Value of Pension

[igneousy2]

never mind that they may all be near worthless in time...

I am trying to figure out how to value a pension into a "career value" calculation.

For example...how would you put a figure on a 25 year career at CAL with a 10% DC vs. AS which has a 1.9% DB and a 3% DC.

The DC portion seems straight forward enough but I am not sure if I am doing the DB part correctly.

What I am doing is taking the formula (1.9%*FAF*YOS) at a given year and then multiplying it by the number of years I would expect to live (80-60=20)

I am suspicious in my calculations because it seems that assuming you top out your pay in the last 5 years you would actually start losing money in your DB.

YOS 24 = 1,537,063
YOS 25 = 1,534,394
YOS 26 = 1,526,388
YOS 27 = 1,513,046
YOS 28 = 1,494,367

this is based on a 1.9% multiplyer and FAF of 11,704 and living until 80.

Any help...prefer a quick or relatively quick rule of thumb.

I am especially interested in the value of an early distribution. For example if I decide to take the money and run at age 45...how do I figure how much that would be worth.

How much of a penalty do you typically take when you take an early retirement?



Thanks.

 

[CitationLover]

never mind that they may all be near worthless in time...

I am trying to figure out how to value a pension into a "career value" calculation.

For example...how would you put a figure on a 25 year career at CAL with a 10% DC vs. AS which has a 1.9% DB and a 3% DC.

The DC portion seems straight forward enough but I am not sure if I am doing the DB part correctly.

What I am doing is taking the formula (1.9%*FAF*YOS) at a given year and then multiplying it by the number of years I would expect to live (80-60=20)

I am suspicious in my calculations because it seems that assuming you top out your pay in the last 5 years you would actually start losing money in your DB.

YOS 24 = 1,537,063
YOS 25 = 1,534,394
YOS 26 = 1,526,388
YOS 27 = 1,513,046
YOS 28 = 1,494,367

this is based on a 1.9% multiplyer and FAF of 11,704 and living until 80.

Any help...prefer a quick or relatively quick rule of thumb.

I am especially interested in the value of an early distribution. For example if I decide to take the money and run at age 45...how do I figure how much that would be worth.

How much of a penalty do you typically take when you take an early retirement?



Thanks.

ok here goes.

when a lump sum distribution is taken in a pension there are numerous things that are taken into account.

1) the accrued benefit. what is the benefit formula? if FAP, is it highest 3/5 yrs (consecutive or highest) out of X years (5/10 usually respectively).

2) what is the early retirement reductions? these are usually a simple flat reduction from age 60 (ie 6% per year from age 60).

3) what are the benefits eligibility? (ie early retirement is age 50 and 10 yrs of service)

4) now we have a calculated benefit at a defined point in time (ie age 55). how does this pension calculate a lump sum factor to convert the calculated annual/monthly benefit into a single sum. for this you need the mortality table and the applicable interest rate defined in the pension plan.

5) simply take the benefit and multiply it by the factor to get the lump sum value AT THAT SPECIFIC DATE IN THE FUTURE WHEN THE BENEFIT WAS CALCULATED.

6) to get the value of the lump sum today you must DISCOUNT the lump sum back to today. this is usually done discounting with interest and mortality, but interest can do. to get a simple interest deduction, take 1/[(1+i)^n] where i is the interest rate and n is the number of years to discount.

for example:

Joe Schmoe, age 40, has an expected unreduced benefit at age 55 of $2,000/month.

His plan reduces 5% each year below age 60, thus his reduced monthly benefit is (1-[.05x(60-55)]) x 1200 = 900/month

This is a MONTHLY amount which we now need to convert to a lump sum (SINGLE) amount. Joe's plan uses 1994 Unisex Pension Table with a 5% interest rate. For simplicity i will assume the value is 17. Thus his lump sum amount AT AGE 55 is 900 x 12 x 17 = $183,600.

We now need to discount this back to his current age of 40 to determine the value TODAY. You should discount the value at a market interest rate (ie it should theoretically be the value you expect to earn on it if you invested it). Since 5% is what the lump sum factor is based on and it is fairly conservative i will use this interest rate. My discount factor is 1/[1.05^(55-40)] = 1/2.0789.

Our value TODAY is 183600 x (1/2.0789) = $88,315.

Your pension plan will have an SPD (summary plan document) which spells out all these steps I've described.

Now you have the DB in a single sum format and can simply add it to the expected DC balance AT THAT SPECIFIC POINT IN TIME.

make sense?

i am not following your calc's. for YOS 25.

0.019 x 25 x 12 x 11704 = $66,712.80
66,712.80 x 20 = $1,334,256 not $1,534,394

 

[Bavarian Chef]

Wow.

I thought this was flightinfo.com, now I am sure it is match.com ... you two were made for each other. Lots of crazy math sex goin' on in those two posts.

Now please, someone undorkify that info for me.


Never mind. I forgot. I work at jb.

:0

 

[CatfishVT9]

Wow.

I thought this was flightinfo.com, now I am sure it is match.com ... you two were made for each other. Lots of crazy math sex goin' on in those two posts.

