How valuable is a very small pension?

February 23, 2024 2:54 PM

I work for an employer that offers a pension after a vesting period. I don't like my job. If I wait another 3 years to leave, I'll be eligible for a pension of about $7500-8500 a year (according to a random online calculator, but let's assume it's correct). How heavily should I weigh the pension in my decision making?

If I leave sooner, I'll get a refund of my contributions, so it's not lost. But it also won't be a pension! But also I'd have to keep track of this thing for the next 30 years? There are other upsides to the job of course, but I'm trying to figure out how important the pension really is. Let's also assume there will be no pension cuts and I won't ever return to this employer.

posted by umwelt to Work & Money (27 answers total)

I was in this situation with a bit more pension than that but not like huge amounts of money. I truly hated the job and stayed partly for circumstantial reasons and I feel like it was the right call on the whole. A defined benefit for life is pretty worthwhile. I don't remember a lot of the misery of the job a couple of years later, and if all goes well, I'll have a monthly check from something that is mostly just an "I had the WORST job" story.
posted by less-of-course at 3:07 PM on February 23 [5 favorites]

This is something that can be calculated reasonably well, but we need more information. How much were the contributions that you have made and over what period? How much would you have to contribute over the coming 3 years?
posted by ssg at 3:19 PM on February 23

To value this pension, we'd need to know the following:

• How old are you?
• When does it kick in?
• Does it have any residual value for your survivors (spouse, kids, whatever) after you die?
• Does that $~$8000 inflation-adjust?
• (on preview after seeing ssg's question) How much more will you contribute over the next three years?
• How much cash would you get back if you left right now?

With those answers, it's pretty straightforward to calculate what that stream of payments is worth, and compare it to what you'd get back from your employer if you leave today.
posted by Hatashran at 3:20 PM on February 23 [8 favorites]

If it doesn't adjust for inflation (or doesn't adjust until you start drawing it) and you're 30 years out from retirement, $7500-$8500/year isn't likely to be worth very much ($8500 in 1994 would be worth about $4000 today). I think people seriously undervalue guaranteed income streams as a form of longevity insurance, but you could probably do better investing your contributions for retirement.
posted by praemunire at 3:31 PM on February 23 [3 favorites]

Depends on your lifestyle? That's enough to keep me living indoors for the year
posted by Jacen at 3:46 PM on February 23 [4 favorites]

Response by poster: * I'm 35
* Kicks in at 62
* At retirement, I can elect a survivor annuity for a 10% reduction. SSA calculates that I will outlive my spouse by two years!
* There is a yearly cost of living adjustment
* I have contributed 36,000 over the past 1.5 years, plus $11,200 matching. I believe I'll be able to roll all of it out. There's another couple of grand in separate matching that isn't fully vested, which I don't understand and am ignoring.
* I'll continue to contribute the max, which is currently $23,000 a year.
posted by umwelt at 4:00 PM on February 23 [1 favorite]

There is a yearly cost of living adjustment

But does it start adjusting the minute you leave, or when you retire? Makes a big difference.
posted by praemunire at 4:28 PM on February 23 [1 favorite]

Are you sure you can roll all of it out, including the match if you leave your job now? Typically that's the hook to the minimum contribution period. It was with mine, anyway.
posted by citygirl at 4:55 PM on February 23

I have a small pension that I obtained from my then-employer 30 years ago. It doesn't pay a lot of money now, just $350 a month, but that covers groceries for me. It's not nothing.
posted by SPrintF at 4:57 PM on February 23 [6 favorites]

Best answer: If I'm reading this correctly, you have $47,200 in there already. While the peace of mind from a defined benefit pension plan is nice, you can also grow that money significantly by investing it over the next 50 years (or hopefully more!) to provide you with a similar or perhaps even better annual income compared to the $8000 (inflation adjusted).

There is more risk for you if you don't have a defined benefit plan, of course, but we're talking about small degrees here. I don't think it is worth worrying too much about the relatively small difference between your defined benefit pension versus what you could get by investing that same money yourself over the same time period. Make your choices to make yourself happy and don't worry about what would be, in the end, small potential differences in your eventual retirement income. This pension is not a set of golden handcuffs, it's just something you can take or leave.
posted by ssg at 5:07 PM on February 23 [2 favorites]

Best answer: It doesn't pay a lot of money now, just $350 a month, but that covers groceries for me. It's not nothing.

But you probably would've done better if you'd been able to roll the contributions into an index fund and then left them, even if you end up having a longer lifespan. Zero nominal growth for 30 years is rough.

