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%.

401k by age savings potential guide - a pension is more valuable now

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.

Less than 15% of the American workforce have a pension (defined benefit) in 2017 - how to calculate the value of a pension
The difference between defined benefit and defined contribution has most certainly widened in 2019

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.

How to calculate the value of a pension

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.

How to calculate the value of your pension chart

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

Percentage of households by annual pension income

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.

Do you have a pension? (does not include social security)

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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. Fundrise manages over $3.3 billion from over 400,000 investors.

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 $954,000 total 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.

private real estate investment dashboard

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.

Planning for retirement when paying for private grade school
Personal Capital sample retirement planner calculator. Are you on track? Click to find out.

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Last Word On Pensions

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. Although pension payouts are declining, they are still quite valuable. Don't underestimate public service jobs and other jobs with pensions!

For more nuanced personal finance content, join 65,000+ others 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.

222 thoughts on “How Do I Calculate The Value Of A Pension?”

  1. Sam,
    I am a regular reader and get your Sunday’s newsletter. I do not understand why you utilize 2.55% as your denominator for the calculation of the net worth of a pension. I worked part-time at the VA as part of a prior academic medicine appointment, and accumulated about 15 yrs of service in FERS, which gave me a calculated pension of about $20,400. I also contributed to their TSP (401K equivalent). I have seen some calculators valuing pensions using 6.67%, partly because they incorporated actuarial data into the denominator and used a historically higher bond return.

  2. Example #2 is not realistic and should be edited as it’s not the case for the vast majority of people in the Foreign Service, specialists and generalists, across all agencies. Most people in the Foreign Service face Time in Class (TIC) as well as Time in Service (TIS). Only very few specialist categories are exempt from both TIC and TIS. Almost everyone is out by age 65 as we are mandatorily retired for age, with very few exceptions. We cannot join before age 18 and time working as an EFM in the Overseas Seasonal Hire Program (ages 16 to 21) does not count towards thee Service Computation Date. The vast majority join the FS after age 22. While it’s technically possible for someone to join the FS at age 18 and retire at age 65, the chance of them hitting a TIC or TIS or just wanting to retire after age 50 or joining the FS after age 22 is very, very high–leaving almost no one left in the example you describe above. Therefore, almost no one would have joined the Foreign Service in 1986 and still be in the FS as of 2023. Just ask your parents for a more realistic FS annuity example, or ask one of your many readers who are FS for a more realistic example.

    1. True, but I mention how the Foreign Service pension has declined. And people are free to use a lower probability rate or higher discount rate to value their pension as a result.

      If you’d like to share an income example based on numbers of years served and the resulting pension amount, I’d love to hear it. thanks

      1. Pension calculations have changed considerably since your parents retired.
        30 years would only get you 40% of your high three average. 1.7% for the first 20, 1% for each additional year. However, one does collect social security unlike your parents which makes up some of the difference. The old system was much more beneficial.

  3. Financial Samurai, to continue the feel-good factor of placing a value on a pension into retirement, would you run your calculation each year, say, following an indexed increase in the monthly pension, or would you suggest keeping the pension value as it was on the day the pension commenced? Thanks

  4. Since I’m retired military (enlisted), I didn’t have a 401K or TSP to contribute to. I’ve been receiving a military pension for 15 years (avg $30K/yr). To catch up, I’ve invested every pension dollar in stock index funds. I’ve also contributed to my company’s 401K and a taxable account. This approach has worked wonders. My financial situation is great. I’m 56 and hopefully can continue to collect my pension for 30+ years. Fingers crossed.

  5. “… but in 33 years, $1,800,000 will buy just $678,000 worth of goods and services today using a 3% annual inflation rate.”

    Can you explain how you got this? (1,800,000/678,000)^(1/20)=1.05, or 5%.

    I’m doing a quick annuity factor calculation, and at 4% interest and 7% inflation it looks like a present value of $1,800,000 will fund a benefit of $65,878 for 20 years. Did you get $33,900 assuming 0% interest and 7.5% inflation?

  6. Just used this to help answer so real questions from real people who are contemplating retirement. Thanks for sharing the ideas, Sam.

    Apologies if you answered somewhere, but I didn’t see it…

    How exactly is the “rate of return divisor” calculated? e.g. where does 0.0255 come from?


  7. Greg Kempthorn

    I am 55 years old. I plan on retiring in 18 months. My pension will be $64,500 per year with no COLA. I am very healthy and would project living to 90. How do I figure the value of my pension to include in net worth? I am estimating approximately 33 years of drawing this pension


  8. We got 4 pensions in various California pensions (UC, 2 Calpers, county level). Never thought to calculate the true value of these. Mind boggling they would be worth this much. Let me add to this that in public service, we don’t pay for much work expenses at all as it’s extremely low maintenance and don’t need to join the clubs to drum up business – unless you’re a politician of course. I missed calpers pepra deadline by like 2 months and joined public service spring 2013… ugh! Would have been classic member and getting 100k more a year then what’s now permitted re salary/cap limits. If I only knew at age 33 when I joined public service. My only regret.

    My husband is 6 yrs older than me, so I’d like to retire at 62 at 2% (in 2042) but 67 at 2.5% final comp cap limit would be much more lucrative for me (earning 3.5k more a month post taxes). We will have plenty in deferred compensation I think by that time (62 and 68) projecting 10 mil in our 4 deferred compensation and Roth IRAs wouldn’t have to ever touch. Debating still on age to retire (62 v. 67)… can’t buy time that’s for sure and afraid I’ll miss golden years w hubby if I don’t retire at 62. What do you think?

    1. johhny rotten

      I am not a financial guru but am early retired but my wife is not. She really enjoys (maybe even loves) what she does. She plans on working for another 20 to 30 years which she also will be paying off her part of the mortgage. I really wish she would retire earlier than later because I except the cost of travel will increase significantly for us when we get older- ie first class tickets and hotels instead of economy premium currently. The increase will just be to travel more comfortably the older I (we) get.

      If I read it right, you will have $10 million you won’t even need to touch by 62 why you retire. I like to golf, ski, travel and hike. I am going to assume every activity gets more difficult the older you are- recovery wise. If your husband likes to watch netflixs and order take out and is a homebody (nothing inherently wrong with that) than you can pull off working late. If you want to travel and do activities, retire earlier. The one regret I have that will not be fulfilled (maybe) is an around the world cruise that we can afford financially but she cannot (or chooses not to) afford is the year to cruise the world. By the time we have the time, I will be 80.
      Take the time if you feel you have enough money. But only you can decide. If I had $10 million in the bank, I would definitely try to sway my wife to take a year off from her job to do that travel anytime before 80.

  9. Your foreign service example is only valid for those who started prior to 1986. I started in 1988 and retired in 2014. Under the current system you receive 1.7 percent for the first 20 years and 1 percent for each additional year. So 30 years only gets you 44 percent. Obviously 44 percent of 120k is much less than 85k as in your example. Under the new system one also gets social security and a 401k match but I would have much preferred the older system that your father retired under.

      1. Douglas Barnett

        I couldn’t find a way to add a reply other than to reply to just one of your comments. You probably are aware that Forbes has published through one of its columnists a pension valuation spreadsheet. It includes the value of a pension according to existing interest rates as well as the value according to “regulations”. If you can’t find it, I would be happy to send you, Sam, the version i downloaded last year. I am not able to send it to every reader but you may want to post it.

    1. Darren Palmore

      I have a cash balance pension plan. I worked 35 years , average salary 80,000, 4%

      I am 55 years old. I am a black male. what is the value of my pension?

  10. Pensions pay a defined payment until your death and may or may not have a death benefit for your spouse. I had a co-worker that died 3 months after retiring, his $4,000 monthly pension was paid for 3 months. Theoretical value of that at your rates would be about $2 million, but it paid him $12,000.

    The way to value a pension is what it would cost to buy it. They are available for sale all over the place, so are high commission terrible products, but you can buy no commission Immediate Income annuities with our without death benefits for you or your spouse.

    As an example I looked at what income I could generate by purchasing a immediate income annuity with no death benefit and it pays about 5.4% With Minimal death benefit it pays 5.3%. Full benefit pays 4.5%.

    Value will depend on age and life expectance, they above are for 63 year old male retiree. Older retirees would get higher rate because of lower life expectancy.

    My suggestion would be to value pensions using a 5% rate and could go higher for elder readers.

    This is the truest apples to apples comparison of a pension (which most often leaves nothing when you die).

  11. I have a state pension waiting for me that is worth 58.8% in March of 2022. In a year and 3 months(my date is March) my best 3 years at this point will be about $118k. If I wait, my percentage goes up to 63.8% and then to 80% the following year, which will max me out. So, I’m looking at around $70k/year if I retire in March of 2022. I would like to retire. I’ve had enough. From what I’ve read in your article, it looks like I should be ok. The only debt I have is a new truck that is into its third year of a 60 month plan. No credit card debt and just paid my last mortgage payment. Wife has a good 401k as well. I’m burned out and want to retire. My question is this: Is it foolish Not to wait and get to 80%? One other question is in regard to your article. It’s says towards the end of the article that you should hang onto your cash cow as long as you can. What exactly are you talking about in regards to this?

    1. Arbas Dimetree


      When you say if you “wait” you pension goes up by 5% and then jumps to 80% the following year. How long would you have to “wait” which I assume means continue working or are you saying delaying drawing on the pension?

      The 80% vs 58.8% is really significant and, depending on how much longer you would have to work, would probably be worth it.

