How Do I Calculate The Value Of A Pension?

If you’ve got a pension, count yourself as one of the lucky ones. A pension is more valuable than you realize. With a pension, you won’t be forced to lower your safe withdrawal rate in retirement like those of use who don’t have pensions. This post will help you calculate the value of a pension.

Pensions, also known as Defined Benefit plans, have become rarer as companies force their employees to save for themselves mainly through a 401k, 457, 403b, Roth 401(k) or IRA. These savings vehicles are also known as Defined Contribution plans.

But as we all know, the maximum amount you can contribute to a 401(k) or IRA is $22,500 or $6,500, respectively for 2023. Even if you max out your 401(k) for 33 consecutive years starting today, it’s unlikely your 401(k) or IRA’s value will match the value of a pension.

Take a look at my latest 401k savings potential chart. After 33 years of maximum contributions, I estimate you’ll have between $568,000 – $1,800,000 in your 401k, depending on performance.

$1,800,000 sounds like a lot, but in 33 years, $1,800,000 will buy just $678,000 worth of goods and services today using a 3% annual inflation rate. However, inflation is currently running at ~7.5%.

If you live for 20 after your last 401(k) maximum contribution, you’ll only be able to spend $33,900 a year in today’s dollars until the money runs out. $33,900 is not bad, but it’s not like you’re living it up after sacrificing your life for decades at a job you didn’t love.

Given the power of inflation, to neither max out your 401(k) nor invest an additional 20%+ of your after-tax income if you don’t have a pension is risky. When it comes to your money, it’s always better to end up with too much than too little.

How To Calculate The Value Of A Pension

The best way to calculate the value of a pension is through a simple formula I’ve come up with. For background, I worked in finance from 1999 – 2012, got my MBA from UC Berkeley, and have written over 2,500 personal finance articles on Financial Samurai since 2009.

I live what I write and speak as an early retiree since 2012. Money is too important to not take seriously.

The value of a pension = Annual pension amount divided by a reasonable rate of return multiplied by a percentage probability the pension will be paid until death as promised.

For example, here is an example of how to calculate a pension with the following data:

Average income over the last four years: $90,000

Annual pension: $67,500

A reasonable rate of return divisor: 2.55%

Percentage probability of pension being paid until death: 95%

Value of pension = ($67,500 / 0.0255) X 0.95 = $2,514,706

One can argue my formula for calculating the value of a pension is overstated. After all, the pension’s value is dependent on the terminal value, and we all eventually die. Therefore, if you are particularly pessimistic, you can apply a discount to the final calculation.

For example, if you are a pessimistic person in poor health, perhaps you multiply the final value of the pension by 50%. In this case, a $2,514,706 pension goes down to about $1,250,000.

If you have a pension, your goal is to live as long and healthy a life as possible! The longer you live, the greater the value of your pension. This means eating better, exercising, and having a good social network of friends.

How Do Pensions Work?

Most pensions start paying out at a certain age and continue paying out until death. The amount of pension you receive is determined by years of service, age in which you elect to start collecting, and usually the average annual income over your last several years of service.

If you don’t know how to calculate the expected monthly or annual payment of your pension, just ask human resources to provide details.

To calculate the value of your pension involves figuring out your annual pension payment, a reasonable rate of return divisor, and a realistic expected chance of payment until the end. After all, your company could go bankrupt and welch on all its pension promises.

Deciding on a reasonable rate of return divisor is subjective. The safest divisor to use is the 10-year government bond yield, which currently hovers around 4%. In other words, one can reasonably expect to earn 4% each year on his or her investments given the 10-year government bond yield is guaranteed.

One could use a more aggressive reasonable rate of return, such as 10%, to reflect a historical annual return of the stock market. However, the higher your divisor, the lower the value of your pension ironically, because it requires less capital to generate your pension income when things are booming.

Pensions Have Become Much More Valuable

Given interest rates collapsed in 2020, it took more capital to generate the same amount of risk-adjusted returns/income. Therefore, the value of a pension went WAY UP because the value of cash flow has gone way up.

Just take a look at this chart regarding how much more capital is needed to generate $50,000 a year in income. Therefore, the proper safe withdrawal rate should be lower the it was in the past.

