[Sara]

At age 40 I have now entered a job wherein I have a pension (I don’t get a lump payout but rather a monthly payout based upon top 5 years salary, age of retirement, and years of service).

I have a past 401k account as well but trying to figure out how much I will need in retirement/when I may be able to retire. I’m far away from this but how do others with similar pensions figure out the math behind all of this?

[Brian]

As Carrie said, read the plan documents very carefully. Consider any number of scenarios: What if the plan gets cancelled? What if you leave or get let go? If your boss changes and the job becomes miserable will you feel like you have to stay? What if the plan isn’t funded/managed properly down the road?

I would still be saving as if the pension didn’t exist and the closer you get to retirement, see how strong the plan is. Hopefully it will let you retire sooner.

Also, the pension doesn’t belong to you, is an asset of the company.

[Teresa]

Is this pension from an employer that takes out social security? Be mindful of any position that you don’t take out for it can mess up the years you paid into SSR.

[Emeline]

Be careful It appears that if you get a pension, you will not be eligible to get your full ss (windfall provision). This is something you need to look into or it is my understanding you could completely lose your pension, especially starting mid career.

Don’t miss: How many years do you need to budget for after retirement?

[Jami]

A rule of thumb that people use is to estimate your retirement expenses and subtract out social security (if any) and the pension amount expected (need to really understand the dollar amounts of how years,age, and HAS comes together). That will help point to investment amount needed. Some add in extra money to the formula to account for inflation and additional medical expenses.

So lets say you need 90,000. At 65 your pension is worth 50,000. And you have 14,000 in social security (note you are going to need to check whether you fall under the windfall reduction provision of social security which means u get less in social security).

90,000-50,000-14,000=26,000. Using the rule of 25 you would multiply 26,000 x 25 which is 650,000. 650,000 is 4% of 26,000. So, you would want 650,000 in investments to make an annual withdrawal of 26,000.

Your pension might be worth more than 50,000 in 25 years. You will want to study and understand how this works.

Your pension plan should allow you to project your pension value at various points. Some pensions allow you to buy extra service years and some jobs allow you to take on extra duties for extra pay to increase HAS.

[Carrie]

Read your pensions paperwork carefully to find out what happens to it if you leave employment before 65 and what happens if you have a spouse and you pass to the pension.

My husband has a state pension and the devil is definitely in the details.

Would you also like to explore: Need some advice on how to approach the 15% rule for retirement

[Kate]

When I did Pension education classes for a living eons ago, I advised people that a standard “benchmark” income replacement ratio was 80% of pre-retirement salary (I told people to use pretax salary but I actually personally calculate it on my after taxes because my actual constructive salary is $22k lower after 401(k) contributions).

Then, if you think SS will be around, take that and add it to your pension benefit @ your desired retirement age. How close are you to 80% income replacement? Any gaps will be filled by your 401(k) or other outside assets.

For example, let’s say I need $80k a year in retirement and my pension gives me $20k and SS gives me another $20k. I’m halfway there and need to get another $40k from somewhere.

Using the 4% rule, a $1,000,000 portfolio would get this person there.

So, to sum: first, figure out your desired income replacement in retirement.

Next, add together fixed income amounts and calculate how close you are to your goal.

Use other assets to fill the gap. And this method, as we saw above, will give you a rough idea of how much those other assets should be.

You’ll also see your accrued and projected benefits on your statements. Your accrued benefit is what you’ve earned to date, payable at NRD. Projected typically assumes continuous service until NRD and no changes to the plan.

When I do projections for myself, I like to account for the fact that my plan may likely be frozen or changed at some point in the future so I typically use a number somewhere in between my accrued and projected.

Also, as others noted, don’t forget to account for any early retirement reduction if you’re mocking this up at any age under NRD.

Hope this helps!

[Author]

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