  12. Safe Withdrawal Rate is 4%, based on your investment keeping up with inflation. As Greg Lee says (sept 18, 2019) multiple income by 25 to get principle amount. But without a COLA you miss out on keeping up with inflation. With inflation at 2% and added tax at 2%. The factor is more like 1/6% (16.7x) or 1/8% (12.5X).

    So for every $40K passive income (I like $40K as it translates to $1M):
    in a brokerage: $40K*25=$1,000,000
    in a pension $40k*16.7 = $666,667
    in a pension $40k*12.5 = $500,000

  13. Hi Sam what is your view on federal veterans disability payments in terms of value and stability compared to pensions? The payer is the federal government, and if the ratings are static there is no reexaminations, and after 20 years it cannot be taken away under any circumstances. Would it be wise to factor it into any savings calculations? Thanks

    1. Chris – the value of a VA disability payment should be considered the same as a pension, although there is no survivor’s benefit (in most cases). If you’re getting 100% VA disability payment, it is ~$40k/year (depending on number of dependents). It is tax free, so it’s value is even more than a regular employer pension (which are all taxed at the federal rate, and state rate in some states).

  14. Emma Lauriston

    I am wondering if a health benefit associated with a pension adds to the value of that pension. IE: Is a health benefit part of a QDRO? I am possibly facing divorce and both of us have pensions. His is bigger than mine by about $700; mine has the health benefit. I am in California – pensions are CalPERS.
    I am just trying to put a good finance package/offer together for a divorce that does not involve attorneys or actually having to file a QDRO since we both have our own pensions.

    1. Great post. Not a lot of posts on this topic because the US has shat on the working class!

      All i need is enough to cover all housing and living expenses. I’ll get a “low stress” leadership job for the benefits and pay.

  15. The correct way is to calculate the net present value, but you have to make an assumption of the number of years the pension will pay out.

      1. The bottom line is that you cannot really know the true value of any pension because you do not know how long you will live. Any method used is, at best, an estimate. I do believe that your method is more accurate for those who live beyond their actuarially determined age of death.

  16. This formula greatly exaggerates the value of a pension. It only calculates a principal amount needed to generate a monthly interest payment while maintaining principal. For that to be true, the retiree would still have that amount in his estate at death.

    A better way to calculate the value of a pension is to use the amount of payments multiplied by the number of payments based on life expectancy. This will be much less than this rosy picture painted here (but still very nice).

    What I would really like to see is someone calculate the value of the Federal Employee Health Benefit for retirees after age 55.

    1. This post needs more attention.

      1) The value of the pension is actually worth less because you don’t get to keep the principal capital being used to generate your yearly pension – the annual pension payments stop when you die. With money invested in defined contributions for example, you get to keep (or pass on) the principal capital that perpetually generate the yearly income after you die. You have the option and access to the $X million that’s generating your passive yearly returns and YOLO’ing the initial capital on hookers and booze whenever you want.

      2) Pension-based jobs are significantly underpaid especially in the public sector. I’ve made six figures with a pension at public sector position (IT related) but my equivalent private sector colleagues average about 20-30% more in salary, and probably double (100%) if I were to move down south. When deciding between a public/private sector job, you could pick the private sector job (which has no pension) and invest the increased amount of salary in the S&P500 which would likely generate a greater return than the pension offered at the public sector. The man difference is the risk of job loss and work/life balance at the private sector job is probably worse

      1. “1) The value of the pension is actually worth less because you don’t get to keep the principal capital”

        As you point out, you can pass on capital in a portfolio, however, from your personal perspective, on death, you don’t get to keep the capital wherever it is, i.e. you can’t take it with you!

        1. Also, for most government pensions, you CAN pass the pension on to a beneficiary. This is not being calculated in. As you said, whether you go private or public, you can’t take it with you when you die. However, you do have the option of passing your pension on to a loved one. Some options allow you to pass it on to a beneficiary for the rest of their lives as well (for a reduced monthly pension for the pensioner).

  17. Something worth highlighting in and among those receiving pensions where (and this is the critical point) the retiree did NOT contribute to Social Security during the years they worked toward said pension; yet DOES accumulate either in post-retirement or otherwise, enough Social Security Quarters to obtain Social Security benefits. They will become subject to the dreaded “Windfall Elimination Provision” or WEP for short. This affects many (but not all) teachers, law enforcement officers, State employees and those under the older CSRS Federal retirement system. In other words, if a pension comes from one of the above sources yet no FICA taxes were paid during those earning years…. then sadly, the retiree will most likely be hit with the WEP. Many a person planning for their retirement ASSUMED that the information gleaned from their SS projected benefits review is accurate and cranks those numbers into their overall retirement financial health formula. But does not realize that SS factors those “lost years” i.e. Zero earnings years right along with actual FICA based earnings years. The retiree becomes shocked later when they find out that their actual SS benefit gets cut about 40 to 50 percent! Read ALL the verbiage on your SS projected benefits statement and this fact will reveal itself. HR resources often failed to realize this part of the SS law which began around 1983 and did not educate their employees accordingly. Even today, one can read tales of misery and woe regarding the surprise WEP penalty and its evil twin the GPO (Government Pension Offset) That’s why sites like the Financial Samurai here are so helpful in cutting through the government mumbo-jumbo so that people can make informed decisions regarding their financial future and financial security.

    1. As a California Teacher for over 33 years, I can NOT collect any Social Security worth mentioning. Also, If my husband dies I cannot receive any of his Social Security even though he has paid in full. I almost feel I have to subtract what I could have received in Social Security and then recalculate the benefits of 84,000 a year. Not complaining. I will be able to retire at 60 as I have planned instead of 67. Also, my health insurance is paid for my husband and myself until 65. it has been a good and meaningful life. No regrets.

  18. Kevin Hanes

    Who the hell are you to say “Not bad for someone who made a decent, but unspectacular $90,000 year for the last four years of his career”.

    The average salary for someone 55-64 is $51.714 so I think $90,000 a year is a damn good salary.

      1. There is an easier way of valuing a pension with a COLA. Multiply the annual pension amount by 25. This gives the amount of the pension portfolio which would be required to give this payout according to the 4% rule.

  19. I am in a quandary about what I should do. If I work one more year my pension goes up 500.00/month. Pensions payments are increased each year with a COLA.
    I have a company who really would like me to work for them. How much money would they need to give me to make me “whole” as it relates to the lost 500.00 going forward. I expect to live approximately 35 more years.

    1. This might help as a rough metric… If you use 5% Discounted cash flow, each $100 a month is about $18000 of asset value.

    2. Thank you for such an informative article. I just needed some advice concerning my situation. I also am vested into a pension after almost 19 years of service as a public school teacher. I would like to however transition to something else next year. My current salary is $107,000. If I stay and work 30 years, I would earn over $100,000 annually starting at age 55. However if I leave at 2O years, that number becomes $34,000 annually until death. In addition, I have saved almost $166,000 in a voluntary tax deferred annuity plan (403 b) which will remain until I retire from the system. I guess am a bit anxious about what my prospects are re retirement if I decide to leave in a year. Any advice would be helpful. Thank you.

      1. I faced a similar situation over the last 6 or 7 years. I decided to wait until 30 years (fully eligible) to make a change.
        If you do the math you’ll likely see that whatever raise you get you’ll have to save it all and perhaps more if you leave to break even.
        Part of my decision was based on happiness studies that show people who retire with a substantial pension are happier AND many of my friends who left state service early lament how much they wish they had a stayed.
        One thought is to find a different position that is still covered by your current pension system.

      2. Arbas Dimetree

        That is a no brainer…stay another 11 years and collect the $100K per year pension and continue to contribute to your 403(b). The difference between 34K and 100K is huge and will not be earned anywhere else in 11 years.

  20. Good morning –
    Im hoping that someone is moderating this blog and hope to get some insight on a pension topic.
    I have a pensions through CALPERS and have contributed to the pension for a period of roughly 21 years. Through the years I have been a part of many different pension formulas, most are
    2-3% at 50-55 years old and are based on a single highest annual salary; and recently I was placed into the PEPRA (Public Employees Pension Reform Act) classification with a formula of 2.7%@57 years old based on a 3 year average salary.
    My question is this, I am in the midst of making a decision to take a job with a large company at $122k per year including quarterly performance and company bonuses. I would be starting a 401K which is matched at .75 to every dollar pre and post tax up to a max of 8% salary.
    My concern is whether I am better off to state on the new pension formula for the next 12.5 years or contribute to the 401K for that period.
    Considering Ive already earned close to 43% of my highest annual salary (98k) I estimate my monthly pension payments (if deferred, until 50) to be approximately $4700/month.
    Thanks for any insight you can provide

    1. You are better off staying with the state. Nothing is guaranteed in a 401k, also you have to consider the health care benefits in retirement that are usually part of public sector pensions. For the most part they do not exist in private sector.

    2. I’m a retired Florida pensioner. For every guy that left the pension early (in other words could draw there pension at the earliest) and seem happy I see three more that said wow I should’ve stayed and maxed out before leaving.

  21. In my opinion Pension should be treated as RMD from 401(k) with 0 balance at the end of average life expectancy.
    If I have 1 mil @6% in my 457 and make RMDs after 70, then I will get 1 million-dollar after taxes(28%) inflation adjusted(3%) distributions at the tender age of 103 and my son will get inflation adjusted inheritance about 250 thousand( I did my own math).
    If I have a pension of the same amount as a RMD then after my death at the age of 103 my son will get nothing. If I kick the bucket at the age of 83- my son still will get nothing.

  22. Allan Marcus

    Should this be a present value calculation? Simply deciding the t-bill rate by the annual assumes the person will get to keep the full value of the pension at the end his/her life. A PV is the more accepted way to calculate the value of an annuity.

