Yup, my company froze their DB and replaced it with an inferior plan. Not fun when you’re halfway to the full DB benefit. It really changed my forward looking retirement projections a bit, and probably cost me a year or two of retirement.
And I hate Cash Balance plans. Just be honest and give me a DC plan if that’s what you want to play around with.
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Speaking of $1M, apparently my youngest brother has achieved a $1M net worth. Half of that in crypto. His wife hasn’t even started working yet (PhD candidate).
I sometimes wish I weren’t so risk averse…
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What?
If given the choice between a cash balance plan and a DC plan that are roughly equal in company spend, I would prefer the DC plan. Don’t give me the pay and interest credit nonsense. Let me take the cash and invest it.
But with a CB plan they can make it look like you’re getting bigger contributions as a percent of pay but it doesn’t actually have to cost that much. It’s a bit of a shell game.
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The plan sponsor is taking on the investment risk in a CB plan, not dumping it on the employees. That’s part of the point.
What do companies typically credit though? I’d likely rather just take the risk and invest in whatever I want.
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I am aware. I don’t think the value of that risk is compensated at the level plan sponsors take credit for.
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i think it was like 10-yr treasury rate?
Woof
my company on average has credited 4% over the life of the cash balance plan
of course they froze the cash balance plan so now we have to rely on our 401Ks
Hmmm, so what would be a good rule for a non-inflation-adjusted DB plan? Wondering how I should value the accrued portion of hubby’s pension and trying to remember interest theory. This would be a simple Course 2 problem… or whatever that exam is these days.
Like say he has a pension that will pay out $10,000 a year (not the actual value) then that would be worth $250,000 if it was indexed to inflation but since it’s not, it’s only worth…
Assume the purchasing power of $10,000 erodes by y% each year. Let x=1-y. Then the value in today’s dollars of n annual payments of $10,000 starting today would be $10,000(1 + x + x^2 + … + x^n-1).
It is easy to prove that this equals $10,000 (1-x^n)/(1-x) and anyone taking a theory of interest course would probably learn this at some point.
Plugging in y=3%, x=0.97, n=20 we would get $152,069. It doesn’t explicitly take into account the probability of continuing to live each year, but then you might as well be planning for I’ll still be alive. Revise n to your life expectancy or whatever you want to plan for, and guess x and voila.
Yeah, but isn’t there some more concise way to calculate that? Your brute force method is obvious but tedious. I was trying for a quicker method.
Well if you want a quicker method (like the 4% rule) with a bunch of assumptions baked into it, I’ve given you that. The answer in the example above is 15x.
If you believe 3% inflation and 20 years of payments. Change the assumptions if you like and get your own personalized multiplier.
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I was using a perpetuity before.
I think the answer is that instead of dividing by 0.04, you adjust the 0.04 to account for the assumed inflation.
For 3% inflation you’d take 1.04/.97 -1 = ~7.2%. That effectively becomes your new interest rate.
So instead of dividing by 4% you’d divide by 7.2%.
I think that doing a perpetuity is too optimistic. At 3% inflation a perpetuity has a PV of 33x the payment. But at the same 3%, a 20Y annuity is only 15x (as Klaymen points out), and for 30Y it’s 20x. Big spread between 15x and 33x.
If you think that somewhere in the 20-30Y horizon is reasonable, then you’re somewhere in the ballpark of dividing the $10,000 by 0.05-0.067, or a PV of something like $150-$200k.
It’s actually lower than that if the payments haven’t started. If the annuity doesn’t kick in for ten more years, or whatever, then further discount the PV by 1.03^10.
Which is still not elegant… there’s probably a more elegant solution but I can’t think of it!
Isn’t the 4% rule essentially assuming a perpetuity?
I was just trying to get something that was an apples-to-apples comparison to the 4% rule.
And isn’t it kind of pessimistic?
If you’re targeting a specific income and then dividing by 4% to tell you the assets you’d need to support that level of income then you’re essentially assuming you’re never going to dip into the principal.
When in reality you could probably spend that much with a lower level of assets and still not outlive your money.