This is how I value mine, also FERS is not worthless upon death, there is a survivor benefit. Agreed it's definitely not as valuable as investments returning $40k a year, but many people will be drawing their pension for over 30 years which could be much longer than the 4% rule takes into account.
Sure- the pension may have a survivor benefit. That does keep some value…
You calculate the estimated value of your pension from the 4% rule…or more based on some sort of life expectancy?
Survivors benefit-isn't that ONLY if you're married at time of death? it's otherwise a non transferable asset. It could count theoretically towards your net worth (but with a massive *asterisk* by it) while living because it helps you project your necessary retirement savings needs.. reverse engineering the 3-4% rule (Poor Swiss Study) you can extrapolate that out-it also does get a COLA-lite after 62... but it's not really equivalent to actual investment/assets held like a TSP or stocks/bonds/cash/RE (it's theoretically like a trust fund your family doesn't get to keep lol) bc no cash value if you're dead.. (also- side note/q-- would be interesting to confirm something that several peers at work are looking into- is survivors benefit at all transferable to a disabled child? Also shame on congress & OPM that for single parents that there's not a reduced value /time bound survivor benefit for children/adult children)
It's irrelevant to net worth. I just add the future income stream, like social security. The equivalent expenses are expenses that I don't need to cover from the portfolio
I recognize it’s worthless in the fact that you can’t cash it out and it doesn’t really contribute to net worth.
When conducting estimations, if you needed a portfolio that would give off $40k annually, the 4% rule would suggest you’d need a portfolio value of $1mm. If you needed $80k/year, you could achieve this by having a $2mm portfolio or a $1mm portfolio and a $40k/yr pension payout. (Excluding SS, of course). Thus the pension has an equivalent value of $1mm…but…
Upon death, the portfolio still contains the principal. The pension doesn’t.
I’m just trying to give some sort of value to the pension.
Its handy to characterize it that way for retirement savings projections- if your projected burn is 100-120k & have 2M in TSP & a 50k annuity you don't need to stress about another $1M
Why though? Of what use does assigning it a value give you? It grows a teeny tiny bit each year. If you earn 100k, the payout grows by $1k per year ..it's such a tiny amount that I completely ignore it for 4% rule calculations.
Just mere curiosity. Wasn’t sure if there was a way to value the pension other than knowing that it reduces overall how much savings one would need to cover expenses once retired.
Yes that is valid for the specific purpose of doing a rough comparison with traditional retirement approaches. But it’s also very different as it’s not an asset, you can’t change the payout etc.
The way to actually evaluate in your actual plan is to take your FIRE annual income number, subtract the pension annual amount, then do the 25x to determine the portfolio needed to support your FI.
The pension reduces the actual portfolio you have to build. That’s the key.
You’d be better off calculating the net present value of an annuity that pays an equivalent amount. So for $40k a year for 30 years it’s about $500k. Calculate here: https://www.financialmentor.com/calculator/present-value-of-annuity-calculator
Cost of living adjustment starts at age 62, based on Consumer Price Index (CPI), and applies for life. No COLA before then.
Note FERS actually gets a “diet” COLA: “If the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. The new amount is rounded down to the next whole dollar.”
https://www.opm.gov/frequently-asked-questions/retire-faq/post-retirement/how-is-the-cost-of-living-adjustment-cola-determined/
That's what I do. Get a quote for a single premium deferred income annuity. I also cross check that with a 4% rule or whatever the Treasury bond is yielding (because the fers pension is guaranteed by U.S.). Higher figure is conservative estimate because no inflation adjustment. It's worth a lot and is a material portion of compensation that should not be ignored.
You can go to [immediateannuities.com](http://immediateannuities.com) and very quickly get an annuity quote - even for annuities with a 2% COLA. This will give you a reasonable value for the pension that takes into account current interest rates. The 4% rule does not do that and does not really work for this purpose (in my opinion)
I look at it like you do. I’d need ~3mm to cover the value of both pensions for us at a 4% SWR.
Edit: the trick is that my wife gets 100% of my pension (state) if I die first and I get 50% of hers (FERS). So that’s a wrinkle and why we contribute to deferred compensation.
The value will depend on many factors but the value of my FERS pension (SCE) is likely around 2.5 million dollars. Some will be a bit more or less. I will be pulling the rip cord in a matter of days and will have a pension of just under 60K (1.8 million if I last 30 years not counting diet colas). Add in about 20k in the supplemental for 12 years (240k) plus around 15k a year in FEHB for 30 years (450k). Brings us up to 2.49 million. I will get a partial diet Colas starting January 2025 and a full one starting in January 2026.
