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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5069  
Subject: Re: Pension Question Date: 3/25/2004 10:42 AM
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He says it's one of those pensions where the payout formula is based on average earnings over the life of your time at the company.

The salary offer from this employer is one of the lower ones he's received, but still higher than where he is now (and his current employer doesn't offer a pension).

Since all the offers are roughly comparable, in the current environment (Social Security shaky, etc.), he is seriously considering going to the employer who has the pension.

In the above scenario, would this be the deciding factor for you? If so, why?


I can't say definitively without more information about the plan, but I'd be asking more questions...

A defined-benefit pension plan (that is what this sort of pension plan is called) is funded either:
* by the employer
* by the employee, deducted from his paycheck (can be pre-tax)
* by both

And it's basically a lifetime annuity. As an annuity, it may or may not be inflation-adjusted. Also, pension funds DO occasionally go broke; this fund may or may not be insured, and the insurance coverage may or may not protect an inflation adjustment.

We generally don't recommend buying annuities. Getting someone else to buy an annuity for you can be a bit different, though.

Since your brother isn't in a cash-flow crisis, I suggest he find out how much the employer will be contributing to the pension fund - probably a set percentage of the salary - and increase the stated pre-tax offer by about 75% of that amount. (75% because that will give about half the POST-tax benefit of having the full employer contribution added to his salary instead.

But then if that puts this offer just barely above some other offers, he should check if any of those offers provide a 401(k) match.

On the other hand, if this offer starts out more than 10% below another offer that he would seriously consider accepting, and isn't his dream job or in his dream location, it would be a waste of time to do the math. The pension won't improve it THAT much.

The big thing is: if he could live well on this lower salary offer, but instead goes for one of the higher salary offers, he should increase his savings by most of the (after-tax) difference!
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