John Parker <jparker10508[at]comcast.net> wrote:

- quote -

The number of years you will work before retirement age is very
important information here.

Also the likelihood of failure to meet pension obligations of your
current company.

Also -- is that pension indexed for inflation? If so, what is the
measuring stick?

You need to know all that to make a comparison.

19% is a pretty good rate of compensation into a pension plan, but to
know whether it beats that extra $2500 a month, you need to know how
long it's going to be put in and what level of risk/return you expect in
the account where it is invested.

Also, you have to account for the value of inflation indexing in the
pension if there is any.

Rule of thumb says that you can draw yearly somewhere between 3-4%/year
out of a batch of money safely and accounting for inflation. You can
get more out if you are willing to blow down principal and assume an N
year life expectancy (as pension plans will do). The lower your N, the
more you can take out.

You can price current indexed or fixed annuities to get an idea of what
a "till death" payout would look like for a given lump sum.

Once you have that, figure out what that 19% a year will amount to in a
lump sum at retirement age. Figure your 95% confidence interval at
6-11%/year for 70-80% equities (high risk), and 4-8% for a more
conservative mix (50-50 or so), then adjust for inflation around
3.5%/year. Be aware that going too conservative toward fixed income can
expose you to more inflation risk than a 50-50 portfolio would expose
you to equity risk. If you really want risk-free, go with something
like I-bonds and figure the return on those. Note that such a risk-free
investment is probably the right comparator for the pension if it's with
a rock-solid company that won't ever default.



Michael

I am contemplating switching jobs but because of the differences in
how the retirement is handled I am having trouble determining what the
new offer has to be in order to exceed the current salary.

My current company has a pension plan that if I quit today and start
collecting at retirement age would pay $2400 / month. If I continue to
work for the current company with an assumed 4% increase each year and
work until retirement age it would pay $4900 / month.

The new company pays 19% of my pay to a retirement account of my
choice. How much would I have to make as a starting salaray (again
based on a 4% increase each year)to match the $2500 difference in the
pension plan.

If this is not the right place to request this information could
someone point me to a web site that might be able to help me.