But, yes, ssg is right about the main point: as it stands, even if you slightly prefer the defined benefit, the amount is not enough to justify spending a lot more time at a job you hate.
posted by praemunire at 5:12 PM on February 23 [3 favorites]

(BTW, if you're a fed: it definitely doesn't start adjusting til retirement. Can't remember but it might not be til 65, even.)
posted by praemunire at 5:16 PM on February 23 [1 favorite]

Response by poster: Thanks all, this is super helpful! And yeah, didn't mean to imply that 8k a year is nothing, just trying to figure out if the money is significantly more valuable in a pension vs a target fund. I may or may not leave the job, but it sounds like the pension shouldn't be too much of a factor.
posted by umwelt at 5:52 PM on February 23 [3 favorites]

Also, whether or not you'll earn more at a potential new job is a big factor. If your income is likely to be flat for the rest of your career, then it makes more sense to worry about making the best choice about whether/when to leave a job that offers a pension. If you find a new job with a big salary bump that lets you save, say, $8k more/year to be extremely conservative with the math (and you actually do save it), then you would be better off forgoing the pension since you'd have the $8K/year plus compound interest.

And don't worry too much about managing any money that rolls out of your account - setting up an IRA is not appreciably harder than opening a bank account (I'm assuming you're in the US given the $23K figure lines up with 401k limits) and they'll hold your hand through the rollover paperwork to get the money out of your old account and into the new one. Once that's done, there are plenty of set-it-and-forget-it investing solutions. Do some research to avoid high fees though.
posted by snaw at 6:06 PM on February 23

The market is rally (EDIT spelling, but seems appropriate so leaving it) high right now, so not the best time to get started, but putting a fixed amount into a no-load index fund every month is a pretty solid strategy.
posted by Windopaene at 7:29 PM on February 23

Ok, one minor point. If you take the money out there will be a certain temptation to spend it. I don't know about you, but that would influence my decision as well. If you take the money out and reinvest it that's great, but if you buy a boat and a bunch of cocaine it will end up being worthless.

If you are sure you will take the cash and immediately reinvest it then I'm pretty sure that's a better deal. Just don't do anything dumb in the middle. :)
posted by Literaryhero at 7:51 PM on February 23 [1 favorite]

You don't actually take the money out and then reinvest - you roll it directly from one retirement account to another. Sometimes this means a check touches your hands, but not always. If you cash it out, you can incur a penalty and owe taxes on it as an early withdrawal. If you roll it over, you don't risk that.
posted by soelo at 9:00 PM on February 23 [6 favorites]

When I left a job with a vested pension at roughly your age, I rolled it into an IRA. As noted above, inflation can massively eat into the value of a pension over 30 years. If you really want the surety of payments for the rest of your life, you can buy an annuity closer to retirement with it.

You can also do more or less the same thing using the 4% rule. Based on historical data, $47,200 invested in an index fund is likely to be worth over $300,000 at 62. With the 4% rule, you should be able to pull out $12K/year for the rest of your life and would likely still have some left over to leave to descendants or charity.
posted by Candleman at 11:21 PM on February 23 [1 favorite]

What happens if the employer goes under? How likely is that?
posted by Nancy Lebovitz at 11:33 PM on February 23 [3 favorites]

Check if you can roll it over into a fresh pension account. If you can then it will still basically be worth what it says it's worth, give or take (assuming it's defined contribution - an investment account - and not defined benefits - typically promising a percentage of your final wage). If you can't it's a withdrawal with a bunch of tax implications. (I think that will be true in any country but it's certainly the case in the US. I don't know if you're in the us because I've found here people don't usually use the word 'pension'.)

If the rollover is an option there is nothing about this pension that holds you to your current employer.
posted by How much is that froggie in the window at 1:28 AM on February 24 [1 favorite]

In 27 years, you'll be unlikely to get anything at all. If you are a government worker, all it takes is one Republican administration set on "removing socialism" and if you are at a corporation, all it takes is one CEO "maximizing profits." Unless you are a cop, don't expect to ever see a dime of pension money, no matter how unfair that might seem.
posted by rikschell at 5:03 AM on February 24 [2 favorites]

Expanding a little on rikschell's comment, there is definitely a risk that the plan will disappear. To evaluate that risk, you have to know the legal underpinning of the plan, basically whether it is based only on the good will of the employer, or if it's covered by a law (probably ERISA) that gives you some protection.

There is also what you might call a legislative risk. There may be new laws that remove protections, or actually forbid the pension to be paid.

By the way, to put things in perspective, Social Security payments are currently in the $30K-$50K per year range depending on what your earned income was. By the time you retire, that will double, maybe triple, due to inflation.
posted by SemiSalt at 5:28 AM on February 24

Social Security payments are currently in the $30K-$50K per year range
Can you explain what this means? I do taxes for a lot of seniors and most don't get anywhere near this amount per year.
posted by soelo at 6:21 AM on February 24

The average Social Security payment is just over $22K.