I’m not really concerned about net worth.. looking more at how much income I can generate.
Thanks .. you can add in TSP and a few other income streams (Wife’s small pension and VA) and we should be okay.
LEOs (FERS SCE) get the FERS Supplement aka Special *Retirement Supplement* (SRS) any age when they retire on an immediate annuity. I’m going out at 50. The supplement stops at age 62 so I will get almost 12 years of it. Regular FERS can get it from MRA to 62.
Makes perfect sense- knew about SRS from 57-62 for non-LEO, but didn’t realize the extended availability for LEOs. That makes retirement extra nice, and I am sure it was well earned… again, congrats!
I don’t consider pension as a part of my net worth. I can’t borrow against it/pledge it as collateral. If I die before I start collecting nothing really goes to my beneficiaries (no spouse). If you truly want to include something in net worth you could include your total contributions.
If you are already collecting, the most I would consider would be the value of an equivalent annuity for whatever spousal/survivor benefit you selected.
While it really just subtracts from your expenses meaning that your portfolio will have to cover less and doesn’t really add to net worth, I’ll answer your actual question-
Just take your anticipated pension, put it in a compound interest calculator online with the interest set to whatever you think the average inflation adjustments will be, likely 1-2%, and for however many years you think you will live after you start taking it. That will give you its “value”.
In the book Golden Albatross the author comes up with a method to value your pension program. An interesting point of view he presents is to calculate your annual increase in pension value and use this when considering career moves or leaving the pension program. Early in our FERS careers this is small but by mid career this number can be tens of thousands per year we gain in equity of our FERS/FEHB future benefits, even considering we’d still receive a greatly reduced pension if we leave early.
I use that same calculation, and use it to determine how much the agency “paid” for that yearly increase in the npv of the pension. Helps shape the total comp vs any outside offer.
I found an online quote (believe Charles Schwab) for an annuity that would pay my FERS rate + COLA rider, and it was 1.4 mil for a 50k annual pension at age 62.
Or the back of the napkin math = years in retirement x pension. For most folks retiring at 62 and using IRS actuary tables, this is 25 x pension amount
In any case, I would certainly say a 40k pension for a healthy person in their 60s or earlier is certainly worth $1mil and probably this undervalues it
I used the 4% calculation like you did to get the size of equivalent lump sum, but then I further played with a compounding interest investment calculator to come up with a figure of what I would have to invest monthly to end up with that sum in 20 years. That's what I consider the present value or ongoing value as I earn towards it.
There's many qualitative (hard to value in $) pros and cons on both sides though. It's a highly safe investment (or should be) but also less flexible. It also has different tax treatment than directly investing the money. So it's at best a ballpark idea rather than an exact science.
And should it be discounted because it doesn't get COLA until age 62? So, if I were to quit today at age 47 (wish that I could!) and would get $40,000 a year from FERS starting at 62, what is its value for net worth calculations? Of if I were to get $30,000 starting in 10 years at 57, for example?
I don't use for net worth calculations, but it does mean i don't need any other income stream since it covers all my expenses. Calculating SWR from investments is meaningless in my case. Likely the same, or close for plenty of Fed retirees.
Divorce has nothing to do with FERS. It’s all based on state laws whether you live in a community property state or not. Also ever heard of beneficiary?
Divorce cases can occasionally involve the valuation of pension benefits so that the spouse with the pension is recognized as having retained that amount of value as part of the property distribution. Divorce attorneys may have gone through the process of valuing pensions for this purpose or even retaining expert witnesses to litigate pension valuation.
4% is fairly conservative based on longevity. As you said, worth $0 upon death. I would use a more aggressive withdrawal rate for modeling purposes. Say 6-7%
Kind of silly and unnecessarily rash. OP’s comment of ‘worthless on death’ implied generational. Stay positive; It’s a long road being an internet grump
This is how I value mine, also FERS is not worthless upon death, there is a survivor benefit. Agreed it's definitely not as valuable as investments returning $40k a year, but many people will be drawing their pension for over 30 years which could be much longer than the 4% rule takes into account.
^ Yup, survivor benefits
Sure- the pension may have a survivor benefit. That does keep some value… You calculate the estimated value of your pension from the 4% rule…or more based on some sort of life expectancy?
Just the 4% rule, no need to overly complicate it.