  23. David J Therkelsen

    Most private pensions are regulated, and backed up, by Pension Benefits Guarantee Corporation. Currently they are protected up to a monthly maximum of about $5,400 (and few pension recipients receive more than that amount). So if you are in a PBGC plan, I don’t see why, in valuing your pension, you would need to factor in the possibility of the company failing – you would still receive your monthly benefit, from PBGC. (Of course, some people worry about PBGC’s own financial health, so that might justify a small cautionary discount, but nothing like 25 or 30 percent.)

    1. If my memory is correct, I don’t believe that your information is wrong. After the last crash, when Detroit was struggling, the Obama administration changed the rules. Companies can claim distress and reduce pension benefits – even to those already retired. On top of that, these companies DO NOT have to bring pension payments back up once their firm has recovered. There are no guarantee’s when the government is involved.

      1. David J. Therkelsen

        I stand by my statement. No Obama “rule changes” changed the fact that most private sector pensions are backed by PBGC, and companies cannot unilaterally reduce benefits. Only exception is multi-employer pensions, who were given the right to reduce benefits in an act of Congress in, I believe, 2015.

  24. Can someone explain to me the role of interest in a pension calculation? I was with a company for 7 years, and luckily I got in the year before they stopped providing a pension. My benefits website calculates I have a monthly pension of $609 starting at age 65, with a (current) interest rate of 3.46%. Are my monthly payments growing at 3.46% annually? If so, what is the value of my monthly payment at 65? I regularly get contacted by the company to cash out my pension early, but I don’t think this would be the most beneficial for me (Assuming I live long enough to enjoy the monthly payments…). Thank you!

    1. The interest rate is used in calculating the lump sum you’d get if you or your beneficiaries applied for a “return of contributions” instead of getting a monthly check during retirement. It’s not related to your monthly pension amount. Requesting a return of contributions can have serious tax consequences, including penalties for early withdrawal, unless you are very careful about how you handle it.

  25. I am lucky enough to work for a local government agency and will be able to retire around 58 years. I would have worked about 35 years here by the time I retire. The pension is years workedx2xfinal avg salary for last 3 years. I expect to retire with an income of around $225k annually which would give me $157,500 in pension income a year. They give us the option to take a little less in pension payouts in order to cover both me and my spouse for both of our lifetimes. So let’s say I die first, my spouse will continue to receive my pension until he dies. Instead of getting $157,500, we may end up with $140-$145,000 annually. I think it is worth it to get a little less in order to ensure that we are both covered. I’m also 5 years older than my spouse.

    1. Kate, using the information that you provided for a local government agency, something appears awry (or the people that I know made extremely bad life choices in working for the federal government rather than a local government).

      Using the federal government’s Civil Service Retirement System (CSRS), the system that does not include any Defined Contribution Plan, a 35-year-serving federal employee — in order to receive $157,500 in annual pension — would need to be making approximately $237,000 in annual salary while actively working for the federal government. The federal government “caps” the active duty pay the most senior executives (akin to a military four-star-general) are able to receive annually at $192,300.

      I am not writing to pry into your personal financial planning; but I can say that the formula that you presented [years worked] X 2 X [most-recent-three-years-average salary] looks extremely similar to the federal government’s CSRS calculation, except that the “2” that you state is “.02” in the federal formula. [“Avg. High-3” X 2% X [years served]]. The first ten years of total service actually receive an average multiplier of 1.625%, instead of the 2% as stated (it kicks in at 2% for all service above ten years).

      1. I don’t know her situation but that does sound about right. 2% multiplier times number of years of service in her case is 70%. In Florida the multiplier can be even higher which is why so many people stay especially if you are in “high risk”. Some municipalities have as high as a 3 1/2% multiplier. Many police officers are leaving with 90% their salary.

  26. Great discussion! I have a CAPERS pension after 32 years in the system. I bought 5.7 years of “air time” under a program that no longer exists. I get COLA and health benefits at group rates.
    I have rental income and a small amount of savings that’s invested. A small mortgage.
    I figure I gross around 60k year, more or less.
    While I’m not hurting, I would like to pay a little more attention to plumping up my investments to cover inflation down the road.
    So I find the current market volatility an opportunity to do that in the next 10 years.
    Since I left at 61, I think I will hold off collecting SSA till I’m 68 to make up for not working till full retirement age.
    Thanks, all of you for reminding me how fortunate I really am.
    For those of you wondering if sticking it out is worth it, I can say it was totally worth it. Just stop thinking about the years and just let time pass. And use your vacation when you can and have a little fun! Will make the time pass more quickly.
    Wish I could say I maxed out my 401k, but I did have a lot of high adventures financed by a so called golden handcuff job.
    Life did not pass me by!

  27. I need to calculate the value of a pension for divorce, sadly.

    How do I go about getting an equitable valuation -does all the above advice apply?

    On my 401k record keeper my company has a section for Pension (not part of 401k)…In this section you get a statement like “$ per month paid at 65 ~ $3840.89 / month”.

    Any advice is appreciated…just trying to be fair to my spouse.

  28. Using my private sector company’s pension calculator in 20 years I’ll have an annuity of about $5500/month or a lump sum of a little less the $1 million. That’s 20 years away though so won’t that be about $2250/month or $500,000 lump sum in future inflation adjusted dollars?

    1. Using a rough idea of 3% inflation (as the samurai does), that’s about right: $500K in today’s dollars. The purchasing power of the USD would have been approximately cut in half by then.

  29. Alberto Ortiz

    Thank you for this posting! We struggled with assigning a value to our pension and social security as part of our Networth so we only accounted for the monthly income.

    We also have CA muni bonds at 5% tax free not due until late 2020s. Very happy about those so far and can be treated the same way.

    Thank you for the message of hope on this one.

  30. How do you calculate the value of a pension when you have to contribute to it? For example, at a particular institution in my state there is a mandatory 8% employee contribution and the payout calculator is about the number of years worked x 2.5%. How would you compare the value of this pension vs working somewhere else and taking that 8% and investing in it yourself?

    1. I don’t have an answer, but that seems great! I contribute 10.1% and payout is yrs of service x 1.9% x 5 yr avg. with rule of 85. I found this site to figure out the same thing. Would I be better off just stashing away the 10.1% in a 401k for 25 yrs?.?

      1. Wealth Vision CPA

        A couple of years ago, I put together a comparison of a pension v. 401k to see which would be more favorable in retirement. I wish there was a way to attach an Excel file to a post here (let me know if there is and I will be happy to include it), but it goes something like this:

        1) Put in your salary for each working year with the contributions you made (EE), as well as an average of what the employer’s (ER) contributions would be to the plan (this is an actuarially determined rate that changes slightly from year to year, but you can get an idea of what the range is by looking at the notes to the financial statements for the employer).
        2) Compound the EE and ER contributions over your years worked. I use an 8% rate of return in my example. This will leave you with an estimated balance of how much money you would have at the time you retire.
        3) Take the defined benefit from the pension plan (calculated by taking average final compensation x retirement factor x number of years worked) and divide it by the estimated balance from step 2. This will give you a breakeven return, meaning the rate of return that the 401k plan would need to generate to produce the same amount of income as the defined benefit from the pension.

        As a reference point, here are the factors I use in my example and how the numbers come out:

        EE contributions 6%
        ER contributions 6%
        Retirement factor 1.85%
        # of years worked 30
        Breakeven return 6.57%

        Additional notes:

        1) I used a very basic salary that was smoothed over the working years to provide a true comparison of the plans. If there were any abnormalities, such as pension spiking, then the results could look significantly different.
        2) If the 401k could generate a 6.57% return indefinitely, then it would be the more favorable option since you own and control the assets and can pass on to heirs.
        3) If the 401k could generate 4%, then it would last for about 24 years (29 years at 5%) if living off the same amount as the defined benefit from the pension plan every year.
        4) Since pensions are now mostly only available with government employers that generally pay less, if you could make more with a private employer then you could contribute more to the 401k (although some might argue that an increased salary from a private employer would need to pay for benefits that would have otherwise been covered by the government employer).

      2. Not sure if your employer matches the 10.1% or if your pension is funded totally by the participants; usually the employer (in defined benefit situations) pays more than the employee so if that is the case you probably need to consider that as well. Just a thought and I could be completely wrong.

  31. Just wanted to comment on your Foreign Service Officer #2 example. That may have been applicable with the Federal old retirement plan (CSRS), but it is no longer a reality for the majority of Federal Employees (to include foreign service officers).

    The new retirement calculation for Federal (FERS) employees is 1.0% x number of years x high 3 years of salary. For example, if one made $100,000 per year (their last 3 years) and worked for 20 years, their pension would be $20,000 before taxes. If an employee retires at age 62 or higher, that 1.0% rises up to 1.1%.

    A pension is nice, but the $85,000 in your example is so far off base from reality I thought I should correct.

    1. Not correct: the amount is 1.7% x high three average for the first 20 years of service, then 1% for each year after that. So retiring at 30 years is 34% + 10% or 44% of your high three average. Still pretty good.

      1. Paul had it correct for the example that he provided; he gave an example of a federal foreign service officer (FSO), retiring under the FERS system.

        For Ben, he gave a correct calculation that only applies to a very select few specialty categories in the federal government, and enumerated by the Office of Personnel Management (OPM): Air Traffic Controllers, Firefighters, Law Enforcement Officers, Capitol Police, Supreme Court Police, or Nuclear Materials Couriers (also certain Congressional employees). See:

        1. I am a Foreign Service Officer and Ben is correct. We are not under FERS, but under a specialty category, FSPS, with rules very similar to law enforcement. A person retiring at 50 or over with 30 years of service would have a pension of 44% of the high three average (so a pension of $52,800 in the example in this post). We are also eligible for a social security annuity supplement designed to supplement income until eligible for social security, at which point that supplement stops. Calculations on that are more complicated, and it is means-tested, but that would give you around an extra $16,000.