Thankfully, interest rates have ticked up from their 2020 lows, making generating passive income easier. However, the higher interest rates go, the more headwind stocks and real estate generally have.

We’re now in a situation where the Fed continues to hike rates aggressively to combat inflation. In fact, patient investors can now earn over 5% in risk-free Treasury bonds. The rates likely won’t last, which reminds us of how fluid economics and investments are.

Let’s calculate the value of various pensions below.

Pension Value Example 1: Police Officer Retiring After 25 Years Of Service

Here is the example again of how to calculate the value of a pension with some commentary after.

Average income over the last four years: $90,000

Annual pension: $67,500

A reasonable rate of return divisor: 2.55%

Percentage probability of pension being paid until death: 95%

Value of pension = ($67,500 / 0.0255) X 0.95 = $2,514,706

Well how about that! After 30 years of service, this police officer will have a pension worth roughly $2,514,706 on top of whatever other assets he has accumulated. Not bad for someone who made a decent, but unspectacular $90,000 year for the last four years of his career.

Let’s say this police officer joined the force at age 20. He’s still young enough to start another career making additional money on top of his $60,000 pension. Talk about the perfect early retirement plan to pursue your passions without fear.

Pension Value Example #2: Foreign Service Officer Retiring After 30 Years Of Service

Let’s say you started in the foreign service before 1986 and finally want to retire. Congrats! You will have a nice pension for life waiting for you.

Average income over the last three years: $120,000

Annual pension: $85,000

A reasonable rate of return divisor: 3%

Percentage probability of pension being paid until death: 100%

Value of pension = ($85,000 / 0.03) X 1 = $2,833,333

I use a 100% probability of the pension being paid until death because the payer is the federal government. This figure is also subjective, but I believe the federal government will honor their promises to older employees. They’re just cutting pension benefits for newer employees.

If I used 2.55% as the reasonable rate of return divisor, the value of this retired foreign service officer’s pension jumps to $3,333,333. The reason is because an investor needs to invest $3,333,333 in capital to generate $85,000 in annual income when the rate of return is only 2.55%.

Let’s say the rate of return was 50%, the value of the pension/capital required is only $170,000. But who on Earth can reliably generate a 50% annual return each year forever? Nobody.

For those of you who start the foreign service after 1986, you receive 1.7 percent of your salary for the first 20 years and 1 percent for each additional year. Therefore, 30 years only gets you 44 percent of your salary equal to a pension. However, at least you can still have 401(k) matching and collect Social Security.

Pension Value Example #3: Public School Teacher Retiring After 30 Years

Average income over the past four years: $72,000

Annual pension: $43,000

A reasonable rate of return divisor: 2.55%

Percentage probability of pension being paid until death: 75%

Value of pension = ($43,000 / 0.0255) X 0.8 = $1,349,019

Although this public school teacher wasn’t earning a huge amount, she gets to retire with a $36,000 annual pension that is worth over $1,000,000. Using an 75% payment probability seems reasonable.

Most pensions also have an inflation adjuster built in order to keep up with inflation. Although sometimes, the inflation adjustments don’t keep up.

Here’s a chart I put together highlighting the values of a $35,000 and $50,000 pension (in the range of the most common pension amounts). As the rate of return goes higher, the value of your pension goes lower. Bond values work in a similar fashion as interest rates go higher and vice versa.

Thanks to the craziness of the pandemic, the 10-year bond yield has declined to under 1%. Therefore, the value of your pension has gone way up. You want to hold onto your cash cows for as long as possible. Your reasonable return of return divisor should be lowered to 1% – 2% in this low interest rate environment.

A Pension’s Value Is Subjective

Obviously, my calculation is simplistic because we all die at some point. My calculation is based on cash flow into perpetuity. To counteract the perpetuity, I assign a Probability of Payout percent. Further, we all won’t have surviving spouses to continue receiving the pension long after we’re gone.

You’re free to lower the Probability of Payout percentage to account for shorter lifespans or a more pessimistic life outlook. You can also call the Probability of Payout the Pension Discount Rate if you wish.

Just remember that value is subjective. Once we’re dead, what does anything really matter? There’s no longer a need to earn any money for ourselves. Given most pensions continue to pay out to a surviving spouse, s/he is covered until death as well.