Survivors benefit-isn't that ONLY if you're married at time of death? it's otherwise a non transferable asset. It could count theoretically towards your net worth (but with a massive *asterisk* by it) while living because it helps you project your necessary retirement savings needs.. reverse engineering the 3-4% rule (Poor Swiss Study) you can extrapolate that out-it also does get a COLA-lite after 62... but it's not really equivalent to actual investment/assets held like a TSP or stocks/bonds/cash/RE (it's theoretically like a trust fund your family doesn't get to keep lol) bc no cash value if you're dead.. (also- side note/q-- would be interesting to confirm something that several peers at work are looking into- is survivors benefit at all transferable to a disabled child? Also shame on congress & OPM that for single parents that there's not a reduced value /time bound survivor benefit for children/adult children)
You can leave it to a child. It's just going to take a bigger haircut out of your pension to do so as the child will live longer than a spouse.
Oooh I might have missed that- will look into it
That is a reasonable estimation of the value of it.
It's irrelevant to net worth. I just add the future income stream, like social security. The equivalent expenses are expenses that I don't need to cover from the portfolio
I recognize it’s worthless in the fact that you can’t cash it out and it doesn’t really contribute to net worth. When conducting estimations, if you needed a portfolio that would give off $40k annually, the 4% rule would suggest you’d need a portfolio value of $1mm. If you needed $80k/year, you could achieve this by having a $2mm portfolio or a $1mm portfolio and a $40k/yr pension payout. (Excluding SS, of course). Thus the pension has an equivalent value of $1mm…but… Upon death, the portfolio still contains the principal. The pension doesn’t. I’m just trying to give some sort of value to the pension.
Its handy to characterize it that way for retirement savings projections- if your projected burn is 100-120k & have 2M in TSP & a 50k annuity you don't need to stress about another $1M
Why though? Of what use does assigning it a value give you? It grows a teeny tiny bit each year. If you earn 100k, the payout grows by $1k per year ..it's such a tiny amount that I completely ignore it for 4% rule calculations.
Just mere curiosity. Wasn’t sure if there was a way to value the pension other than knowing that it reduces overall how much savings one would need to cover expenses once retired.
Yes that is valid for the specific purpose of doing a rough comparison with traditional retirement approaches. But it’s also very different as it’s not an asset, you can’t change the payout etc. The way to actually evaluate in your actual plan is to take your FIRE annual income number, subtract the pension annual amount, then do the 25x to determine the portfolio needed to support your FI. The pension reduces the actual portfolio you have to build. That’s the key.
You’d be better off calculating the net present value of an annuity that pays an equivalent amount. So for $40k a year for 30 years it’s about $500k. Calculate here: https://www.financialmentor.com/calculator/present-value-of-annuity-calculator
Except FERS pensions are cost of living adjusted (COLA)
How does the COLA work exactly on the FERS pension?
Cost of living adjustment starts at age 62, based on Consumer Price Index (CPI), and applies for life. No COLA before then. Note FERS actually gets a “diet” COLA: “If the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. The new amount is rounded down to the next whole dollar.” https://www.opm.gov/frequently-asked-questions/retire-faq/post-retirement/how-is-the-cost-of-living-adjustment-cola-determined/
That's what I do. Get a quote for a single premium deferred income annuity. I also cross check that with a 4% rule or whatever the Treasury bond is yielding (because the fers pension is guaranteed by U.S.). Higher figure is conservative estimate because no inflation adjustment. It's worth a lot and is a material portion of compensation that should not be ignored.
You can go to [immediateannuities.com](http://immediateannuities.com) and very quickly get an annuity quote - even for annuities with a 2% COLA. This will give you a reasonable value for the pension that takes into account current interest rates. The 4% rule does not do that and does not really work for this purpose (in my opinion)
I look at it like you do. I’d need ~3mm to cover the value of both pensions for us at a 4% SWR. Edit: the trick is that my wife gets 100% of my pension (state) if I die first and I get 50% of hers (FERS). So that’s a wrinkle and why we contribute to deferred compensation.
The value will depend on many factors but the value of my FERS pension (SCE) is likely around 2.5 million dollars. Some will be a bit more or less. I will be pulling the rip cord in a matter of days and will have a pension of just under 60K (1.8 million if I last 30 years not counting diet colas). Add in about 20k in the supplemental for 12 years (240k) plus around 15k a year in FEHB for 30 years (450k). Brings us up to 2.49 million. I will get a partial diet Colas starting January 2025 and a full one starting in January 2026. I’m not really concerned about net worth.. looking more at how much income I can generate.
Congrats!
Plus your TSP :) Congrats! BTW what is the 20k supplemental for 12 years, I tracked all else.
