Reply to How do you calculate the value of your federal pension?

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[quote=Anonymous][quote=Anonymous]The gov basically wants you to take your pension starting at age 62.  Let’s say you’re a fed for 20 years.  That’ll give you about $44k/year in pension income, more or less - assuming your high 3 years salary is $200k.  So let’s say you live another 25 years after that.  How much money would you need to give you $44k/year for 25 years?  In other words, what kind of investment do you need to have at retirement in order to match what the pension will give you?  You’d need about $950k.

So now you calculate what you need to save monthly for the next 20 years in order to accumulate $950k.  At a 5% rate of return, I need to save $2300/month (after tax).

Now, depending on when you joined the government, you may be contributing 4.4% of your pre-tax salary to the pension – about $7k/year, or probably something like $4k after taxes you’ll be missing.

So the delta in after-tax savings between pension and non-pension is about $23,600.  And $23,600 after taxes equals probably about $35,000 in salary per year.

That's the general idea.  Obviously plug in different numbers for your situation.  [/quote]

This is the right calculation! Although the assumptions do tilt towards favoring pensions. Very few feds have a $200K high-three. Even if you’re a capped GS15 retiring now that number will be more like $190K. And to get a 1.1% bump at 20 years of service you have to have Goldilocks timing; most will only be 1%, so the pension is more like $38K, so your savings to create that is around $820K. If you’re investing over 20 years for retirement you’d use a tax-deferred account and assume more like 7% return and so the monthly savings rate to achieve that drops to about $1,600. That’s $19K a year. You pay for this at 4.4% of your present salary of $195K = $8.5K per year. The net value of your pension is therefore only about $10K, not the $35K derived above. So getting a 5% pay rise on leaving the government is probably worthwhile if you have the discipline to save the difference. [/quote]

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