What this article and my calculation attempts to do is provide an easy way for all pensioners to assign a real value to their pensions. I also want to give pensioners hope that their financial situation isn’t as dire as expected if they are comparing themselves to private sector workers or my average net worth for the above average person chart.

Cherish Your Valuable Pension

All three individuals with pensions above are millionaires due to their long-term dedication and pensions. Even if you were only receiving a $15,000 a year pension, it’s still worth more than $500,000 a year using a 2.55% divisor and 90% payout probability.

Given the median net worth in America is around $100,000, we can conclude that anybody with a pension is considered very well off. Less than 20% of Americans have pensions in the new decade.

Live As Long As Possible To Increase Your Pension’s Value

There’s one key variable that I haven’t discussed, and that’s a pension owner’s lifespan. Unfortunately, the foreign service officer with a pension worth $2,833,333 can’t sell his pension to anybody for that amount. Nor does the pension keep paying out after death.

Although, in some cases, a pension can keep paying out to a surviving spouse. The reality is one’s pension value fades as the owner inches closer towards the end.

Therefore, it behooves every pension owner to live as long and healthy of a life as possible to maintain the value of his/her pension. The same logic goes for anybody with passive income, including social security. The richer you are, the healthier you should try to be!

The value of your pension is subjective. You could even multiply your annual pension amount by the average P/E multiple of the S&P 500 to come up with its value. There are many variables and variable amounts to consider.

Just know that your pension has tremendous value, just like your Social Security, the nation’s pension plan. If your pension plan has a high cost of living adjustment rate, then your pension is worth even more.

If you feel your net worth is lacking based on my charts for the average net worth for above average people, simply calculate the value of your pension using my formula. The results will likely surprise you.

Invest In Real Estate For More Income

Given the value of cash flow has gone way up, it is wise to invest in assets that generate income. The best type of income-generating asset regular people can invest in is real estate.

Investing in real estate is like getting a pension because real estate tends to produce a steady income stream that gets more valuable over time. Inflation helps left the value of real estate and rents.

Take a look at Fundrise, my favorite real estate crowdfunding platform available for all investors. You can invest in a diversified real estate fund that primary investments in the heartland where valuations are cheaper and rental yields are higher.

My other favorite real estate platform for accredited investors is CrowdStreet. CrowdStreet focuses on individual commercial real estate projects in 18-hour cities such as Charleston and Memphis. With higher cap rates and potentially higher growth rates due to demographic shifts to lower-cost areas of the country, CrowdStreet is very interesting.

I’ve personally invested $810,000 in real estate crowdfunding to generate more diversified passive income. So far so good as my passive income hits roughly $300,000 a year. Real estate is the ultimate inflation.

Stay On Top Of Your Finances

The best way to grow your net worth is to track your net worth. I’ve been using Empower’s free financial tools and app to optimize my wealth since 2012. It is the best free money management tool on the web.

Link up all your financial accounts to analyze your wealth. Start by measuring your cash flow. Then x-ray your portfolio for excessive fees. The best feature is the retirement planner.

There’s no rewind button in life. Even if you have a valuable pension, it’s important to continue staying on top of your finances. Do your best to optimize the wealth you have now.

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Note: Pensions are most common in the following fields: military, government, education, gas and electric, insurance, and health services. Having a pension is likely winning the lottery. Enjoy it for the rest of your life! Most people are not so lucky. In a low-interest rate environment, a pension’s value has increased significantly. Calculate the value of your pension and make the best career decision possible. Don’t underestimate public service jobs and other jobs with pensions!

For more nuanced personal finance content, join 55,000+ and sign up for my free weekly newsletter. I’ve been helping people achieve financial freedom since 2009. How To Calculate The Value Of A Pension is a FS original post. Your pension is worth more than you think in this low interest rate environment.

Comments

1. And yet many people don’t seem to get this. I have an older friend with a pension (in addition to his private contribution pension) guaranteeing $20k from 60-death, he barely values it at all – no idea how good he has it compared to most people who will never get this type of pension again!

   Will forward this article to him – think he’ll be in for a surprise!

2. i’m going to have to weigh in here being one of those lucky ones that gets a pension. If someone has already commented on this and I missed it I apologize.

