In the last post we projected what a $1,200 contribution would grow to at age 65 and at age 60 using various interest rates and various ages at the time the contribution was earned. Using that projected value, we then determined how many years a $20 distribution could be paid from that amount.
For many years, the CDC has been issuing a National Vital Statistics Report, updating the United States Life Tables each year. The most recent year available is 2017, and that report was released in 2017. You can find that report here:
Table A shows the life expectancy from ages 0 to 100 in 5-year increments. Since most volunteer firefighters are male, we'll look at the male numbers. This table says that a 60-year-old male is expected to live about 22 more years, and a 65-year-old male is expected to live about 18 more years.
Therefore, on average, a male participant who begins collecting his service award at age 60 can generally expect to be paid that benefit for 22 years. Similarly, a male firefighter collecting at age 65 can expect to be paid for 18 years. Most defined benefit LOSAPs include a 10-year guarantee. This means that if the participant dies before collecting 120 monthly benefits, then payment would continue to a beneficiary until a total of 120 monthly benefits have been distributed. If the participant lives to collect for more than 10 years, then payment continues for the rest of his lifetime and stops at death. Based on this CDC report, it is expected that most LOSAP participants will live to collect for more than 10 years.
So when looking at the age 65 table from the last post, we could use 18 years as the dividing line of which plan is better for certain ages. Using the 4.5% rate of return projection, a 45-year-old that earns 50 points and a $1,200 contribution will see that contribution grow to $2,894 by age 65. That amount is enough to pay $20 per month for 17.3 years. Since that is very close to 18, we could conclude that for anyone younger than age 45, the $1,200 DC plan would result in a larger benefit at age 65. For anyone over age 45, the DB plan would result in a larger benefit.
Again at age 65, we we assume only a 4% rate of return, the line drops to about age 40. If we assume a 5% rate of return, the line ticks up somewhere between 45 and 50.
I think it is safe to say that on average, firefighters under age 45 would benefit more from the $1,200 DC plan, where firefighters over age 45 would benefit more from the $20 DB plan, assuming an entitlement age of 65.
At age 60, the line just shifts back by 5 years - on average, age 40 is roughly the dividing line between which plan is better.
When trying to determine this for your own department, it is very important to not only consider the average age of the fire department, but the goal of the LOSAP. If the goal is to retain younger members, maybe that leads you to the DC plan. If the goal is to keep more veteran members, then the DB plan may be the better choice.
However, it is also important to consider the total costs of each plan. If on average a $20 DB plan costs 25% more than a $1,200 DC plan, you can expect that the $20 DB plan will provide a larger benefit on average (maybe not 25% more, but more). So it is important to look at two plans that have similar annual required contributions.
This is a certainly a nuanced and complicated analysis. But in general, I the conclusions reached here are reasonable.
Sharing my thoughts and insights on LOSAP, and occasionally other topics.