Pension Plan Calculator

Planning for retirement is easy to put off until it's too late. Our pension plan calculator can help you weigh your options and plan ahead.

Let's say you're getting ready to retire, and you have a $3,000 monthly pension awaiting. Plus, you can expect $2,000 per month for as long as you or your beneficiary live through your spouse's social security.

So, how does that impact for your retirement plan?

Trying to decide how to use your pension plan wisely is challenging. The pension plan calculator helps you weigh your options by calculating your income needs and illustrating the effect of inflation.

It's worthwhile to do your research, so you can make the right choices for a secure future. You can also save this page to the home screen of your smartphone, for quick access to it.

A pension plan is a type of retirement plan that's similar to a 401k or a 403b. Pension plans are generally provided through your job.

How It Works

You might have to contribute a certain percentage of your income each month while you're at the company, and your employer may match your contributions or contribute a percentage of their own.

Types Of Pension Plans

Pension plans come in two types:

What Is a Defined Benefit Plan?

The traditional type of pension is known as a defined benefit pension. They're also called career average or final salary pensions.

This is the type of pension plan you're familiar with from your parents and grandparents.

In this type of pension, as the name implies, the employer guarantees that the employee will receive a certain amount of benefits upon retirement, regardless of how the underlying investment pool performed.

Because of this, the employer is contractually obligated to provide the agreed-upon pension amount. This is a problem if the investment pool doesn't perform as well as hoped because the company has to pay out of pocket to make up the difference to their employees.

You can guess why this type of pension plan is losing popularity in the private sector--only 10% of private sector employees now receive defined benefit plans, while about 90% of public employees receive this type of plan.

It depends on the employer, but some employers offer both a pension plan and a 401k.

If this is the case, you can opt for both, neither, or one or the other. Let's take a look at how pension plans stack up against 401ks.

Pension Plans

The pension plan has actually been around for a long time. They got started in 1875, with the first pension plan established at The American Express Company.

Pensions became more popular over the years. At that time, it was normal for a worker to stay with a company from when they started working until they retired. Of course, today, that's often not the case.

That's why 401ks have become more common than pensions.

401k Plans

With a 401k, you can roll your retirement savings over into a new company's plan or an IRA if you switch jobs. And, with a 401k, you can better control your investments than with a pension plan.

401ks also allow you to choose to increase your contributions, while with a pension, you can only contribute a set amount.

Few companies today offer pensions, much less both a 401k and a pension. However, it's common to have both choices if you work in the public sector.

Which One Is Better?

If you plan to spend the rest of your working years with the same company, a pension makes sense.

But a 401k can be a better choice if you plan to leave the company in a matter of years.

There are different types of retirement benefits that vary between the plan in question. This depends on:

• decisions made by participants and their beneficiaries
• the distribution options allowed by the specific plan

One option, for example, is a lump-sum payment, which is pretty much exactly what the name implies, or installment payments.

In a lump-sum, a plan can payout the entirety of benefits without consent as long as the total is less than $5,000. If it exceeds this amount, written consent must be given.

The other option of installment payments are made at regular intervals for a specified time period, or at a specified amount until the account runs out.

Under a defined benefit plan, annuity payments can be made. Payments are made at regular intervals for more than a year, depending on the terms of the plan.

Now, let's say you want to calculate the value of your pension.

To calculate your pension, you need to estimate your annual pension payment, a reasonable return divisor, and a realistic chance of payment until the end of your life.

Remember, there's a possibility your company could go bankrupt and be unable to pay out your pension.

The safest divisor is the 10-year government bond yield (around 2.55%) so that's what we're using here. In plain English, that means you can reasonably expect a 2.55% return on your investments.

Example

Let's say you're a public school teacher retiring after 30 years and you earned $72,000 over the last four years.

Now let's say you'll receive an annual pension of about $43,000, and that your probability of payment until death is 75%.

In that case:

You may not have been earning a killer amount as a public school teacher, but as pensions go, that's hardly a shabby one.