Pension: Archaic Relic?
One thing I really haven’t mentioned in my projected future income is my company’s pension plan. Yes, we have a 401k w/ matching AND also have a tiny little pension plan. Emphasis on the word tiny. To me, based on the amount of years you need to work to get a decent chunk of change, this pension plan is more like a lovely bonus than a real safety net. Besides, I don’t plan on working the number of years they required to get anywhere close to decent. And based on future inflationary concerns, by the time I can get money from the pension plan, the amount of money I can get would be closer to peanuts than, say, hamburgers. I don’t plan on living off it nor will it make any real dent in my standard of living, but seeing how this is supposedly a financial-related blog, I should at least mention it.
So the workings of our pension plan is as goes. It is determined by three factors:
High-3 Salary x Years of Service x Pension Multiplier = Annual Pension Income
Now that seems pretty basic right? Just your average ‘ol pension formula. Well, the catch and kicker is the Pension Multiplier on average is a sickly 1%. Yup! That is non-extraordinary by all means.
Now applying this to my case, I would have worked at my company (assuming I retire by the age of 35) for about 9 years! So assuming I can reach an income of 90,000 by the age of 35 (this should be possible) then I can get the ensuing: 90,000 x 9 x 1% = 8,100/year
Adding another nut in the works is when I can start receiving these benefits. According to my company policy, my minimum retirement age is when I am 57. Booo! So I can’t actually get this money unless I retire at 57… no way in hell am I working another 22 years! The normal retirement route is struck out.
However, there is another thing called early retirement but that ends up reducing the pension amount. In early retirement the pension is permanently reduced by 5% for every year you are under age 62 and you must have at least 10 years of service. Just to satisfy my curiousity, lets do some calculations. Assuming I delay retirement for one year until 36 (so that I have 10 years of service) then my pension will be reduced by (62 – 36 = 26) x 5% = 130%… That can’t be right, based on their formula I would get jack.
Either way, this pension sucks and won’t be applicable to my Retire by 35 plan for a long while. This is probably the reason why I didn’t calculate it earlier.
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Your pension plan formula is pretty typical, although 1.0% x years is a bit on the stingy side. What you are discovering is that a typical pension accrues more as you get older. It’s commonly called a “J-curve”. You’re being hurt not only by the fact that you don’t plan on working there your whole career, but also by the fact that your years spent there occur near the beginning of your eligible working years, and not near the end. The pension would be worth much more if you worked at your company from ages 56 to 65, rather than from ages 36 to 45.
For me, it’s in the middle of my possible working years, plus my employer is more generous. Hence, it does amount to something significant, but if I retire at 45, I will have to wait until 65 to start drawing benefits, and inflation eats up so much in 20 years.
My pension dilemma is actually a pretty major decision I have to face. If I retire in my 40s, it is just when the J-curve is starting to crank up. It is very lucrative to stay with my employer until 50 or 55 because of the pension. My approximate pension value would be $20K/year at 45, but it increases to $40K by 50, and to $80K by 55. That is really, really hard to pass up. However, retiring that late conflicts with how I really want to handle my career and my life. Sigh.
Oops…meant to say ages 26 to 35 for you.
You’re right that most pensions follow a J-curve. I know someone that works for County and in his pension plan he gets around 2.8% of his salary for every year he works, until when he hits the 25 year mark and it suddenly gets boosted to 100%! So if he misses just that one year, he only gets 67.2%. It’s crazy what a difference that makes, so he definitely wants to hang on until the 25th year since he is already in his 21st year.
To me the way the pension plan works is kind of like a carrot and stick routine. The longer you hang around the more it hurts if you leave, so most people end up incentivized to stay around until it becomes really profitable. But in my case there really is no incentive: ours is a straight 1% no matter how many years you work and if you take early retirement (and want the benefits early), even that amount gets reduced by 5% per year… And like you said, inflation can be a killer and over a few decades a lofty sum will end up be tiny peanuts. So I am not depending on a pension by any means.
That is pretty crazy how rapidly your pension cranks up later in life from 20k -> 40k -> 80k! And all in the span of 10 years! I can see why you would have a dilemma about whether to stay on for another 10 years (60k difference per year is definitely large by most means). I think overall the question comes down to which is more important, the money or the time, and whether you will have enough resources to retire at the age of 45. If you can live a comfortable retirement at the age of 45 then maybe all the money in the world won’t be that important to you, but if that extra amount would really change your future lifestyle (and how happy you are in retirement) then it might be worth hanging on for some more years… and you can always compromise by just doing 5 more years and not 10.
I dream of pension plans. Well, not really. I wouldn’t want to be tied to any one job for my entire life! It’s funny, my dad was an actuary and as a child I had no idea what that meant… now I understand why he said his job is becoming obsolete. He spent his whole life figuring out plans that would be the least risky for companies. No wonder he was so depressed all the time.