  32. Should I take a pension of $47,000 a year at age 65 in two years, or the lump sum of $677,000.


    Should I take a pension of $87,000 a year at age 70, or the lump sum of $1,070,000????


  33. Just wanted to clarify your assertion that a foreign service officer pension would be 85K per year. Maybe under the old system, but under the current system (FSPS) the annual pension would be only 40,800 assuming 120K per year average salary over the three highest paid years with 20 years of service. 120K x 1.7%=2040. 2040*20= 40,800. Still thank you for the article and good work.

  34. Once vested, there are some big decisions regarding optimal time to walk away when additional income can be made. For example, a school administrator in Cali can retire earlier (draw a smaller pension), but work another job and continue to invest the additional income of the new job in a 403 and after tax account.

    For example, a CalStrs employee can receive full CalSTRS retirement benefit, with no earnings limitation, if they take a job outside of CalSTRS-covered employment, including work in:

    Private industry outside of the California public school system
    Private schools
    Public schools outside of California
    University of California or California State University system

    Also, deciding if taking less of a pension in exchange for providing a spouse with benefits after death, versus the cost of an additional life insurance policy, is another big decision.

  35. I retired at 57 as an LEO (3% @ 55) and my wife retired at 58 (2.7%) and I also am retired Military, combined we have a 100K+ a year income without any withdrawals from out 457 (300K) or 401K (250K). I did work for close to 40 years but we are both healthy (I am now 69) and travel a lot. This is not due so much from good planing but a combination of listening to good advice from a friend and a desire to travel. We are really lucky as I see so many of our friends who decided to splurge young and not think about their retirement who now envy our ability to have fun and do what we wish (within reason).

  36. Nice article! On a side note, I have read a lot about of annuity vs lump sum payment and created a bunch of spreadsheets to try and get the wining choice, but I am still struggling. My annuity is not inflation protected, I can get $4500 monthly or $800K in 5yrs and I will be 43 by then.

    Annuity: I like the fact my monthly payment is money in the bank that I don’t have to manage, 80% probability I will get it and if not PBGC can give me some discounted portion.

    Lump sum: take the cash out and not roll it over at all, pay 25%-30% tax, invest in a commercial property that will get me 10% Cash on Cash and 9% in principal payments (not including appreciation). The commercial property investment numbers are based on personal experience.

    Any thoughts why I should still consider the pension?

  37. I just realized: your simple formula only works at the time of retirement. If you are pre-retirement you need some kind of regression. For example if I left my job now (freezing contributions) and retired at 65 (in 30 years) I would have $X at retirement per your analysis. However what is the value of my theoretical pension today? Obviously the numbers are estimates, but when I look at your net worth goals, my pension is a good chunk of my current net worth so as a thought exercise I like a number to work with.

    I would also say that you are overestimating the dollar value because your simple model assumes a withdrawl rate at the rate of return with the original chunk left at the end of life, when in fact the final balance would be zero. A drawn down, multiplied by your likelihood factor, I think would be more appropriate. Though once again: it’s a thought exercise so this is more nit picking than anything. But you seem to be overstating the material value of the pension with how you are approaching it.

    1. I agree on the overstatement thought. Since a pension is in essence a reverse mortgage, couldn’t you just plug in the “(loan) or estimated pension value” amount, the estimated interest earned, and an estimated “(loan duration), life expectancy, payout term”. If you know your monthly pension payout offer (mortgage pymt) and play with the payout term, interest rate and loan amount, couldn’t you match them up and just use a loan calculator?
      The actual value of the pension would have to take into consideration the interest earned and principal used as you take your monthly payments.
      The only thing you can’t plug in is longevity risk.
      Any actuaries with a simple pension thought process?

  38. John Hartman

    Dear Sam –
    Great article. It gave me a lot to think about.
    I know your parents were FSOs so perhaps they were under the old FS pension system, which was more generous and perhaps it will pay out $85K for a $120K max salary. Unfortunately the current FS pension system pays 1.7% per year for the first 20 years and then only 1% a year after that on the high three year average salary. So your example #2 isn’t quite accurate.
    Foreign Service Officer Retiring After 30 Years Of Service = 34% for first 20 years +10% for next 10 years = 44%
    Average income over the last three years: $120,000
    = Annual pension: 44% of 120K = $52,800

    source –

    The Foreign Service Pension is still quite generous. However, it’s not as good as the military’s pension plan, which pays out 75% for 30 years of service.

  39. I was recently wondering about how to value my pension (or potential pension) as the result of a career dilemma I’m facing. The article nicely lays out a good way to estimate the value of a pension, and I read through all the comments – a few seem to allude to my issue, but I thought I would throw it out explicitly to see what folks’ thoughts might be.

    I’m a 9-year federal government lawyer. Based on my current salary, if I work another 22 years to retire at 62, my annual pension should be around 66k. I’m not even bothering to calculate likely raises over two decades, which would increase that amount significantly, even at the historic 1% COLA raises we’ve been getting. I’m near the top of the GS scale, so while I am relatively well-paid, I’m hitting a ceiling in terms of salary over the next few years.

    After nearly a decade, however, I’m increasingly drawn to leaving government. Primarily to give myself more flexibility in where and when I work, and to engage in more entrepreneurial activities that I’m restricted from as a government employee. Potentially, I could make a larger salary, but there’s the risk that I might not. And there’s certainly no likelihood of a pension.

    So, I was looking into how to value the potential pension as part of estimating my salary needs in the private sector. This article is helpful, but I’m still not entirely sure how to account for its value in order to make sure I can make it up in salary or other income. And, now I’m wondering whether I shouldn’t leave this job so that I can keep this valuable benefit as a guarantee. But my gut says it can’t be worth it to work another twenty years in a job I don’t love for a pension, and that I should bet on my skills and experience in the private market. Plus, I don’t want to have to work until I’m 62, unless I want to.

    My head is on the fence, recognizing the stability of that potential income stream and the low floor (with higher ceiling) on the private side.

    Has anyone else wrestled with this issue, or have any thoughts?

    1. Honestly, it sounds depressing to have to work for 22 MORE YEARS so you can get your pension.

      I’d start a SIDE HUSTLE and see what happens for a couple years before leaving. That’s what I did for 2.5 years before I left my day job. My side hustle was making a livable income stream by then, so I knew it was now or never.


      1. That’s how I’m leaning – 22 years is almost half my adult life to that point, and a third of my entire life working a job I’m no longer passionate about – I was just worried that I was being too romantic and by not having a good handle on the value of the pension, maybe overlooking significant economic benefit. But now that I’ve put this in writing, it seems silly to spend so much time just to get a financial reward after two decades. And you’re right – it sounds really depressing. I picture Tom Hanks at the beginning of Joe Versus the Volcano.

        Side hustle options are limited because I have restrictions on what I can publish, and on taking on outside employment like consulting (and I’m prohibited from practicing law outside government except in certain pro bono cases). This is one of the reasons I am looking for a private sector switch – to allow for that kind of flexibility. I am able to do some teaching on the side, which is a small but helpful income stream. One area where I’m not restricted is property ownership, so also am considering buying a rental property in the next year or two while figuring out my exit strategy. This website has been invaluable in helping me figure these things out!

    2. DCFed,

      I am 56 and work for my state and have close to 30 years. I know what you mean by feeling tired of working for government (I probably have been for over a decade) but the pension trap kept me plugging away. At this point in time, I am currently earning about $110K and about 5 years from retirement. I should get approximately $60K and an additional $22K from SS (since we pay into SS). This income, combined with my wife’s $60K (pension and SS), should afford us a decent retirement.

      Conversely, there have been many a times when I regretted my choice of staying in the public sector vs. working in the private sector for considerable more monies or even starting my own consulting practice. At this point, it is probably too late for me but given that you have a good education and if you feel comfortable that you can be successful in the private sector or in your own operation, I would not discount this option.

      In my humble opinion, the main thing is what makes you happy.

      Best of luck in whatever you choose to do.

      1. I’m a retired Federal employee after 31 years under the old CSRS system. We referred to it as the “Golden Handcuffs” because if a person left Federal Service before being retirement eligible (under CSRS rules) they could only get their own contributions, plus some interest back. Imagine a CSRS employee with many years of service, but not yet retirement eligible, abruptly leaving or gets RIF’d out of their job…there’s not nearly enough in their contributions to sustain a long retirement. Whereas, under the newer (FERS) system since circa 1982, many of the benefits were portable to the private sector, albeit with the exception of what’s called the “Basic Benefit Plan”. The FERS employee could safely leave Federal Service knowing that at least the bulk of their retirement contributions (SS, TSP) were going to be part of their final retirement numbers. Neither system was perfect, and both had their flaws and quirks (the CSRS vs FERS debate rages on among Feds to this day like debates about the Civil War). But fortunately both systems provide a comfortable standard of living as long as a person remains financially vigilant.

