Leaving corporate for VA?

[Mman]

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That estimate doesn't include a COLA rider. Even at 2% inflation that $8K/month is only worth around $5K after 20 years. The COLA is important and it costs money.



I totally agree. I brought up the SWR calculation because it was suggested $1M invested could produce $80K/year of income for the individual's remaining lifetime, and that's a risky bet. The point of safe SWR rates isn't leaving money to heirs - it's having a high probability of not running out of money before dying.

Just because the MEDIAN life expectancy of a 65 yo M is 18 years doesn't mean many 65 yo men won't live for 30. The average 65 yo who doesn't plan for a 30 year retirement is a playing a dumb game.

Actually pricing an annuity is the best way to determine what a stream of income will cost. If you want a COLA included on the estimate, simply use a calculator that includes it. The reason individuals use a SWR is obviously so they don't run out of money, but that includes the possibility that they live for an additional 30 or 40 years which necessitates taking smaller amounts out annually. The point of an annuity is that they spread that risk across a population so if you happen to live a really long time the annuity can still keep paying a higher amount than a SWR would have over the same duration. Having a 30% probability of failure with an SWR would obviously be not very good for an individual, but would be absolutely wonderful for an annuity since that meant 70% of their customers got paid out less. That's why annuities can pay out a much higher rate from a lump sum than any rational individual would take for themselves.

I do not argue for or against annuities for personal retirement planning. They are what they are. But the pricing of annuities is a very useful tool for understanding the value of something providing a similar stream of income indefinitely.

 

[DM27]

I think you are significantly overvaluing that pension. An 80,000 pension is probably worth 1 million invested in the S&P. At the most, it’s worth the cost of an annuity producing 80k income, about 1.3 million dollars.

I think there is a misunderstanding regarding how I am valuing the pension. I am not doing it with the intention of comparing it to investing the money instead in something high risk like equities or even some bonds, it will 100% fail against that, so the comparison it isn't even worth making.

I am simply comparing the amount of money the annuity/pension draws a year to the amount of money you would be required to have in a retirement account with an expected rate of return of 3.5% (a fairly accepted conservative figure) to be able to draw that money until death without touching the principle. This is 100% an oversimplification and I am not bothering comparing it to annuities because the intention of the post is not some argument for or against working a VA job, but rather an easy way to view a way to factor the pension into your retirement plans.

The reason I see value in viewing it this way is that it allows for a very simple calculation of FU money. Let's say someone calculated they need $100k a year in retirement, they would need ~2.86 million in a retirement account with an expected 3.5% rate of return to be able to accomplish this without fear of touching principle. If they have a job with an expected pension they accumulate yearly, they can simply extrapolate that into its cash in the bank equivalent to figure out their moving retirement number. For example, this person needs 2.86 million, they make 300k at the VA yearly, they have worked there for 15 years, they will draw a 45k year pension (divide this by 0.035) their moving retirement number is now 2.86 - 1.26 = 1.6 million saved in order to retire with a 100k a year combined withdrawal rate. Again, this is an oversimplification intended for someone who does not have the additional goal of leaving as much wealth behind for their heirs etc since this pension money will disappear.

 

[pgg]

Actually pricing an annuity is the best way to determine what a stream of income will cost. If you want a COLA included on the estimate, simply use a calculator that includes it. The reason individuals use a SWR is obviously so they don't run out of money, but that includes the possibility that they live for an additional 30 or 40 years which necessitates taking smaller amounts out annually. The point of an annuity is that they spread that risk across a population so if you happen to live a really long time the annuity can still keep paying a higher amount than a SWR would have over the same duration. Having a 30% probability of failure with an SWR would obviously be not very good for an individual, but would be absolutely wonderful for an annuity since that meant 70% of their customers got paid out less. That's why annuities can pay out a much higher rate from a lump sum than any rational individual would take for themselves.

I do not argue for or against annuities for personal retirement planning. They are what they are. But the pricing of annuities is a very useful tool for understanding the value of something providing a similar stream of income indefinitely.

I agree with 100% of this.

I was just pointing out that since the FERS and military pensions have inflation adjustments, a quote for an annuity without a COLA was not a reasonable estimate.