was employers would promise pensions, then not fund the pensions. This happened in both the private sector and the public sector. Currently about 15% of my base goes into a pension system. 10% from the employer and 5% from me.

#2 The other has to do with a shift in society from long term employment where someone was a "company man" for decades and there was trust and shared responsibility between the company and the employee. Those times are behind us and it has become more an more common for employees to view jobs as a temporary stop where they will stay 3-5 years and then move on to the next job.
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I'd like to see the return of pension plans (properly funded) but which are mobile to account for #2. Once you are "vested" with a plan you can choose to let it ride (getting a very, very small pension), cash it out (usually at a reduced value), or roll it over to a new employer fund. To make this work (and safe) the pension fund needs to be under 3rd party management. The employer SHOULD NOT be managing the pension fund, investing the fund, or have any access to the fund beyond contributions to the EEs account.

WW

 

[initforme]

Anything to gut workers benefits seems to be the trend.

 

[Couchpotato]

I found this article today about how to factor in a pension for retirement planning.

Helping retirement plan participants understand their net worth - Journal of Accountancy

Two easy mistakes seen in retirement planning involve valuation of pensions and improper net-worth comparisons.

www.journalofaccountancy.com

A good rule of thumb is that the retiree would need $18,000 in retirement savings for every $1,200 per year ($100 per month) of earned pension income. In applying this rule, the amount of earned pension income an employee has at any point in time is based on the employer's pension formula, the employee's current earnings, and the time spent on the job to date.

...

As an example, examine how much an earned pension income of $30,000 would add to a person's net worth. A defined benefit plan income of $30,000 annually is $2,500 per month, which is 25 times $100. Therefore, it follows that funding such a pension benefit with a 401(k)-style defined contribution plan would require retirement savings of at least $450,000 (25 × $18,000). Consequently, the defined benefit plan adds $450,000 to net worth.


What do you all think of this formula?

I get pretty close to the same numbers when I just calculate how much a pension will have paid if I live to be 85. So I feel the formula is pretty good.

Does this formula assuming that the retiree doesn’t touch the principle and is living on the “interest” of the investment?

If so I’d think the 401k is worth more since the money is still there after the retiree dies. If not we would need to know how many years between retiring and death.

 

[Admiral Rockwell Tory]

The first question that comes to mind:

Can the majority of Americans afford to save a hundred dollars, or to the point, hundreds of thousands of dollars?

You are a Canadian, so why do you care?

 

[Harpy Eagle]

Does this formula assuming that the retiree doesn’t touch the principle and is living on the “interest” of the investment?

If so I’d think the 401k is worth more since the money is still there after the retiree dies. If not we would need to know how many years between retiring and death.

It is not about which is worth more, it is about how to factor in a pension. The formula estimates how much you would need to have in a 401k/IRA to get the same monthly benefit the pension is giving.

It helps in retirement planning.

You need less in a 401k/IRA than you would if you did not have a pension. Take my Marine Corps pension for example. Using this formula, I would need another 450k in savings to make up for what it will give me over time.

If I do some simple math, my monthly pension times 12 times 20 it comes out to 570k will have been paid to me if I retire at 65 and live to at least 85.

 

[Seymour Flops]

It is not about which is worth more, it is about how to factor in a pension. The formula estimates how much you would need to have in a 401k/IRA to get the same monthly benefit the pension is giving.

It helps in retirement planning.

You need less in a 401k/IRA than you would if you did not have a pension. Take my Marine Corps pension for example. Using this formula, I would need another 450k in savings to make up for what it will give me over time.

If I do some simple math, my monthly pension times 12 times 20 it comes out to 570k will have been paid to me if I retire at 65 and live to at least 85.

Is the assumption here that the retired person will eat into their principal, which will not grow?

Not sharpshooting, just asking about the assumptions underlying the math. It seems that an estimate of how much capital you would need for your investments to pay out $2,375 per month (570K/(20 x 12), would be more important than adding up your future pension payout and trying to match your savings to that figure.

 

[MarathonMike]

Great question, start a thread about that topic.

For this one, stay on topic

On topic? Dudley H? Not gonna happen.

 

[Harpy Eagle]

Is the assumption here that the retired person will eat into their principal, which will not grow?

Not sharpshooting, just asking about the assumptions underlying the math. It seems that an estimate of how much capital you would need for your investments to pay out $2,375 per month (570K/(20 x 12), would be more important than adding up your future pension payout and trying to match your savings to that figure.

There is a link to the article, but it is not about trying to match savings to a figure, but an idea of how much savings it would take to get the same result as the pension. It is a way to help understand how much the pension is worth when trying to figure out "do I have enough saved to retire".

 

[martybegan]

I found this article today about how to factor in a pension for retirement planning.

Helping retirement plan participants understand their net worth - Journal of Accountancy

Two easy mistakes seen in retirement planning involve valuation of pensions and improper net-worth comparisons.

www.journalofaccountancy.com

A good rule of thumb is that the retiree would need $18,000 in retirement savings for every $1,200 per year ($100 per month) of earned pension income. In applying this rule, the amount of earned pension income an employee has at any point in time is based on the employer's pension formula, the employee's current earnings, and the time spent on the job to date.

...

As an example, examine how much an earned pension income of $30,000 would add to a person's net worth. A defined benefit plan income of $30,000 annually is $2,500 per month, which is 25 times $100. Therefore, it follows that funding such a pension benefit with a 401(k)-style defined contribution plan would require retirement savings of at least $450,000 (25 × $18,000). Consequently, the defined benefit plan adds $450,000 to net worth.


What do you all think of this formula?

I get pretty close to the same numbers when I just calculate how much a pension will have paid if I live to be 85. So I feel the formula is pretty good.

I think the other thing to consider is with a pension, it's the pension's money. With a 401k it's your money. Pension plans can fail, and while protected to a degree by the government, it's not 100% protection. for you to lose your 401k money while retired (assuming you have moved most of it to stable money market/bond type funds by this point) it would basically take a societal collapse for you to lose said money.