Now please, someone undorkify that info for me.


Never mind. I forgot. I work at jb.

:0

A visual I didn't need. The thought of their Avatars together was too much.

 

[CitationLover]

Wow.

I thought this was flightinfo.com, now I am sure it is match.com ... you two were made for each other. Lots of crazy math sex goin' on in those two posts.

Now please, someone undorkify that info for me.


Never mind. I forgot. I work at jb.

:0

yes god forbid some INFORMATION is exchanged here.........

 

[Bavarian Chef]

A visual I didn't need. The thought of their Avatars together was too much.

hahahahaha.

 

[sf340flyer]

Also don't forget with a DC, you have to wait until 59 and a half, or you have to pay penalties to use the money. Hope you have a big savings account if you pull out early.

Also, at AK we have a spouse death benefit, that if you die before you retire your old lady gets 50% of the current value of your A plan. Which makes your A plan a free life insurance policy. As well as if you go on Medical Leave all of your time off is still counted towards your years of service. For example (assuming age 60 retire and you've been a Capt for at least 5 years) at 55 you lose your medical. You go on medical leave, then at 60 you retire. Your DB is the same as if you worked as a Capt those last 5 years.

For me those are things you can't put a price on.

 

[Full of LUV]

Put a price on???

Also don't forget with a DC, you have to wait until 59 and a half, or you have to pay penalties to use the money. Hope you have a big savings account if you pull out early.

Also, at AK we have a spouse death benefit, that if you die before you retire your old lady gets 50% of the current value of your A plan. Which makes your A plan a free life insurance policy. As well as if you go on Medical Leave all of your time off is still counted towards your years of service. For example (assuming age 60 retire and you've been a Capt for at least 5 years) at 55 you lose your medical. You go on medical leave, then at 60 you retire. Your DB is the same as if you worked as a Capt those last 5 years.

For me those are things you can't put a price on.

Well, I think that indeed Citation Lover has shown us that he can put a price on that........

 

[Freight Dog]

Value of a DB plan = your trust in your airline management's promise that it will be there when you retire.

 

[30West]

Value of a DB plan = your trust in your airline management's promise that it will be there when you retire.

What he said.
Your pension most likely will be raped by whatever Robber Baron is pwning your airline at the time you retire.

 

[CitationLover]

Also don't forget with a DC, you have to wait until 59 and a half, or you have to pay penalties to use the money. Hope you have a big savings account if you pull out early.

not true. you can withdraw a 401k penalty free if you "separate from service" after age 55. see IRC 72(t)(2)(A)(v).

http://www.72t.net/Sepp/IrcSection72.aspx

72(t)(1) IMPOSITION OF ADDITIONAL TAX. --If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

72(t)(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS. --Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:

72(t)(2)(A) IN GENERAL. --Distributions which are --

72(t)(2)(A)(i) made on or after the date on which the employee attains age 591/2 ,

72(t)(2)(A)(ii) made to a beneficiary (or to the estate of the employee) on or after the death of the employee,

72(t)(2)(A)(iii) attributable to the employee's being disabled within the meaning of subsection (m)(7),

72(t)(2)(A)(iv) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary,

72(t)(2)(A)(v) made to an employee after separation from service after attainment of age 55,

72(t)(2)(A)(vi) dividends paid with respect to stock of a corporation which are described in section 404(k), or

72(t)(2)(A)(vii) made on account of a levy under section 6331 on the qualified retirement plan.

Also, at AK we have a spouse death benefit, that if you die before you retire your old lady gets 50% of the current value of your A plan. Which makes your A plan a free life insurance policy. As well as if you go on Medical Leave all of your time off is still counted towards your years of service. For example (assuming age 60 retire and you've been a Capt for at least 5 years) at 55 you lose your medical. You go on medical leave, then at 60 you retire. Your DB is the same as if you worked as a Capt those last 5 years.

For me those are things you can't put a price on.

There are prices associated with the J&S benefits you describe (Joint and Survivor). In theory the "costs" associated with these benefits are zero as they are "actuarially equivalent" to the normal life annuity. The benefits are simply reduced and the reduction is the "cost" associated with the benefit. Further pensions have "standard" payment options (of which a subsidized, ie unreduced, survivor annuity may be one). Typically the standard payments are a life annuity for a single participant and a 50% J&S annuity (reduced) for a married one. For example:

You want to provide an X% survivorship to a spouse.

You're life annnuity benefit at age 60 (spouse age 57) is $100/month.

The X% actuarial equivalent factor for an age 60 (spouse age 57) is .9 (this is made up, but a reasonable factor. your pension plan will define actuarial equivalence with a mortality table and an interest rate).

Thus the X% J&S equivalent benefit is 100 x .9 = $90/month.

Thus the "cost" is $10/month for the $X/month survivor benefit as on average the payment will be longer than a single life annuity, thus the reduction.

I hope intuitively you can see that as X increases, the equivalence factor decreases (ie a 100% factor will be less than the 50% factor).