  40. BestDayEver

    Thanks for writing this article! I like to compare our finances to your “Above Average Couple” article, although without including pensions we are way behind… but with our pensions we are right on track. I am 44, DW is 43… Current status below:

    Currently her pension would pay about 32,571/year, and mine would pay about 15,050 or 47,621/year together. (I like to use 4% as a guide so I have them worth 1,190,000.) We have about 200k in home equity, and 380k in 403/deferred comp accounts, so all total we have 1,770,000. Just ahead of target:)

    DW can retire on her 55th birthday, and I can retire on my 57 birthday. Pensions caculated to be $95,000/year at that time, add 1 million savings projected for 403/ deferred comp, home paid off, and I will still be eligible for SSI. ( Both of our pensions are COLA’D, and have provisions to keep paying the other spouse when one of us passes)

    We have 3 kids- goal is to get them through college… then pay off the house, and go chase our dreams, wherever that may take us…

    Love the blog and my question is – can I consider ourselves above average? I want validation, My DW does not care…. :)

    1. BestDayEver

      January 2022 Update: (5 years down, 7.5 to go)

      Currently have pensions worth 67k/year or 1.67M, 730k 403b, 200k home equity
      or approx 2.6M counting pension value (49yo & 48yo)

      Paid oldest sons tuition 5 years, assisted middle son x 2 years, paid 2.5 years Daughters tuition- 1.5 years to go for Dtr

      Projected at retirement 6/2029: will be 56/57yo
      100k/year pension(s), 1.5M 403b, 20-25k/year SSI, (500k home equity), so at 4%w/d rate approx 180k/year (Live in Midwest, low cost area of living)

      Keep chasing your dreams!

  41. Pensions may disappear, but some have survivor benefits. It would take an actuary to determine their worth over a survivor’s lifetime. Which begs the question for military folks conflicted about the new retirement system which add a match, but decreases the annual benefit by 10%… What’s the breakout between high, medium and low savers who plan on dying before their spouse, for both systems?

  42. Great article but I’m wondering in your examples if the pension values should be worth less since they do disappear after the person passes away.

    In your first example, if the police officer had $2,514,706, they could collect they 67k from from putting that amount in investments and when they pass away there is still $2.5 mill left for their family.

  43. No pension for me, but I learned over Christmas that my father who had been a fed is early retired living off his annuity and VA health benefits. The annuity is small, but more than covers his expenses. Only took thirty years of service between the military and other sectors of the government to achieve.

  44. SelfSufficient

    Just my opinion. If one qualifies for a government pension, it’s just wrong that they can have no real purpose for working profitable, just show up to work for many years, and continue to steal my tax dollars until they die.

  45. Hi Samurai,

    Do you have any general thoughts on buying “years of service” in a Govt Pension fund?

    I’m in a generally well run and not in any acute crisis State Retirement PERS fund. I’m still allowed to buy up to five years of service credit at an actuarially determined amount based on my age and current salary. I have the money to do it in my 457 deferred comp plan, but it would be a considerable chunk of my savings. I’ll continue to max my 457 contributions, but I’ll obviously be trading the potential compounding return from my own account for the “guarantee” of an extra 13% or so (2.67%/yr x 5 yrs) in the PERs system. I would likely retire at about the same age either way, based on actual years I need to put in, my kid’s ages/school status etc.

    Is there an easy financial calculus to determine if its a good idea to reinvest/change allocations from my 457 back into the PERs?

    1. Howdy Jake,

      Haven’t thought about your question too much. In general, I’m averse to putting more money into anything government run. Folks w/ pensions should work on building their NON-government retirement accounts and after-tax investment accounts instead.


    2. The Professor

      Does CAlPERS still allow this? I know CALSTRS does not. This was changed under pension reform a few years back with the state.
      I actually bought a bit of time. It’s not a great return on investment but being that I was having trouble with my employer it was sort of insurance to get to that 30 year mark if I lost my job and being able to collect instead of waiting several years.

  46. 33 year old here who works at a large megacorp in the Midwest. I joined 8 months before they phased out their pension for new hires – so I’m a hybrid of 401k and pension. Anyone older than 45 is tied to an attractive pension, so they all just bide their time making it tougher to keep working your way up.

    That said though I’m very lucky and fortunate to have built up a nice little next egg through the pension having worked there for 9 years. If I left I can cash out as a lump sum, receive monthly payments of $350/month or defer it to 55.

    1. This is how my current company works now as well. They stopped offering pensions I think about 5 years ago, which was a few years before I got hired, but all the new hires get a larger 401k match and a contribution to a personal annuity account, so although I don’t have a guaranteed income stream at retirement I should be retiring with a much higher cash balance to compensate.

      A lot of the older guys are actually jealous of the new plan. If I want to leave or retire before I have the time and age to max my pension, I can walk away with 100% of my retirement. If they want to leave without the age or max time in their future pension payments get slaughtered by penalties. Furthermore…their pension is only based off a % of their base pay when they retire, so the relative increase in pension per extra year of working is minute compared to the extra potential compounding of the plan I’m under. If they hit 30 years to get their full payout while they are in their 50s and can’t collect it til 62 without an early retirement penalty, they pretty much end up working a few years with almost no increase to the max value of their pension.

      1. Very interesting – yes for me every year I obtain pension credits equal to 3-4% of a rolling average of your income for the last four years. The % increases the older you are and years of service.

        I’m lucky enough where I few my 401k and small pension as simply nice to haves to help in retirement goals – where my own after tax investments will be of more value.

        It’s amazing how many people I hear at my company tied to pensions say things like “well I’ve been here for so long, what’s another year” or “if I leave, I’ll be giving up so much”. It can be a curse for that generation.

  47. Easiest apples to apples for private sector pensions is to get a low cost single premium immediate annuity quote for the anticipated benefit amount and age. THat will give you a nice lump sum equivalency.
    Both are by private sector companies with regulated asset financial requirements etc. and both have a limited govt backstop either state based insurance backup or pbgc

  48. No Nonsense Landlord

    The 401K numbers seem high, but even with a 0% return, the low end should be reasonable. I maxed my 401K for many years, although not for the first 20 years of working. It is difficult to put in $18K when the limit was considerably lower. Or if your income was not even at the maximum contribution.

    My real estate portfolio more than makes up for it, and a small non-COLA pension.

  49. I use a simple 4% to calculate the value as well. For example, an educator contributing 10% to CalStrs and making 100K will most likely have a 60-70K pension coming. That would make the pension worth 1.5-1.75mil X .04% = 60-70K on a 300K investment (or 10% x 30 years). That leaves another 750k-1mil that would need to be put away in a defined contribution account (403b) to cover the other 30-40K (750-1mil X .04%) assuming an individual wanted to make as much in retirement as they did working. Saving 750k-1mil in a defined contribution account is a lot more doable than saving 2.5mil. Of course, many feel like they wouldn’t need to make their full pre-retirement income in retirement so the defined contribution account could be projected to be much smaller.

  50. My husband retired at age 49 after 25 years in law enforcement 3 years ago, and decided to do a rollover of his pension to a new IRA since our rental income is more than sufficient to cover our monthly expenses, therefore, this million dollars plus will be left for our daughter inheritance.

  51. I have about 12 years credited towards a Teamster pension, and I don’t consider it a valuable retirement asset for two reasons.

    First, I have enough time in to get 31,000 a year when I retire…but the problem is I started at 18 and was out at 31 and can’t collect it til 64. 31,000 a year isn’t going to hardly amount to anything after 33 years of inflation.

    Second, the fund is underfunded and union memberships down. I am almost 100 certain payouts will be getting cut before I can collect. The money just simply isn’t there to support their obligations, and unlike government pensions private pensions can’t just be supported via higher taxes.

    I’d rather have had all the money I worked for that went towards the union pension fund instead going into my own 401k. I would have made out much better. I guess in theory if I collected 31k a year for 20 years before I died the pension was worth 620k for me…but roughly 75k-100k isntead dumped into a 401k between 18 and 31 with 33 years of compounding would have equaled a lot more…and well…what if I die at 50…that pension is worthless and the 401k could at least be passed along to others.

    Just my take on pensions…but I laugh when I hear people talking about how my generation(millennials) won’t have pensions so we won’t be able to retire comfortably. My worst two retirement investments to date are my Teamster pension and social security. The only pensions that are really a sweet deal are some government pensions, and its only because they get yearly cost of living increases and they aren’t actually pension funds, they are just line items on budgets paid for by tax payers each year.

    1. Good reasons and good perspectives. Good thing at 49, you can still do other things to make money until you can start collecting at 64 yeah?

      I guess my question for you and others with pensions is: Did you save and invest money beyond your pension given the low probability of getting 100% owed to you?

      It seems many pensioners feel misled by their company/union/government’ promises. I guess I haven’t trusted government since day 1 to do the right thing with the people’s money because there have been so many corruption cases!

      Perhaps the grass is always greener.

      1. As far as did I invest other than blindly putting all my faith in a pension, yes and no. I put most of my money towards college and my condo during the time I was working that job…so yes I invested in education and being debt free, but no I didn’t invest much in the traditional 401k/IRA retirement investments during that time.

        Now I’m set up though where I’m making good money and my monthly expenses are rather cheap, so I’m able to invest about 2/3 of what is left of my income after maxing my 401k, HSA, and paying taxes, and I don’t have to go through life stressing out over the debt hanging over my head like most other millennials are going to end up doing.

        In my opinion, its not that the grass is always greener, its that you need to realize a raw deal when you are getting one, and paying into a pension fund that is 40% funded and paying out full pay outs to the people who left it under funded while working is a raw deal, especially when over the last decade I’ve watched that fund go from 60% funded to 40%, and it doesn’t look like things are going to get any better because they are going to refuse to cut payments until the fund is broke. Once that happens I believe the federal pension insurance covers 17% of promised payouts for multi-employer plans.

        Its like investing in a 401k where instead of getting a company match the company confiscates a % of what you contribute instead. Its not very hard to find greener grass when you are getting robbed.

        1. This is exactly how I feel about Social Security, which is just a government run pension that won’t be there for my generation.

