Hey everyone, it’s Finance Fridays again. Today we’re going to ponder the question “Am I Undervaluing Our Pensions?”
Am I Undervaluing Our Pensions?
Well, the short answer is:
Yes.
However, let’s delve into the longer answer of:
Yes, because
However, before we go there, I think you should read my previous post about How To Value a Pension to gain an understanding of where I’m coming from.
The take home point from that post is that I don’t really take our pensions into account when planning for retirement. The reason for this is because if we change jobs, the expected calculation on what the pension would be worth in retirement changes. This is more significant the earlier a job change happens.
For that reason, it’s unreliable and can’t be counted on — at least not yet. In my opinion, at anything less than 10 or 15 years of service into your pension, you shouldn’t even consider it. Basically, just think about it as this potential retirement money in this “cloud”. Like you know it’s there, but you can’t count on it.
Is this different from the “old days”?
Yes.
In the “old days”, people took jobs with pensions with the idea that this would be the last job they would ever do. Take my father for example. We moved to California specifically for him to take a job as Assistant Professor a CSULB. Once we put in his time and made tenure, that was it, he wasn’t going anywhere.
The tenure and the pension made it a simple decision to stick with his job. It would be very difficult to entice him to take another job. Trust me when I say other companies and corporations tried to steal him from the university with higher paying jobs. However, he turned them down — specifically because of the stability that his job with its tenure (and its pension) provided. I didn’t quite understand at the time, but I understand now.
When I asked my dad why he didn’t take the higher paying job my dad replied with another question:
“How much is stability for our family worth to us?”
Since he didn’t take the job, I guess the answer was:
“Priceless.”
What about you?
Well, at this stage of the game I have 5 years service into my pension and my wife has 2 years into hers. Ideally, I’d like us both to have 20+ years into our pension before we retire because of the 1.1% at 20+ years. However, the likelihood is that my wife will probably only do 15 or so years before she goes to part time or changes to a part-time type of job.
So what’s the plan then?
Well, 15 years from now, it’ll be 2034. I’ve talked about that year before. At that point I’d have 20 years of service and my wife would have 17 years of service (if she’s still working and not part-time yet).
My daughter will be starting her senior year in college and Lucas will be starting his freshman year in college. This is probably the time that I can safely calculate how much more money our pensions would provide us. As such, we can make plans to go part-time or retire.
Wait, that’s at 20 years, didn’t you say look at 10 or 15 years?
You’re right, so 10 years of service for me would be 2024. Since I am conservative, this is simply way too early for me to even consider the pension.
At 15 years of service for me, which is 2029 I will probably have started looking at things a little closer. I’d be at 15 years of service and my wife would be at 12 years. I would assume our student loans will have been long gone by this point.
In 2029, Kylie would be 16 years old and Lucas will be 14 years old. They will both be teenagers and mostly independent. If they’re anything like me, they will think they know everything and argue with their parents a lot. I guess it’ll be payback for how I was a teenager.
At this point, we would give serious thought to my wife dropping down to part-time (if she wasn’t already), or even retiring early.
I would need to do a bunch of calculations regarding our retirement and losing her 401k contribution for those years. As for me, I would still plan to do my 20 years, but this may change to 20 + part-time or 22+ full time depending on the above factors. It was also depend on how I feel about working at that point. However, these are all conversations and calculations for 2029, which are still far away.
The long and short of it is that at that point we won’t be forced to keep working. We’ll have options on what we can do in terms of work whether its part-time or early retirement or even changing jobs.
So then back to the question:
Am I Undervaluing Our Pensions?
Yes, I am undervaluing our pensions on purpose because of my assumption that it may not be there — or it may not be as much as I think it will be.
The reason I am doing this is because it gives me much more flexibility later on in life for dropping down to part-time or early retirement.
One of the hidden benefits of a pension is that you are forced to pay into it, so once again it’s money you’ve saved without ever seeing it.
I imagine it like this:
You do everything on the Checklist. You’re prepared for a retirement at a reasonable time with a reasonable amount of money.
Then you look up and it’s been 15 or 20 years and you realize that your amount of service to your pension is actually pretty significant now. You can now include it in your calculations. The ability to include it in your calculations is almost like getting a windfall of money. As such, you may be more comfortable dropping down to part-time or retiring early. That is the kind of flexibility I want — and my goal for the 20 Year Career.
I undervalue my pension because I understand its true future value.
TL;DR
Am I Undervaluing Our Pensions? Yes, because I understand their true future value.
Ignoring it early on and including it 15 years later allows for flexibility.
Even though it was always there, it’s now “real” to me 15 years in, and it’s almost like getting a windfall.
-Sensei
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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