   In example 1 the police officer, many police and fire (at least in CA) get paid 3%. That is, 3% X # of years X salary and can retire by 50. That has changed a bit since there has been some pension reform but many can still retire under those conditions. That means in your first example, a police officer having worked 25 years at $90,000 being the top amount would get .75 X $90k which equals $67,500.
   Teachers are often lumped together with the pensions of police and fire (and CAlPers) which is unfair. Teachers are paid through CALSTRS (in CA). We are also paying currently 10.25% as a contribution into it.
   Teachers in CA get 2% at 60. You can retire earlier, if you have 30 years in. So in example 3, a teacher with 30 years in and a salary of $72,000 would get 60% (30 X .2) of $72k for a total of$43,000 a bit more than the $36,000 in your example. Age, of course, is a factor and if the teacher retired earlier then they are penalized and that 2% factor drops and can reduce the amount significantly.
   I think it’s great that you are writing an article on this, I’ve yet to see one on financial blogs regarding pensions and their values for the most part.
   I’ve given this a lot of thought and I use a much simpler formula:

   I use the standard 4% rule that is common in the financial world. For example what would it take in savings to give me a return of say $60,000 a year for the next 30 years? In this case, $1,5000,000 would be that amount. (1.5mill X 4 %= $60k a year). Therefore in this scenario the pension would be worth $1.5M.

   With that said I guess I’m technically a millionaire, (though I cannot touch the principal).

   Great subject, (much to the chagrin of many I know), but thanks for discussing it!

3. Retirement posts always terrify me.

   We will have a pretty decent pension and are currently maxing out a 401k (unfortunately, we wasted nearly 10 years only contributing 10%). However, we will still have to limit our retirement needs to 60% of our salary to make our money last until age 95.

   While we live under this threshold anyway, it seems pretty bleak for the average American. You have to save so much to have enough, and if polls are to believed, most people aren’t saving anything. I feel like I need to brace myself for…an impoverished generation of retirees? A bankrupt America trying to bridge the gap? Foreign overlords offering a New Deal?

   See? I’m hysterical. Happens every time.

4. My wife is a public school teacher with a pension. They pull 6% of her paycheck as her contribution to the pension fund. She would need to work until 55 to get reduced benefits and 60 to get full benefits. Full benefits would be worth around $43,000 annually and reduced benefits at about 15,000. It pays to put in another 5 years!

   $43,000 guaranteed (or at least close to guaranteed) annually would be awesome, but we’re planning on retiring well before then. She would retire today if I let her! The contributions she makes get credited with 4% interest annually. When we retire early, she’ll receive all her contributions plus the 4% compounded interest. Would much rather have that money to invest myself!

5. No pension for us here. All is left up to us to continually contribute to our 401k and IRAs. Interesting scenarios though, thanks for sharing.

6. Hi Sam —

   In the absence of a pension, Would you consider setting up a variable annuity a viable alternative? It would provide the steady, dependable stream of income.

   • If you are contributing after-tax dollars over the years to a variable annuity, even with the tax-free growth, aren’t you just taking gains that would have been capital gains over the years taxed at a lower rate and turning it into income that would be taxed at a higher rate? I’m not in sure what specific scenarios this would be better, but I’m sure there are some. This doesn’t sound like one though.

7. My husband was a police officer for 32 years and has an annual pension around $36,000. As an educator in NY state, I am eligible at 55 with 30 years of service to get my full pension. I have just over 5 years to go to start collecting! I currently have 27 years in but I am hoping to earn the last 3 years of credit teaching online (still through public high schools). It’s as close to “retiring” before retirement as I can get! Our highest 3 years of pay are used in determination of our “FAS” – final average salary. If I didn’t finish the 30 years – I would be penalized (significantly) or I could wait longer to start collecting. There are formulas that show exactly what that would look like on our state retirement system page. If I stayed working one more year – (2017-2018) – I’d earn a salary that would replace one of my 3 highest years – and it would likely up my pension by $4K a year. BUT – I’m trading a year of my life too…. and your posts make me want to retire and head to Hawaii and not worry about that $4K 🙂 Time to get to the Y to work out so I can be healthy and get that money back from NY state!

