In the last post, we settled on 4.5% as an assumed rate of return when projecting the DC account balances. However I decided it was just as easy to perform the calculations at 4.00%, 4.50% and 5.00%, therefore giving some more options. Below you will see two charts. The first chart assumes and Entitlement Age of 65. For age at 5-year intervals from age 20 to age 65, a $1,200 contribution is projected using the stated rate of return to age 65. The “Yrs @ $20” represents the number of years someone could collect $20 per month beginning at age 65 from the projected value. The second chart is the same, but to an Entitlement Age of 60.
So what the first chart displays is that a firefighter age 45 that earns a $1,200 contribution will see that $1,200 contribution grow to $2,894 by age 65 if a 4.5% annual rate of return is earned. That $2,894 would be enough to pay the firefighter $20 per month for 17.3 years.
You will notice in some years there is an infinity sign. That is because the $1,200 contribution grows to such an amount that it would pay a $20 benefit forever. The reason is that the interest accrued is more than the $20 monthly benefit. For example, $6,980 would earn about $314 per year at 4.5%, which is more than the $240 that would be paid annually.
How we will use these figures to compare the $1,200 DC plan to a $20 DB plan (still by far the most popular DB plan here in NY State) will be discussed in the next post. But we will use the average life expectancy data to try and draw some conclusions.
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