Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
In the case of a defined benefit pension, there is no precise answer because we don't know how long we will live, and if there is a provision for survivor benefits we don't know how long our survivor will out-live us. Of course the pension system doubtless has statistics about the average paid-out value of its pensions, and that would be the answer.
Recently I was curious how much I have received to date from my California teachers pension (California State Teachers' Retirement System) and so I calculated the gross amount. In the ten years and two months I have been collecting the pension (retired at age 61 with 34 years of service) I have grossed $596,400 (rounded off to the nearest $100). I do not receive any health benefits and I opted for the full pension amount (no survivor benefits).
If I live another 10 years to age 81 (not an unreasonable guess but certainly not guaranteed) I will be able to say that my pension was worth about 1.3 million dollars. (The gross received value will more than double in the second ten years because of the COLA's - 2% per year non-compounded).
Of course pension systems differ in their pay-out formulas; some are more generous than others, and some include medical bennies and others do not. The contribution of the retirees themselves also varies; in my case I had 8% deducted from my salary for the entire 34 years to help fund the pension. Also, in the case of California teachers, there is a huge hit if one retires early at age 55.
There are people who make a living valuing pensions and the like. They make certain assumptions about interest rates and a person's life span, plug those numbers into a formula and there it is. The present value of a future cash flow. if you have a business calculator, you can probably crunch the numbers yourself.
The issue can come up in a divorce when the assets are being divided. Or, maybe a person wants to sell his pension to one of those companies that gives you "cash now." Or let's say you want to buy an annuity. How do you think they figure out what to charge you?
Looking at it in a different way, if you are receiving say 70k this year, it could easily take a couple million dollars in safe passive investments to get that kind of income....so from that perspective your pension is worth a lot!
Nothing can beat a defined benefit pension w/COLA - spoken by someone who doesn't have one (well, only a very teensy one w/o COLA b/c employer got smart and stopped funding it in 1993).
Now, ER has contributed to his pension. 8% contribution is not an insignificant amount. In ER's case, CA did not contribute to SS. So, the pension is it, pretty much.
And, a darned good one, it is.
According to Immediate Annuities, male, age 61, monthly income $5k - without COLA - would need $971,000 to fund that benefit. Add the COLA, the amount is probably more in the area of $1.5 million.
Looking at it in a different way, if you are receiving say 70k this year, it could easily take a couple million dollars in safe passive investments to get that kind of income....so from that perspective your pension is worth a lot!
My wife and I receive $1,275/month in government pensions and to me it's worth a whole lot more than it might seem.
It comes with COLA's.
It comes in the form of a direct deposit at the end of the last day of every month. Our social security checks will both arrive on the fourth Wednesday so it's kind of a boost!
I'm 67 and the plan is to not take social security until I am 70, that is if I can make it and if I go to 68 I'll be happy, and having always had a somewhat higher than average income our combined social security will be in excess of $4,000 so that with the pension we should do very well I think. We should be able to live well on social security alone and the pension is our play and fun money.
I love it because we shouldn't have to worry about money and I am at the point of life where the only thing I want anymore is security and no worry. With this in mind I don't think I would trade it for $150k.
As others have noted this is a very debatable issue determined by the objective of the question. One of the most often asked questions is how much savings would it take to generate the same income at a determined drawdown rate. There are answers for that. It is not a simple X*Y=income because the investment will generate positive and negative returns that will impact how long it last and the size of the resulting drawdown.
Having a million dollars in the bank is fine, but when it is gone, it is gone. A pension is forever. Priceless in value.
That is why the concept of a safe drawdown rate. Having a chunk invested gives you health and living options down the road that a pension alone might not. The best solution is both.
If you want a strictly numerical answer, I would value it by getting a quote for an annuity. How much would you have to pay someone today in a lump sum for them to guaranteed payments equal to your pension for life?
you can put a value on the income stream but even that can be hard .
to get 40k you need 2 million dollars if not using equity's and only 1 million if you are using at least 40% .
then there is the fact the pension goes away with death so depending on age you would still have money for heirs if not a pension .
the problem is it is hard to value insurance and an annuity and pension act as insurance products. about the closest way to come up with a value would be that immediate annuity .
sometimes it can be life insurance . many times it can be a better deal to take a single annuity instead of a joint annuity or pension and then use life insurance for the spouse instead of a joint annuity . .
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