That said, if OP is making enough to be able to comfortably max out the $23K limit at 35, they're probably earning enough to be significantly higher than average. The Social Security website has an estimator that would give a decent idea.

By the time you retire, that will double, maybe triple, due to inflation.

A 2% inflation adjustment over 30 years would put it at just under doubling. However, the program is underfunded and various options would be on the table to "fix" it, ranging from reducing the payments to adding years before you can retire, so I wouldn't rely heavily on that.
posted by Candleman at 7:51 AM on February 24 [2 favorites]

It's not clear how much money you'd be leaving on the table. But the question is if the value of money you'd gain by staying is greater than your dislike of your job. Look for jobs; can you increase your pay enough to compensate you for the lost pension funds? Online calculators are imperfect; share more details and you'll get better advice. Defined benefit pensions are really nice, can you look for a job in the company or state agency or whatever, where the benefit can transfer?
posted by theora55 at 11:09 AM on February 24

* I have contributed 36,000 over the past 1.5 years, plus $11,200 matching. I believe I'll be able to roll all of it out. There's another couple of grand in separate matching that isn't fully vested, which I don't understand and am ignoring.
* I'll continue to contribute the max, which is currently $23,000 a year.

Actually, looking at your update again and setting aside the inflation-adjustment issue I initially focused on, I'm lightly confused. If this is a defined-benefit pension, then you should be contributing a fixed percentage automatically yearly (assuming you participate at all), not a discretionary amount, and while in theory the employer is setting aside money to contribute its share of the payments, it's not usually described in employee documents as "matching." Further, the $23,000 is the limit for 401(k)-type contributions. (I think there is some weird upper limit for pension-plan contributions, but that applies to the employer and you'll never see or deal with it unless you are very highly compensated and independently negotiating a pay package.)

Instead, it sounds more like you are contributing to a 401(k) or 403(b) plan with an employer match. Which is a whole different kettle of fish! There's no guaranteed benefit at all, just whatever the market gains are for the investments. So...stay, leave, makes no difference. The balance is the balance.

It is possible your employer offers both a defined-benefit pension to which you make an involuntary contribution and a 401(k)-type plan to which you can contribute up to $23K this year. Not many do these days (but the feds still do). In that case, most likely, once your pension vests, even if you leave and roll the 401(k) money over, that doesn't affect the pension. In fact, once you've vested, you may not even have the option to roll your pension contributions over upon departure. (This is different from what would happen if you left before vesting and rolled your pension contributions over, which would definitely terminate your participation in the plan.)

But if that's the case, then, if you're looking at an online calculator that is not specific to your pension plan (hard to find a random one of those unless your union offers it, although they're definitely out there for the feds, in which case you're fine), you're probably not getting an accurate calculation of future pension benefits, it's probably just an investment-returns calculator, which is quite different. Thus you likely need more data to make this decision.

Finally, while never say never under a second Trump administration, doom-mongering about pensions is irrational and counterproductive. Your vested pension is a property right. Your big risk is if you have a private employer who goes through a bad bankruptcy with an underfunded plan, which throws the pension plan into a complicated backstop system I don't pretend to understand but which could lead to significant cuts. Otherwise, if the employer merely ends the plan, you keep what you have vested. (My mom's employer ended the pension plan ~10 years before her retirement, but she still gets payments based on what vested before the end.) If you have a government employer, well, if the federal government ceases payments on its obligations, you'll have bigger worries than a small pension. States can't declare bankruptcy and the worst municipal bankruptcy of modern times, Detroit's, saw retirees take a 4.5% cut to payments and lose their health benefits (the latter of which mostly affected retirees too young for Medicare and not otherwise eligible for coverage due to disability). That was rough for those people, who were generally none too highly paid to begin with, but you wouldn't be depending on this pension for the bulk of your income.

Sorry for the length of this comment, but, in deciding, it's really important for you to be clear about what you actually have and might, or might not, be giving up!
posted by praemunire at 11:19 AM on February 24 [2 favorites]

"Social Security payments are currently in the $30K-$50K per year range
Can you explain what this means? I do taxes for a lot of seniors and most don't get anywhere near this amount per year."

My view is likely skewed because I postponed getting benefits until age 70. But I never earned enough to make the Max contribution. OTOH, seniors getting tax help probably skew low.

But the point is that the size benefit quoted by the OP may be a useful addition to a retirement income, but isnt big enough to be foundational.
posted by SemiSalt at 11:27 AM on February 24