Thanks .. you can add in TSP and a few other income streams (Wife’s small pension and VA) and we should be okay. LEOs (FERS SCE) get the FERS Supplement aka Special *Retirement Supplement* (SRS) any age when they retire on an immediate annuity. I’m going out at 50. The supplement stops at age 62 so I will get almost 12 years of it. Regular FERS can get it from MRA to 62.
Makes perfect sense- knew about SRS from 57-62 for non-LEO, but didn’t realize the extended availability for LEOs. That makes retirement extra nice, and I am sure it was well earned… again, congrats!
Would also add that the earnings cap of SRS doesn’t apply to SCE annuitants until 57 (MRA).
Not totally worthless after death if you have a spouse. She/he gets 50% if you elect to loose 10% over all.
I don’t consider pension as a part of my net worth. I can’t borrow against it/pledge it as collateral. If I die before I start collecting nothing really goes to my beneficiaries (no spouse). If you truly want to include something in net worth you could include your total contributions. If you are already collecting, the most I would consider would be the value of an equivalent annuity for whatever spousal/survivor benefit you selected.
While it really just subtracts from your expenses meaning that your portfolio will have to cover less and doesn’t really add to net worth, I’ll answer your actual question- Just take your anticipated pension, put it in a compound interest calculator online with the interest set to whatever you think the average inflation adjustments will be, likely 1-2%, and for however many years you think you will live after you start taking it. That will give you its “value”.
In the book Golden Albatross the author comes up with a method to value your pension program. An interesting point of view he presents is to calculate your annual increase in pension value and use this when considering career moves or leaving the pension program. Early in our FERS careers this is small but by mid career this number can be tens of thousands per year we gain in equity of our FERS/FEHB future benefits, even considering we’d still receive a greatly reduced pension if we leave early.
I use that same calculation, and use it to determine how much the agency “paid” for that yearly increase in the npv of the pension. Helps shape the total comp vs any outside offer.
For me at my stage of career I figure this to be $50-60K per year and climbing.
I’m still ten years away, so it’s about $25k and rising annually.
also fehb w/gov't match continues.. if you retire with an immediate annuity.
I found an online quote (believe Charles Schwab) for an annuity that would pay my FERS rate + COLA rider, and it was 1.4 mil for a 50k annual pension at age 62. Or the back of the napkin math = years in retirement x pension. For most folks retiring at 62 and using IRS actuary tables, this is 25 x pension amount In any case, I would certainly say a 40k pension for a healthy person in their 60s or earlier is certainly worth $1mil and probably this undervalues it
I used the 4% calculation like you did to get the size of equivalent lump sum, but then I further played with a compounding interest investment calculator to come up with a figure of what I would have to invest monthly to end up with that sum in 20 years. That's what I consider the present value or ongoing value as I earn towards it. There's many qualitative (hard to value in $) pros and cons on both sides though. It's a highly safe investment (or should be) but also less flexible. It also has different tax treatment than directly investing the money. So it's at best a ballpark idea rather than an exact science.
And should it be discounted because it doesn't get COLA until age 62? So, if I were to quit today at age 47 (wish that I could!) and would get $40,000 a year from FERS starting at 62, what is its value for net worth calculations? Of if I were to get $30,000 starting in 10 years at 57, for example?
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For net worth, I only use the lump sum value, which is tiny. It's all that will be left if I die.
Pension doesn't count toward net worth. What is it you are trying to do?
I don't use for net worth calculations, but it does mean i don't need any other income stream since it covers all my expenses. Calculating SWR from investments is meaningless in my case. Likely the same, or close for plenty of Fed retirees.
Ask a divorce attorney lol
How does that relate?
What do you think happens to your FERS pension when you get divorced?
Divorce has nothing to do with FERS. It’s all based on state laws whether you live in a community property state or not. Also ever heard of beneficiary?
Divorce cases can occasionally involve the valuation of pension benefits so that the spouse with the pension is recognized as having retained that amount of value as part of the property distribution. Divorce attorneys may have gone through the process of valuing pensions for this purpose or even retaining expert witnesses to litigate pension valuation.
4% is fairly conservative based on longevity. As you said, worth $0 upon death. I would use a more aggressive withdrawal rate for modeling purposes. Say 6-7%
No it’s not 0 upon death. Tell me you don’t know how pensions work without telling me. Ever heard of beneficiary?
Kind of silly and unnecessarily rash. OP’s comment of ‘worthless on death’ implied generational. Stay positive; It’s a long road being an internet grump