I wrote this post initially in 2016 and I’m here to give it a bit of an update. Most of it is still written from my perspective in 2016. It’s now 2021 and I’ve had some interesting learning, which you can review at the end of this post.
I’ve been giving this some thought the past few months, trying to assign a numeric value to my Kaiser Permanente pension plan. If I know the value of my pension then I can better decide if it’s worth sticking around to maximize my pension, since many pensions have a vesting schedule – time it takes before it is officially yours.
I have 2 pensions, a traditional pension, called a defined benefit plan and a less traditional type of pension called a cash balance plan.
Defined Benefit Plan
The DBP is what most of us are familiar with, the kind of pension many of our parents and grandparents had – your traditional pension plan. It is based on the number of years I work at my company, whether I’m part-time or full-time, what my highest gross annual income is and just like any kind of pension, whether I have worked long enough to vest in it.
The reason for this post is whether I want to invest another 3 years of my time into my current job in order to qualify for this pension plan. To answer that question, I need to know what my time is worth both qualitatively and in terms of dollar figures. I also need to determine the financial value of my pension.
I am 7 years into working for this company (as of 2016, when I wrote this post), at an average of 55 hours a week. I need a total of 10 years before I can be eligible to receive my pension at age 65. I could get it as early as age 58 but the value would be substantially lower, therefore I won’t discuss that here.
The vesting goes like this, the physician would need to work for 10 years at my medical group, putting in at least 1,000 hours a year on the books, and they would then be eligible to get credit of 2% per year up to 10 years, then 1% a year for the next 25 years. That’s a total of 45% of their salary.
This is how Kaiser Permanente does it – other medical groups have their own structures.
45% of the salary is 45% of the highest 3 consecutive years of income. If I made $250k for 4 years, then $350k for 3 years followed by $200k the next 3 years, the 45% would be calculated off of the $350k for 3 years… it’s a bit convoluted but there is a very intelligent reason for this (benefiting the medical group) which I won’t get into.
I would forgo the vesting if I switched down to per diem. Though I could continue working part-time and stay on track to vest, the per diem schedule has the awesome benefit of being highly flexible allowing me to work whenever I feel like.
The Value of My Time
In this monetary culture we aren’t taught how to put a financial value on our time. We don’t put a financial value on love neither. So if I’m in a committed relationship and decide to put more time and effort into my career instead of my significant other then I likely made that decision without even knowing how to compare them on an even level.
If I walk away from, say, $1 million worth of a pension, but in return I get a lot more free time, and if I don’t need all of that money, then I would have wasted a limited resource (time) for a far more ubiquitous and rather useless resourse (money).
Next 3 Years of My Life
Some will say if you’re gonna spend it mostly on your sofa watching Netflix and eating chips then perhaps it’s only worth those unwashed, tore up boxers you wear doing so.
If you’re going to be productive and making money through some other venture then it’s worth however much money you could potentially make.
I disagree with both. If I decided to spend the next 3 years of my life living a peaceful life, helping out friends and family or perhaps reading up on things that will add non-financial value to myself or those around me then the numeric value should be quite high.
Simply put, the value is in the eye of the beholder. Don’t let society or others around you determine the value of your time. You should guard that shit like your childhood porn stash.
What if I die early? What if I’m gonna live another 60 years? What if I get sick as fuck? What if I’ll be just working my ass off anyways being a per diem and just lose out on the benefits I would have being at least part-time? Or what if I end up feeling deliciously free without having a set schedule?
The Monetary Value of a Pension
This one is a bit easier to figure out but still a bit convoluted. My payments, starting at age 65, would be worth around $60k a year, gross. If I only live to age 66 then it would be worth that $60k minus taxes.
If I live a long life then it could be worth $1,800,000. That’s before tax of course but let’s roll with that. It would be worth $1.8 mill in future dollars. In order to figure out what that is in today’s dollars I used an online calculator.
Basically, assuming a 3% inflation on average for the next 27 years (until I turn 65) then that $1.8 mill would be worth $750k in today’s dollars.
If I were to account for taxes then I could cut that $1.8 mill down to $1 mill and today’s value would be $420k.
Would I rather sacrifice the time flexibility for the next 3 years in order to increase my net worth by another $1.8 mill or give it the middle finger and work enough (flexibly) the next 30+ years to accumulate that sum?
I suppose the more relevant question here is whether I need that pension or that $1.8 mill equivalent to begin with…
Let’s dive into that, I’ll start on my second cup of coffee.
I am spending somewhere in the $3,200/mo range currently (as of 2016). It’s higher than I like it to be but I don’t have much of an incentive to be frugal beyond this point at this time. The argument I am making, though a bit weak, is that I am generating income to cover this extra income.
Replacing the Spending with Passive Income
In order to generate $3,200/mo of passive income I would need to invest $960k using the passive mutual funds that’s the main part of my investment strategy. I got this number by multiplying my monthly income by 300 which is based on the current wall street investment scene where passive index funds (mutual funds) make ~4.5% after inflation/taxes/fees.
I currently have a net worth of around $570k. I would need to add another $390k in order to generate that full $3,200 per month.
Realistically, if I didn’t have a job to worry about my expenses would be far lower. They would be as low as $1,100/mo or a more realistic $1,500-2,000 a month.
Using the 300x multiplier I would either need $330k, $450k or $600k to generate $1,100, $1,500, or $2,000 respectively.
This is all assuming that I’m not gonna work another day in my life… or maybe go back to work if my investments eat major shit due to market circumstances.
The more likely scenario will be that I will continue doing some sort of income generating work until I drop dead. Covering my monthly expenses of $1,500/mo would be quite easy… covering even $3,200/mo of expenses would be fairly easy with part-time work as a physician.
This would allow my investments to grow instead of having to draw down from them. $450k invested and left alone until my age of 65 could be worth $2.2 million. With $570k I would be at $2.8 mill, far beyond my needs.
The Final Verdict
Here I am, age 38, slightly leaning more towards wanting the luxury of time-flexibility. Not having a set schedule, picking up a shift when and where I want.
3 more years of work, whether full-time or part-time, would generate more money than I really need but it would allow for quite a bit of room for error.
I likely don’t need the pension. Trying to calculate the pension’s value is helpful because it has helped me through this thought process. Would it be nice to have? For sure, only because of that fear of failure and the fear of the unknown which is always so hard to suppress.
From the Future
The value of my pension was exactly what I expected. It was a high future numeric value but had little actual value to me.
I’m 43 now and rewriting this post, and I’ve long retired from traditional western medicine – from the grind. I’m now doing work I love and constantly trying to pursue just that.
The value of a pension will be different from person to person. I don’t want to sacrifice my free time just so that I could have some steady money coming in, in some future time in my life.
My time is valuable now. I’m writing this from Oaxaca, Mexico. And before that I was living in Spain, and before that in Portland, Oregon. These experiences are what matter.
In hindsight, I am glad that I walked away from the pension. In fact, I would have never vested because I had massive drama with Kaiser Permanente, which forced me to walk away before I could have ever vested.