          I agree with Sam. The grass is always greener…..…for people that don’t have pensions. It seems like they may not be the magical retirement vehicles our elders make them out to be. Not if your former employer can cut your payments or not pay you your pension.

          What a way to continue to be dependent on your employer!

          I’m not saying pensions are BAD, but the drawbacks that they have are HUGE. Fear losing your 401k money to a market crash all you want, but I’d be more fearful of leaving everything in the hands of one company rather than the whole stock market!

          ARB–Angry Retail Banker

  52. I wouldn’t know about the wonder of pensions. The banks, like most other places, gives 401k’s only. Our retirement saving is up to us.

    That said, pensions do have their drawbacks too. If you leave your job, get fired, or your company goes belly up, you lose your pension. Where you should be diversifying your income streams, people are relying on their employers even AFTER retirement. I also had a small pension, along with a 401k, at one of the banks I used to work with. In the time the 401k took to get me up to almost $20,000, the pension got me less than $2,000. I wasn’t enthused, and I like the fact that a 401k offers me the opportunity to change careers or to not lose all my retirement money if I, say, eff up the vault timer (by accidentally setting the vault to open in 12 DAYS rather than 12 hours, as one branch recently did) and get terminated on the spot.

    I’m not saying that the 401k is necessarily better than the pension, just playing devil’s advocate. The pension is wonderful until it vanishes. And who in their right mind would stay with a single employer for 25-30 years in today’s service-sector economy?

    But you’re right on the limits of a 401k. I’m just using it now to reduce my taxable income. Not even for actual retirement. It hurts to see the government tax me so heavily despite making less than $50,000/year, which is why I’ve more than doubled my contributions in the past year. I would contribute MORE if I wasn’t saving for a property.

    ARB–Angry Retail Banker

  53. Excellent analysis, Samurai. It’s important for people to take inflation and opportunity costs when looking at long term financial projections for retirement income.

  54. Will Yu Smile

    Sam, maybe a topic for another discussion:

    Public Sector Vs. Private Sector Employment

    I know Public Sector/Government Jobs take a lot of heat for their “generous” pensions, but those same workers receive less comparable pay in the present.

    Is it an automatic that working for the government/public is the better option?

    1. They are overly generous. My grandfather was a state cop here…20 and out for him. He has been collecting his pension for over 40 years, and after a few years of his yearly increase, he was making more retired than his highest grossing year working. He probably collected about 4x more from his pension than what he earned while working, and he’s still alive and collecting with continued raises each year.

      If the state(CT in my case) actually funded retirements, it would be like they paid cops here their salary and then gave them a 150% match into a pension fund…meaning a cop is effectively earning 250k+ a year right now…so I’d hardly say they are less compensated than private sector workers by any metric. I know doctors who don’t even make that much. That is why people say government pensions are too generous.

      Plus the way they work is just wrong. State employees here pay almost nothing into their pensions while they are working and their payouts are a line item on a budget paid for by current tax payers. Us millennials here in CT aren’t going to be able to support all the fat pensions retiring boomers promised themselves and refused to fund while they were working.

      CT wouldn’t be on the hook for a billion+ a year and rising to keep up with unfunded pension obligations if they actually ran their “pensions” like a pension and rather than legislated generational theft.

      1. so why is there a shortage of individuals willing to enter the line of police work?

        could it be that they are putting their lives at risk? doesnt that deserve some salary premium?

        1. It depends on your area. I specified state cops in my state. Starting pay for them is like 70k a year base(much more after OT) with full benefits, a ridiculous 20 and out pensions like I talked about previously, and full use of a state vehicle they can use whenever they want.

          You can’t really lump that package in with some townie in a crappy town making 35k a year. Would I be a state cop here? Most definitely, its a sweet gig. Would I want to be a townie in Ferguson and make half as much and deal with race riots every six months? Nope.

      2. Not true that public salaries are lower, and haven’t been for years. Other bennies beside pension are much better too. 30 years of globalization has hammered private sector compensation and benefits, while gov’t has been almost unscathed. Quit rates in gov’t are 1/3 of private sector.

        The uber generous public sector pensions were a deferred liability that in most cases weren’t prefunded, hence the growing share of taxes going to retirees instead of current services.

      1. Oh I’m not opposed to public employees or seeing them earn a decent wage, I’m just opposed to how the system is run in my state. People who promised themselves fat pensions before I was even born and didn’t actually fund any pension fund while they were working are now telling me to shut my mouth and pay for it. Had they promised themselves fat pensions and actually funded them during their working years, I’d be happy for them, but that isn’t the case.

        I don’t know how you’d expect one to be happy about being born with a responsibility to pay for someone else to have a more generous retirement then you’ll ever have, while that person didn’t actually save anything for their retirement, and at the same time they are making it harder for you to save for yours. The only positive thing here is moving out of the state is always an option, because in the last few years we’ve seen the worst case scenario of not only taxes going up, but the state deficit going up at the same time.

  55. I’m surprised by the high % of readers with pension. I know FS has the data, but I don’t recall the age demographics of the readers. I was guessing average is 40’ish? Amazing that close to 1/2 of readers have a tangible pension.

    1. I’m totally surprised as well. NO WONDER why everything is unicorn and lollipops yeah?

      But actually, it’s all about having older, more dedicated, and more responsible readers.


      * Age: 76% of you are between the ages of 26 – 45. 11% are under age 26. 13% are over 45.

      * Annual Income: 33% of you make between $100,000 – $200,000 a year. 18% of you make over $200,000 a year, while 17% of you make between $75,000 – $100,000 a year. 3.3% of you make over $500,000 a year, the level which I consider to be the definition of rich. Impressive that 45% of readers make over $100,000 here.

      * Value Of Primary Residence: 39% of you said your apartment or house is worth between $250,000 – $500,000. 28% said your apartment or house is worth between $500,000 – $1,000,000. And 9% of you said your apartment or house is worth more than $1,000,000. Most homeowners have refinanced at least one over the past 10 years to take advantage of record low interest rates.

      * Retirement Savings: About 19% of you have saved over $1 million dollars for retirement, excluding the value of your primary residence. Another 18% of you have saved between $500,000 – $1 million dollars. While 38% of you have saved between $100,000 – $500,000. Roughly 35% of you consider using a low cost digital wealth advisor like Wealthfront to manage a portion of your after-tax retirement investments.

      * Social Class: 67% believe you are considered in the Mass Affluent Class followed by 20% who believe you are Middle Class.

      * Education: 62% of you went to public university while 29% of you went to private school with grants or scholarships worth at least $4,000 a year. Roughly half of public university attendees got grants or scholarships worth at least $2,000 a year.

      * Debt Levels: 52% of you have $0 consumer debt outstanding. While 22% of you have less than $10,000 in consumer debt outstanding. 36% of you have total debt outstanding (mortgages, credit cards, student loans, etc) of between $150,000 – $500,000. 15.5% of you have no debt of any kind.

      * Net Worth: 35% of you have a net worth of between $300,000 – $1 million. 23% of you have a net worth over $1 million. 80% meticulously track their net worth with free tools like Personal Capital at least once every six months. Leveraging the internet to grow your net worth is a no-brainer.

      * 401k/IRA Savings: 21% of you have between $100,000 – $200,000 in your 401k or IRA. 25% of you have between $201,000 – $500,000. 17.5% have over $500,000.

      * Ideal Income For Happiness: 14% say you need to make $101,000 – $150,000 a year to feel “very happy.” 22% say $151,000 – $250,000. While 52% of you need to make over $250,000 a year to feel very happy.

      * Savings Discipline: 15% of you save between 11% – 20% of your after tax income each month. 18% save between 21% – 30%. 28% save between 31% – 50%. While 23% of you save over 50% of your after tax savings.

      * Career Risk: 53% of you say you’d prefer the stability of a full-time job over the flexibility of being a contractor.

      – See more at:

  56. Great article!! it’s good to know how much a pension is worth even mine is on the low end, next year I will be 50 planning to call it quits after 25 year and $48k/year my pension will be $1200/month, or I can choose $1600 until SS kicks in at 62 cut down to $400, also lifetime medical, it’s not much compared to other fat pensions but with frugal living and house paid off this will be the main income to live on without the need to tap into other income streams

    I am thankful to have a pension even it’s a humble amount, it provides the confidence, stability and peace of mind and is the main impetus to quit early

  57. This is a very interesting discussion and hit home for me and one I’m grabbling with. For 30 years, I worked in the private sector (No pensions) in senior management positions. I have been fortunate to amass a very good nest egg through pre and post tax savings. At 53, I could receive about 80K (4%) distribution including social security at age 70, and be fine through to 90 (per Personal Capitals Retirement Planner – nearly 98% Forecast – Very Good Shape).

    Two years ago, I took a position in the public sector (pseudo-government in the Reserve System), which has a very good pension program. The pension will give me ~$6500/annually, no other benefits other than pension and I will be eligible to receive at 55 but will need to work to age 56 to vest (5-year vesting).

    After reading Sam’s – Shoot to Retire at a Certain Age; not by a Certain Financial Figure piece … my age target is 56 … which is only 3 years away if I can hang on long enough as 31 years of operational management has been good but I’m nearing enough.

    Here’s my dilemma…hang on until 61 – 10 years of pension puts me at $16,500 annually plus retirement health insurance at substantially lower costs than going out into the open market and a solid savings to draw from or just call it good at 56, use the small pension to pay for as much as we can health care premiums costs for wife and I, use solid savings to pay base expenses and a little fun here and there, go do my own thing for awhile, work part time, maybe start a small woodworking/remodeling side gig and use the part-time earnings as a rainy day fun.