8. Both my parents are retired college professors (different schools) but both have pensions. My father got 50% pay with COLA and health insurance for the remainder of his life after 20 years of teaching. 20 years seemed like forever when he explained it to me in my teens. Now that I’ve more than that in my career, it doesn’t look that bad.

   My biggest fear is our schizophrenic government ruining my parents’ retirements by continuing the current ZIRP madness. Fortunately, neither pension is CalPERS, but California isn’t the only state facing an acute pension crisis. Should I have to support my parents and my children, we’re all going to lose.

9. I agree pensions are great if you can get one, but I have an issue with the somewhat negative portrayal of the 401k.

   It’s stated that maxing out a 401k for 33 years will only generate $33,900/year (in today’s dollars) for 20 years. However, that assumes a 0% rate of return after the initial 33 years, which is not realistic. Even a modest rate of return would result in significantly more income.

10. “Golden Handcuffs!”….staying in the same company for decades for pensions….

    We are fortunate to get pensions from our company. My wife age 51 was recently laid off after 30 years of service (YOS) and her pension will be 52K next year if she decides to collect.

    I am 52 and if I quit or get fired now then my pension at age 55 is 37K. If I reach 55 with 32 YOS then my pension would almost double to 71K. If I leave just ONE day before 55 then my pension would be about 50% less. Age 55 is a major milestone.

    Each year before age 65 there is a 3.6% reduction in our pensions so many people try to max out by working longer. Max pension is 66% of your avg 5 highest consecutive salaries within 10 ten years and years of service.

    Our min combined pension is 89K (52K+37K if I leave before 55) and max is 123K (52K+71K if I reach retirement at age 55). My pension will grow about 5K more each year after 55 BUT not for me. I have been providing 24×7 IT online support for the last 27 years and I had enough. I will retire at age 55.

    In 2009, we started buying 4-5% muni bonds in preparation for laid offs or in case we have to quit. Our bond portfolio will generate 87.3K in 2017 and 88.3K in 2018 & beyond tax free so we appreciate how much money it takes to generate our pensions.

    Adam

11. I am a teacher in Maryland, 18 years in the state system. 53 years old. I would love to retire after 20 years service, but each year before the age of 62 is subject to a 7% reduction. Once I get to 20 years I will be eligible for 75% health insurance coverage. In addition to my pension I have saved aggressively (have 1.1M invested and a paid off house) and know I should be fine, and like that I will have choices. I will “leave money on the table” for sure. Most certainly a case of the Golden Handcuffs. Looking at 59 as most likely. The hardest part for me is that for every year I will leave 2-3K on the table. Likely 8k a year for life, which I equate to a value of $200k with a 4% withdrawal rate. Most of my co-workers will be shocked when/if I retire early. They do not know about my investment portfolio though.

12. I will have a pension with New York State if I work another 20 years (when I will be about 55). Actually I also have a vested pension with the Feds but I was only there 3 years so I’m sure it will be pennies. In any case, the pension is a great thing but also a bit of a golden handcuff. I’ve been a little obsessed with retiring early but you really take a big penalty if you don’t put in the time. I kind of preferred my benefits as a federal government employee…pension was not as lucrative but there was a match to the TSP…and the TSP is awesome.

    • Hi Andrew,

      I’m in a similar state. A lot of my peers rely on the pension for everything and it freaks me out. On the other hand pension + deferred comp + house paid off AND income from blog/investments/real estate sounds like an easy win that many ignore by focusing on just more overtime cash.

13. I think you are overestimating the value of the pension. While using a simple divisor will tell you what you would have to have in order to get that monthly payment, if you had that much money in your personal account, when you die, it would go to your heirs. A pension (except in a few circumstances) would have no such flow of funds to your heirs when you die. So a better way (though not as simple) to calculate the value of your pension would be based on your life expectancy with the assumption that your account is going to 0 on the day you die. So at $50,000 a year, 3% return, with a life expectancy of 10 years, your pension is worth $440,000, while with 40 years of life left, the same pension would be worth $1.2 million. This is about 25% lower in the best case than your simple method. In any case, like you said, staying healthy and living long is the way to maximize the benefit.

