Looking for confirmation from my smart GE friends to see if a pension freeze for someone retiring in 20 years is equivalent to a 11-12% pay cut. Here is what I had to do to estimate this since GE does not want to share the old pension estimation tool:
Assumptions:
- Retiring in 20 years.
- Pension accrual rate per year of service 1.65% (if pension had not frozen).
- 1.5% average annual increase in wages (I am an optimist).
- 6% annualized return (based on S&P returns from 1999 to 2019).
- Federal + State Tax Rate = 20%.
- 20 years of post-retirement pension withdrawals at 100% rate (I said I was an optimist).
- 8 years of additional pension withdrawals at 50% rate (spousal benefit).
Calculations:
- Use IRR (internal rate of return) of 6% to estimate lump sum needed at retirement to match cumulative withdrawals (sum of items 6 & 7 above).
- Compute additional post-tax annual savings rate needed (after including extra contributions from GE) to accumulate the lump sum.
Results
- I estimated I would need to save additional 11-12% (assuming 20% taxes) to compensate for the lost pension.
- If one is able to make the entire extra contributions pre-tax, it equates to having to save extra 9% of their wage from 2021 to retirement.
- If GE had not provided the extra 3% match and 2% transition, I would need to save 16% (assuming a 20% tax rate) or 13% (if done pre-tax).
- Simply no way to save that much extra with stagnant pay and rising health-care costs.
Can someone provide feedback on if this makes sense? Thanks in advance.