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Old 07-27-2017, 09:00 PM
$ Saving Kindergartener
 
Join Date: Jul 2017
Location: Florida
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Default Present cash value of defined-benefit plan

Hi. I just joined and this is my first post.

I'm a 54 year old single person and am trying to estimate what I'll have for retirement. Currently i have about 420K in an IRA (I now put away 46K a year into these) and a defined-benefit plan that will kick in when I'm 62. A lot of retirement stuff that I read considers only your IRA amounts (understandably because fewer people today have DBPs).

I'm trying to understand what my defined benefit plan is "worth" in terms of present value. If I leave my job today, it will pay me 45K a year for life beginning at 62. If I stay in this job till I'm 62, it will probably pay 65K a year for life. Any thoughts on how you would value that benefit?

Also, I'm thinking of changing jobs but most likely I would not be able to get any kind of DBP in a new job, only a defined contribution one. I really value having some economic security, so I'm nervous about giving up a DBP for a new job. How important do you think this should be when thinking about changing jobs?

Thanks in advance for any thoughts.
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Old 07-28-2017, 10:43 AM
$ Saving Assistant Professor
 
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Welcome to SA. We're a mixed group with different backgrounds and experiences but we care passionately about doing good job of managing money.

I believe your decision to change employment is a 'stand alone' issue with your personal list of pros and cons. You've decades of options for retirement to decide later. {I'm particularly involved in this topic as I'm immersed in research on retirement}

What do you visualize your retirement to be decade 1, decade 2, decade 3 and onward? Of course your retirement savings continue to appreciate as you merely withdraw the sum necessary to meet expenses. The figure I see float is 30% to replace earnings, if you're in good health, no outstanding loans or mortgage, no dependents, nothing exotic.

While I understand your appreciation of a DBP, the downside is severely restricted level of risk permitted to their managers. The DOW has jump from 13,500 to today's 21,796 and those paltry income options barely offer 2%.

How are you managing your IRA What asset allocations are you/advisor using? Is it possible to transfer your DBP balance directly to a low fee, low cost, Retirement instrument? Handled correctly, you would not be incurring tax ramifications and those offered by Vanguard for example are adapt with smooth transitioning.

Alternately, if your existing contributions to DBP were to remain in place until age 62, would they continue to accrue interest income?

Last edited by snafu; 07-28-2017 at 11:01 AM.
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Old 07-30-2017, 04:26 AM
$ Saving Jr. High Schooler
 
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Quote:
Originally Posted by Boston1 View Post
Hi. I just joined and this is my first post.

I'm a 54 year old single person and am trying to estimate what I'll have for retirement. Currently i have about 420K in an IRA (I now put away 46K a year into these) and a defined-benefit plan that will kick in when I'm 62. A lot of retirement stuff that I read considers only your IRA amounts (understandably because fewer people today have DBPs).

I'm trying to understand what my defined benefit plan is "worth" in terms of present value. If I leave my job today, it will pay me 45K a year for life beginning at 62. If I stay in this job till I'm 62, it will probably pay 65K a year for life. Any thoughts on how you would value that benefit?

Also, I'm thinking of changing jobs but most likely I would not be able to get any kind of DBP in a new job, only a defined contribution one. I really value having some economic security, so I'm nervous about giving up a DBP for a new job. How important do you think this should be when thinking about changing jobs?

Thanks in advance for any thoughts.
Hi there Boston -

I ran some numbers. Here it is:

---If you stay for the 8 years and get the 65k, you are getting 20k extra year for the rest of your life. If you live another 20 years after that (I assume you will, lol) You will be pulling in an extra total of 400k (20k x 20 years). Assuming you don't get COLA. This is not taking inflation into account as well.

To get that same amount from a 401k over 20 years (that would accrue at 5% interest just for simplicity), you would need to have 260k by the age of 62. So assuming you get 7% interest on your 401k during the next 8 years, and saving the max every year (16.5k), you would only end up with about 170k.

I may be missing something here, but it seems way better to stick with the DBP, especially since they are continuing to dissolve. Plus if you stay at the current job and continue to increase your pension amount, you will still have extra money to put towarda Roth IRA that would give you even more money.

Everyone's situation is different, but if it were me I would probably stick it out. Unless you absolutely hated the job, then that would be different.
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Old 07-30-2017, 06:37 AM
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I've seen this discussed on other boards. The simple answer I have seen is to go to sites where you can buy annuities and put in the amounts for your pension today. Your age when you can start getting it (62), the amount you will get for life ($45k), and so on. Then see how much that will cost to buy today. That is a good estimate for the value of the pension. There are other ways to do it, but that will be the most concrete.
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Old 07-30-2017, 08:11 PM
$ Saving Kindergartener
 
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Many thanks for those replies. I appreciate it.

Jose
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Old 08-01-2017, 05:30 PM
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I think typically a DBP comes out ahead depending on health. it's hard to match the savings return.
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Old 08-13-2017, 12:20 AM
$ Saving College Senior
 
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Quote:
Originally Posted by Boston1 View Post
Currently i have about 420K in an IRA (I now put away 46K a year into these)
Since the contribution limit for IRA is $5500/year, are you confusing IRA with 401(k)?
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Old 08-14-2017, 12:06 PM
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pension really depends on how long you'll be collecting and if there's an inflation adjustment


At 62 years, assuming youre living another 20 years and 2% inflation adjustment $1.30 million

At 54 years, assuming you live another 28 years and 2% inflation adjustment $1.260 million

Possible the #s are off somewhere, they're awfully close for 8 years apart. Are you sure it's $45k now and $65k later? If they're accurate, one would think you should retire now, collect the 45k/year, and go work for anther company to earn another salary on top of the 45k.

------------
Assuming the pension plan doesn't go kablooey sometime before you die, it usually is the better option over a 401k style plan unless the company makes ridiculous contributions on your behalf.
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