14. I’ve known how fortunate I am to have a pension but never quantified it. It feels great to know that it’s worth over a million $$$! I work for a university and employees vest after 8 years of service. Annual benefits = average of five highest years’ earnings X (1.6% X number of years of service). I’ll either retire at 52 to receive full retirement benefits and work full time at my dream job, or, quit at 42 to receive reduced annual benefits but still working at my dream job. It would be even more awesome to hit FIRE before 42 then I won’t care about waiting until 62 to collect pension benefits!

15. Hi Sam,

    I used to be happily a part of a Big California city’s 3% at 50 pension plan. On the down side pay was mediocre, you needed 20 years to vest, and the politics were FIERCE (many officers were fired and got their jobs back through lawsuits. Not fun.)

    It was also a non reciprocal plan, so when I left for a smaller city I took a 2.7 % @ 57 (the new standard) plan (kicks in after 5 years). I received my pension contributions back plus interest and rolled it into an IRA.

    On the upside my new city pays me much better, is supportive, and wisely contributes the max to a segregated CalPERS account. I never realized this before but when choosing a city you are tying yourself to that city’s fate. Thanks to high property values, a port, and significant commercial companies, I feel sanguine.

    I left the military before being eligible for a pension there, but after three deployments as an LAV Scout I counted myself blessed to still have all my arms and legs (if not my sanity). Some juices aren’t worth the squeeze. My hats off to the heroes who persevered, but I could not.

16. I have worked for the city of San Diego for the past 20 years, I need 5 more to retire at 55. with 25 years of service –then I have the option of joining the drop program for 5 yrs.

    I would love to hear any opinion on this program? Does anyone out there have this program? Any input would be greatly appreciated…Kristina

    Dop program?What Is Deposited Into Your DROP Participation Account?

    Remember, your service retirement benefit is calculated at the time you enter DROP. During your participation
    in DROP, the following funds are deposited into your DROP Participation Account:

    SDCERS will deposit your monthly service retirement benefit into your DROP Account.

    You will contribute 3.05% of your pensionable salary each pay period.
    Your employer (plan sponsor) will contribute 3.05% of your pensionable salary in matching contributions.
    Annual COLA (Cost of Living Adjustment) increases to your monthly retirement benefit that occur while
    you are in DROP will be added to your DROP account.
    The 13th Check (supplemental benefit) will be deposited into your DROP account if you are eligible and
    if it is distributed; and
    Interest is credited to your DROP account each quarter, at a rate determined by the Board.

    Example of How A DROP Participation Account Accumulates:

    Member: Joe D. Member

    DROP Start Date: 6.30.2012
    DROP End Date: 6.29.2017
    Current Monthly Retirement Benefit $3,000
    Bi-Weekly Salary $2,000
    Note: Year Ending Account Balances do not include 13th Check
    Year
    Ending
    Annual
    Pension
    Annual 3.05%
    Member
    Contribution
    Annual 3.05%
    Employer
    Contribution
    Annual
    Interest
    Annual
    Interest
    Rate
    Year Ending
    Account Balance
    6.30.2013 $36,000 $1,586 $1,586 $375.00 1.90% $39,547
    6.30.2014 $36,720 $1,586 $1,586 $1,138 1.90% $80,577
    6.30.2015 $37,454 $1,586 $1,586 $1,931 1.90% $123,134
    6.30.2016 $38,203 $1,586 $1,586 $2,752 1.90% $167,262
    6.30.2017 $38,968 $1,586 $1,586 $3,604 1.90% $213,005

    • I would read about the DROP program in Dallas where their Police Officers are having some real issues:

      https://dfw.cbslocal.com/2016/12/08/dallas-police-fire-pension-board-ends-early-drop-payments/

      I am not sure if it is similar to San Diego’s plan, but it might help understand potential risks.

    • All the detectives at “Big City” PD (not too far from San Diego straight crowed about the glories of DROP. If you can get it and are planning on leaving anyway, go for it! Take the win.

      The department gets a contract on when you leave, gets to keep you a bit longer, and gives your retirement one last boost.

17. I have a pension in Denmark from working there for 5 years at a private company. It is a couple hundred bucks a year… just enough to be worth following up on in 30 years despite being a huge PITA to manage and report.

    I prefer their method of saving as public policy, but the US system of individual responsibility benefits me more personally.

18. Surprised by your calculations of 401k potential. For example, your 65 year old’s “low end estimate” would assume an average net loss for 43 years? (43 years * 18k would be 774k).