    As John Quiñones would say “What would you do?”

    1. Will Yu Smile

      Do you love your new job?
      Do you feel a sense of purpose when you work?
      Do you dread waking up every day, commuting, or dealing with coworker or clients?
      If you were not working, how would you be spending your free time?
      Would my lifestyle drastically be different if I left the workplace earlier?

      Take a look in the mirror and you will be able to answer your own questions…

      Take care..

      You are in a win/win situation…lol

    2. I vote for 3 more years and then retire at your target age of 56!

      Life speed accelerates as you get older. You can make the decision at 56 when the time comes. It will be hard to walk away. But I will tell you that I have NO REGRETS walking away at 34, when I originally planned to retire at 40.

      I’m 40 in 2017, and these past 5-6 years has been everything I could have imagined and more because I ACTIVELY PURSUED my dreams. I didn’t just sit back and wait for things to happy.

      Get back to us in 3 years! I hope to still be around by then.

      Related: Overcoming The “One More Year” Syndrome To Do Something New

  58. Interesting discussion! Defined benefit plans are just not worth if these days for employers. It requires a lot of work…you have to hire actuaries to calculate scenarios, hire a manager to invest the assets, and even hire an accountant to do the books (pension accounting is pretty complex).

    My mom retired earlier this year after 30 years with the government and she’s enjoying her pension.

  59. My global mega-corp is one of the few that still offers pensions, although the did transition from a traditional defined benefit plan to a cash-balance plan two years ago. As luck would have it, I was laid off right before the transition and then hired back a few months later. Here’s what happened. I am vested in the old plan with 15 years of service and now am in the NEW plan with 1 year of service. So really, I have two pensions!

    The original plan has a very complicated formula to calculate it’s value and you can read about that here ( The new plan is simply 15% of your compensation for the year put into your pension. When you retire, you can take it as a lump sum. Easy peasy.

  60. Gold Medal Finance

    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!

  61. The Professor

    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!

  62. CPA Housewife

    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.

  63. Go Finance Yourself!

    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!

  64. The Green Swan

    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.

  65. 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.

    1. 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.

  66. 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!

  67. 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.

  68. Fiscally Free

    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.

    1. What is $18,000 X 33?

      What is the high-end value amount for someone who contributes $18,000 for 33 years in my chart?

      check out the discount rate I use to calculate present value. I think we have our numbers crossed.

      1. Fiscally Free

        I’m second guessing myself a little, but I think I still stand by my comment.

        $18,000 X 33 is $594,000
        To get to the $1,800,000 in the high-end column would require an annual return of about 6.2%.
        If you continue the 6.2% return after contributions stop at year 33 and use 3% inflation, I calculate you could spend about $48,000 in today’s dollars for 20 years. That isn’t spectacular, but a lot better than $33,900 (which is just $678,000/20).

        Am I crazy?

        1. The reality is you can make the numbers work the more aggressive you get with the return assumptions. I think it’s always best to be as conservative as possible.

          Another easy check is simply sharing what your age is and how much you have in your 401(k).

          Does your 401(k) amount match up to my 41K by age estimate?

          My fear is that everybody is using cherry numbers after an eight year bull market to extrapolate into the future. But then again, I’ve seen evidence time and time again that most people are much wealthier than we think.

          1. Fiscally Free

            It’s definitely good to be conservative. In most of my projections I assume 5 or 6% returns, which I think is reasonable.

            I’m about to turn 30 and my savings (not all in a 401k) are above your High End guideline. That makes me feel pretty good, especially since tomorrow is my last working day before I “retire.”

            1. Congrats on retiring at age 30! It’s going to be a wonderful life.

              Just remember though, your entire investing life, or at least most of it has been in a bull market. Somethings investments can go down or nowhere.

            2. Fiscally Free

              I definitely recognize the great market I’ve had for the most part, but I was in the market (with a relatively small amount) through the great recession, so I know what it’s like to be down 40% or so. As you can probably guess I didn’t sell at the bottom; I actually increased a couple of my positions on March 5th, 2009, which I believe was the second lowest day of the Dow. That will probably be the greatest feat of market timing I will ever achieve.

  69. Adam and Jane

    “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.


  70. 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.

  71. 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.

    1. Jack Catchem

      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.

  72. 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.

    1. Some pensions pay out to surviving spouse.

      I wrote in my conclusion that the pension’s value fades as we inch closer to death. So yes, this formula is simplified. Since we can’t take anything with us anyway, and we can’t sell our pension as I wrote in the conclusion, calculating the value of the pension (capitalizing the value) is a simple financial exercise.

      The more important variable is the payment and probability of payment. Just like the important value of the house is to provide shelter or provide rental income.

      You’re free to simply lower the probability percentage to adjust for a earlier death.

      1. ActuaryImAnActuary

        The “values” in the article are misleading, especially depending on their intent.

        A simple present value calculation of guaranteed payments requires an interest rate and the number of payments.

        Obviously, pensions are not guaranteed in that they are payable only for the life of a participant (assuming no survivor benefits for this purpose). An “actuarial” present value calculation requires that you incorporate mortality. Using example #1 and an annual pension of $67,500, how can the value be ~$2.5 million when there is a chance the person will die the day after starting his benefits? If they die, the value is then $0 (again, assuming the simple case of a single life annuity, i.e., no survivor benefit). That probability of death in year one, although small, needs to be considered. Furthermore, the probability of death at EVERY age needs to be considered in order to calculate a true present value of a pension benefit (or ANY benefit payable for the LIFETIME of a person and/or spouse).

        For Example #1:

        First, let’s assume this person is GUARANTEED to get 20 payments. Then the Present value of 20 GUARANTEED annual payments of $67,500 at 2.55% per year = $1,074,022. Google search “present value calculator” or use the “PV” function in Excel and you can replicate this.

        Now, let’s consider this is a pension benefit that is payable for someone’s lifetime. The Present value of annual payments of $67,500 at 2.55% per year payable for life = ??. This depends on the assumed mortality of the participant. For this actuarial calculation, the payment at every age will incorporate the assumed probability of death at that age and then every payment will be discounted back to the present value date.

        Benefits that are payable for the life of a participant and then a portion of the benefit is payable to their surviving spouse are complicated further as the mortality of both the participant and spouse at every age needs to be incorporated.

        The above is how the “value” of any benefit paid in installments needs to be determined, ESPECIALLY when they are based on the lifetime of a participant and/or spouse, if they are to be compared to say, receiving $1,000,000 lump sum instead of the installments.

        1. Obviously, my calculation is simplistic because we all die at some point and 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.

          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 and 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.

          You’re calculating the value based on your occupation as an actuary. That’s fine, and especially great for insurance companies and pension funds looking to make a profit. I’m calculating the value of a pension based on my background as a personal finance writer who’s looking to deliver an answer in a relatable way that people can understand.

          1. A little late to the party here, but the Society of Actuaries has a nice calculator online. The calculator takes a few assumptions and current/commencement ages and spits out an actuarial factor. It may seem a little complex, but anyone who wants to see some actuarial magic take place and get a more detailed factor. Check this out. (Multiply the annuity factor by your annual benefit to get a present value of your pension.)


  73. Ms. Conviviality

    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!

      1. Ms. Conviviality

        Thanks for the link. Now I know to beware of the “one more year” creep. Though, I have found that my desire to work solely on my dream job dissipated a little when I got my boss’ blessing to have a side business, which is in no way related to my job. I started a floral design business specializing in wedding/event flowers. The funny thing is that I was so nervous to let my boss know that I wanted to start a side business (outside activities disclosure is required). I’m actually a better employee now that I have an outlet to be my creative self.

  74. Jack Catchem

    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.

  75. 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
    Annual 3.05%
    Annual 3.05%
    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

    1. Jack Catchem

      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.

  76. 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.

  77. 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.

    1. Sometimes in life you lose 50% of your 401(k)s value within five years of retiring as many people did in 2008 2009 and 2010.

      Think about it. You could save and invest for 30 years and lose 15 years of value in just one year if you aren’t properly allocated based on your wrist tolerance. How crazy is that? We can hope for the best but we should plan for the worst.


      1. True. But hopefully a 60 year old has a more balanced portfolio than I do at 35.

        I’m sure I’ll see at least a few more downturns btw now and the time I start cashing out my 401k but hopefully will be able to recover each and every time.

    2. 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.

  78. 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.

    1. Ten Bucks a Week

      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.

    2. But isn’t the retirement plan just you putting money into the plan pre-tax, and being able to keep your own money through vesting that you can’t and shouldn’t touch until later anyway?

      Key variable for all these people in my post is that they committed for a long time.

    1. The interviewer is so annoying. Feels like he’s trying to exploit her. But what a scam the California government has performed on this poor woman.

      Maybe we should lower the percent probability to 50% for some cases. It is such a shame that the government cannot properly manage their finances. Never rely on the government!

      1. The Professor

        Having your retirement pay drop from $49k to $19k is just wrong. She needs a good lawyer and right away. CALPERS is disgusting what they are trying to do here along with the city of Loyalton. CALPERS probably figures that since there are so few employees that they are doing this to they can get away with it.
        It sets a dangerous precedent if these retirees do nothing. It’s up to CALPERS to go after this city not stick it to a 75 yr old? retiree.


    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!

  80. Will Yu Smile

    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.

    1. 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 :)

      1. Will Yu Smile

        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.

        1. Another Reader

          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.

    2. Man, a $64,000 a year pension at 55 sounds FANTASTIC! Set for life fantastic actually.

      But having to work a full-time job for the next 17 years at the age of 38 sounds depressing to me. How does it sound to you? I remember at 32 thinking how far away working until 40 sounded. But I guess I’m almost there! I just took a more scenic route.