    I know that some years are good some years are bad but hopefully we can count on more years than not being good in the 40-45 years of a career? If not, i’m in trouble.

    • As an anecdote, I have 16x years of max 401k contribution and a balance of 670k.

      I’ve had some good and some bad investments in this fund… wouldn’t say the balance is on the high end or low end. I.e., I agree that the table is a bit pessimistic on the high end.

19. Hi Sam,

    My job has the option to select between a pension or retirement plan. The main difference was that the pension vests after 10 years of service and the retirement plan vests immediately. I decided to choose the retirement plan because what if I don’t want to work here before the 10 years is up? Now I’m wondering if this is a wise choice (been here over 3 years so far). People these days don’t stay at a company for so long, maybe that’s why they structured it this way.

    • I think that is a wise move, 10 years is quite a while and 7 is still a way to go. If you love the place and can imagine being there for 10 more as well as it surviving the rapidly changing world until you retire, then maybe you could negotiate choosing the pension.

20. Did you catch this video? Very relevant to this d8scussion.

    https://finance.yahoo.com/video/meet-retirees-calpers-pension-crisis-150939359.html

21. Sometimes I wonder if I should have suffered and stayed at my government job just for the pension. Nah…wouldn’t have been worth it. While I have no pension now, I very much enjoy the work that I do. Looks like I will be fully funding my retirement!

22. I am fortunate to have a pension. I work for the County of Santa Clara. My biggest concern is that Calpers may be underfunded by the time I retire and may receive only 70% of it.

    I am 38. If I retire at 55, I am looking at an annual payout of approximately 64K a year.

    As a precaution, I am maxing out my 457 retirement account. Balance is around 294k. I also have a Roth 401k valued about 110k and a brokerage account with stocks at 260k.

    As in life, there are always trade offs. While you are able to retire early, I have to slave away at a government agency for the next 17 years. If I were to leave my job today, I would only receive 28k per year at the age of 55.

    My mortgage bill is around 2400 a month so I definitely need to keep my job for now. Also have to pay child care for 2 small children…

    I guess 55 is early to some, but that is the current track I am on.

    • Will:

      You can use your 457 as an early retirement funding source. 457’s do not have the “early withdrawal penalty” that 401ks have if you access it before 59 and 1/2. If you retire from your job, you can access it. While you still have to pay ordinary income tax on the distributions, that can be mitigated by moving to a lower tax state.

      At least…this is my plan 🙂

      • Yes, provisions of 72T.

        However, you are required to stay in that plan and take required distributions.

        Won’t work if you wanted to roll 457 into a self directed Ira in which you could buy individual stocks.

        • That’s not correct. You can withdraw from a 457 plan without using a 72 t once you sever employment. 457 plans are not qualified retirement plans. They are deferred compensation accounts. There is no penalty for early withdrawal. You pay the income tax on the withdrawals.

          Government agency 457 plans are superior to private 457 plans. The assets are held in trust for the employee and are not assets of the agency in a bankruptcy. That is not true for private 457 plans.

23. The company I work for shut off new pension contributions this year in favor of increasing 401k match from 4-6 percent. A forced cash out can’t be far behind. It was earning 11 percent of monthly earnings a year, so it’s worth something like 500 a month. Not huge but it will be a nice supplement if I’m wrong about the lump sum. My last company had a pension in the form of defined contribution, which I’ve since converted to a Roth. Your right it’s becoming harder to find in the public sector.

24. Hi Sam –

    It definitely seems if you were under the CSRS agreement in the government that it was much more lucrative that the FERS agreement today.

    Also a quick question for you.

    I was curious why you used the 3% for the government worker versus 2.55% for both the teacher and police officer?

25. Great post, but I believe anyone under 45 should not count on their pension actually being paid (at least a public pension).

    I am in my mid-30s and already have 12 years in the CalPERS system. I would be set up if I ride it out for the next 20 years. However, CalPERS investments continue to under-perform and thus, they keep raising the contribution rates on public agencies (and thus, taxpayers/ratepayers). Many local governments in California face staggering pension liabilities. They will never be able to pay them off because there would be a revolt by the taxpayers/ratepayers.

    My solution: employees should only count on their individual contributions to be available. I only count my contributions in my net worth calculations. For most plans, you contribute 7% of your pay to your pension. These contributions grow by 6% each year (CalPERS assumed return). At the end of your service, you can roll your contributions to an IRA. The downside of course is that you forfeit the “pension.” However, as I said, I don’t believe it will be available anyway.

    Seems like the best option to me. Plus, it forces employees to build other retirement savings (the 457 – which is great, Roth IRAs, etc.) and side-businesses.

    • In this case getting out would be the best. Unfortunately it will reduce the funds CalPERS has and may snowball into a Dallas Police situation.

26. “Percentage probability of pension being paid until death: 95%”

    I don’t know about that part, Sam. The rest of the article is solid.

    Unfunded pension liabilities by states are climbing up to $1.75 trillion in 2017, according to Moody’s. They’re not putting enough money in, and they’re expecting an aggressive rate of return, so the gap keeps widening.

    • I think it’s a fair certainty percentage for California. The vast majority of cities pay and are good for their pension funds. The employee contribution used to be anywhere from 0-9%. Now CalPERS demands 12-14.5% and has lowered the pension percentage and raised the payout day. Even the cities that have declared bankruptcy (Vallejo /San Jose) are still paying it out, but it was a consideration for a while.

27. If I work until 2025, and don’t start the pension until 2055, I will get $1228/mo or $14,736 per year. Not great, but not terrible either. It’s enough to boost me up should my stash fall a bit short after 30 years of living off of it.

28. Is it better to take a lump sum (if available) than to take the monthly pension, especially a pension with no cost of living adjustments?

    • That depends, when you receive the lump sum are you likely to manage that large sum of money or will you then decide you want to convert it into an annuity and receive monthly payments? If you’re just going to take the lump sum and then convert it back into an annuity, it’s likely better to stick with your original pension benefit.

      A good article: https://www.cbsnews.com/news/pension-elections-beware-crafty-insurance-agents/

      A good excerpt from the article: “While it’s possible there’s an insurance policy out there that could result in higher survivor income for the spouse, I have yet to see one. And that shouldn’t surprise you when you think about it. Pension plans and insurance policies are both designed by actuaries using the same principles regarding mortality rates and interest rates. Insurance companies don’t have any special insight that’s not available to pension plans. But insurance companies need to build margins for profits, administrative expenses, and commissions to insurance agents into their premium rates, while pension plans are operated “at cost”. Most employers actually spend money to operate their pension plans as a benefit to their employees; their pension plans certainly aren’t a source of profits. So it only makes sense that employer-sponsored pension plans will usually be able to offer a more favorable deal than a commercial insurance policy.”

29. great post, also pensions will continue to pay a surviving spouse and you often can choose the payout formula at retirement if they outlive you (can take a little less today for a higher payout for them if they outlive you). You often can also set aside an amount for a dependent who outlives you if so desired.

    A relative has retired w/a 2.5 @62, he also can collect social security on top of it. A fire fighter friend has a 3 at 50 but cannot collect social security ever. This isn’t bad when you are making 200k+ w/ OT in California on top of a great pension down the road.

    Also many pensioners get life time health care for them and even a spouse.

    I also think many teachers in California make far more 66k, transparentcalifornia.com is a great read for public employees compensation.

    • OT for firefighters in California is not calculated as part of their retirement package. The few firefighters I know that make over $200k, work an average of 6 to 8 more shifts each month (yes 24 hours for each shift) year round. Firefighters spend a minimum of 1/3 of their life at work, so the extra shifts whether by choice or force (yes, we had mandatory force backs rather frequently), can really place a heavy burden on a family.

30. Many of the few remaining private companies that offer pensions do not have an inflation adjuster so that they can better forecast and manage pension costs.

    I have a pension. The monthly payout is calculated as years of service x average monthly salary for final 36 months of employment x 1.5%. Vesting occurs at 55 years of age or 5 years of employment; whichever comes first. Full benefits payable at age 65. Early benefits available between ages 55 & 65 based on years of service.

    • If your self employed you can start your own defined benefit plan. Annual deductions are much more age weighted than a 401k plan. I am 54. (STONE AGE) Myou plan allows up to 200k per year. If you like it so much DIY!!

    • What expected life span was used in pension network calculation?