      55 is pretty early in the grand scheme of things. Are you really “slaving” away at a government job though? What are the hours? If you want to try long hours, try banking, consulting, and startup land!

      1. Will Yu Smile

        Sam, Have you watched the movie “Office Space”? lol.

        Actually, I like my job. In my line of work, I make my own schedule and not micromanaged as long as I get my work done. I would say half the time I am in the field and half the time I am in the office completing paperwork. I get to visit families in need and provide services to ensure that the elderly, disabled and blind get to stay safely in their home. In a few months, they are rolling out “teleworking” for our staff, an opportunity to work from home.

        It’s a sweet gig. But before that, I was a social worker with Child Protective Services, working with abused and neglected children within the foster care system. It’s a different type of stress, was emotionally draining and wore me down.

        If I wanted the long hours, I would have stayed with CPS, given that there is unlimited OT opportunities during afterhours (after 5pm) and on weekends. Remember that story about that janitor making over 250K….There were some coworkers who were making as much OT as their base salary….But the question was….Did I want to be called out at 3am on a child abuse allegation in a potential DV home, or investigate the safety of a 3 year old whose parent’s were high on drugs in the middle of the night, or drive a child to Fresno on the weekend so he could be placed with his grandparents and come home that same day…

        I took a demotion, but I am less stressed and still providing needed assistance to my community. Can’t complain. I now have a 4 year old and 1 year old that I can focus on and not let my job interfere with daddy duties…

        You can’t put a price on that…seriously.

  81. 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.

  82. 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?

  83. 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.

    1. Ten Bucks a Week

      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.

  84. “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.

    1. That’s the great thing about life: choice! People who want to calculate the value of their pension should use whatever divisor they feel comfortable using.

      I’ve simply showed an easy way to calculate the value of attention with a formula.

      What divisor would you choose?

      1. Depends on the state. If I was a state worker in Illinois? They have the highest unfunded pension liabilities in the country, and there’s very little chance they won’t have pension cuts at some point. But if I was a state worker in Oregon? Then probably the 95% figure would work. Their pension funds are holding up well.

        Using Detroit as a model for what can go wrong, they cut pensions by like 5-10%. So even if pensions are cut, it’s not likely to be a lose-all scenario.

        Here’s a chart from the WSJ showing the percent funding of each state pension fund. It might be a useful addition to reference it in your article, because it helps people calculate for risk:

        Anyway, great article idea! My father retired after 30 years as a detective, earned a pension from that, and went on to have a 25 year second career as a counselor.

        1. Ten Bucks a Week

          Agreed, check out the Dallas Police Pension, there is a run on the funds because people don’t foresee them being there in the future.
          With so much of government spending on entitlements I imagine cuts in the future. Here in California there is CALpers which has an assumed growth rate 7.5% which may or may not be achievable, but pensions are going to be much more underfunded if they don’t achieve that.

        2. Good stuff Lynn. Glad your father got to collect on his pension!

          I don’t think there will be a lose-all scenario either. With social security, I think it’s safe/conservative to use a 30% haircut for everyone 40 and under. And if we get surprised on the upside. Great! If not, it is what we expected. Glad to have helped the older generation collect what they deserve.

        3. Wow. This article and link to the WSJ is so timely. Thank you both. I am a 34 year old public school administrator in the state of Washington, so I’ve got some time before I will tap into my defined benefit. I am so happy to see that Washington is 98% funded! I was lucky that there was the option of going the defined benefit route.

    2. Jack Catchem

      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.

  85. 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.

  86. 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?

      1. I guess this wasn’t exactly the point of the article, but when calculating your pension for inclusion in your net worth, I’ve always thought you would need to discount it to the present day…Basically treat it more like an annuity. Thoughts?

        1. The calculation is more true if you are actually receiving your pension now. If the pension payments are still 20 years away, it’s hard to really know the future, and hence a larger discount may be needed. But hopefully, if you are 20 years away, you’re still earning and hustling just fine.

    1. ActuaryImAnActuary

      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:

      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.”

  87. 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, is a great read for public employees compensation.

    1. 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.

    2. Can you elaborate on the definition of 2.5 at 62 and 3 at 50? Do you mean 2.5% for each year worked, with 62 being the eligible year to collect the pension?

      What percentage of pensions do you think keep on paying out to surviving spouse?

      The government smartly gets to keep all SS paid in/not pay out if you die single. Hence, a big benefit to marrying in retirement!

      1. 2.5 * years or service * highest 3 years average salary (I think), i think the formula was actually 2 @ xx but it scaled up to 2.5 (which was the max) at 62. This is CalPers and when we looked at it, you could take about 5% less and the surviving beneficiary gets the same amount (same age as the pension holder ~62). I believe the payout goes up if the beneficiary dies first too. If you choose the max amount (5% more) the surviving beneficiary was haircut pretty decently and it made no sense. something like 40%

        interestingly with about 20-25 years of service and given the fact you no longer pay into SS and get about +2500 month from SS, the net salary ends up being about the same. It also is possible to actually get a raise in retirement with enough years of service! This plan also has COLA increases yearly i believe.

        hope that helps

        1. BTW, newer employees have a far worse plan and no way to buy back into the better ones. This one had to bought back into for somebody starting about 20 years ago (it wasn’t the default option)

      2. ActuaryImAnActuary

        I would say that every pension has the option to pay a portion of the benefit to a surviving spouse.

        Typically, the Normal Form of Payment for the pension benefit is a Single Life Annuity (payable for the retirees lifetime and ceases upon death) for single participants and a 50% Qualified Joint and Survivor Annuity (a reduced benefit is payable for the retirees lifetime and 50% of the benefit is payable to the surviving spouse upon retirees death) for married participants.

        Often, there are optional forms of payment that can be elected in lieu of the normal forms. For instance, a retiree can elect a 100% Joint and Survivor Annuity and take a larger reduction in their benefit and then receive that reduced benefit for their lifetime after which their surviving spouse receives 100% of the benefit the retiree was receiving.

        A very simple example:

        Retirees benefit is $1,000/month at retirement. They can choose the following:

        A Single Life Annuity and receive $1,000/month for their life and $0/month to surviving spouse for spouses lifetime.

        A 50% Joint and Survivor Annuity and receive $910/month for their life and $455/month to surviving spouse for spouses lifetime.

        A 100% Joint and Survivor Annuity and receive $800/month for their life and $800/month to surviving spouse for spouses lifetime.

        Another important detail, much like my response to an earlier post regarding reductions in benefits for early retirement, often times the reductions for Joint and Survivor Options are subsidized by the Plan. In other words, The plan is saying they will lower the benefit from $1,000/month to $910/month for the 50% Joint and Survivor option, but the actuarial reduction (incorporating mortality for both the retiree and the spouse) would produce a benefit of $890/month, thus the Plan is subsidizing that payment form by $20/month ($910 – $890).

  88. 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.

    1. 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!!

      1. Tell us more about the DIY pension for self employed folks! If you contribute $200,000 a year to your pension, what’s the point if it’s your money you are contributing? Hopefully it is all pre-tax money at the very least, like the $54,000 we can now contribute to a SEP IRA or Solo 401k for 2017?

        1. Nothing is free….. even the pension plan you feel is nirvana. You have to work for someone else for 30yrs… total drudgery….
          Yes it’s you money buy uncle Sam offers a nice initial return on the amount funded equal to your tax rate. Of up to 43.8%
          And because it’s YOUR PLAN. It can be self directed away from the stock market…!!! If you want super ROlI buy income generating income pre tax.

        2. This strategy is used a lot by doctors because they have high incomes and get started saving for retirement really late due to their extensive training. It can allow you to put away a lot more money tax free than the 401k does. The contribution allowed is determined by an actuary based on your age and how much is needed to provide the expected benefit at retirement. The older you are the higher the contribution allowed since there is less time for it to grow. There are some limits but they are quite high. The problem is if you have any employees then you have to let them participate in the pension too, which can get really expensive. It is ideal, however, for high earners with no employees or only part time employees who can be excluded.

          1. It works well as long as your have under 10 ees and the average age is much lower than the owner. Most well designed plans give. 93-95% of the pension to the owners.

        3. For a person with Schedule C income the personal defined benefit plan is extremely tax effective method to fund retirement accounts quickly. The earliest retirement age for calculation purposes is 55 and once you reach that age there is the option to roll over to an IRA. One issue could be the required minimum funding amounts might get large, although thats kind of the point…..

          I use shcwab,

          I though you’d have an article on this already actually.

    2. Ah, so lucky. I assume you plan to work at your corporation until at least 55?

      I wonder how many fewer people would leave their jobs if they knew they calculated the value of their future pensions. Hmmm.

      1. I’m on the fence about working until 55. You can quit before 55 and defer the pension payments until 55 to get the same pension reduction percentage. If you do that, you are not considered “retired” by the company. If my current financial situation extends into the future, I would treat the pension like social security. I will likely defer both until full benefits. The other valuable retirement benefits my company offers are subsidized health & life insurance which are only available to “retirees.”

        The pension is not enough to keep me around but subsidized health & life insurance & pension are close to being enough. On the other hand, as soon as you qualify for it, Medicare becomes the primary payer and the retiree health insurance becomes the secondary payer. That means if you retire at 55, you get a maximum of 10 years of subsidized primary health care insurance.

        If you are FI, the annual incremental value of the pension relative to your net worth becomes inconsequential and your time left healthy & alive becomes extremely consequential.

        Choices, choices, choices….

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