Strategy Example
An Example of Pension Impact
A simple example:
Let’s assume you were a school teacher for the first ten years of your career. Then you changed and became a realtor. Your teacher pension, at age 60 when it becomes ‘unreduced’ will pay you based on a simple formula. You would receive about 2% x years of service x best five years average salary or last five years average salary (or something similar, every formula is a bit different).
Pretend you earned $80,000 per year average for the final five years. Your pension, starting at age 60 would be $80,000 x 2% x 10 years = $16,000 per year forever. (We will ignore details like bridges and survivor benefit options in this example to keep it simple). You changed professions at age 33. The cost of living over the next 27 years to age 60 doubles. Your pension remains the same. It does not grow.
In 27 years, that pension will pay you the same $16,000 per year, but it won’t buy as many groceries. Historically, the cost of living goes up around 3% per year. That means the cost of living doubles every 24 years. In our example, the pension’s purchasing value, is cut more than in half.
Once the pension starts at age 60, it receives increases for the cost of living, but the purchasing power remains lost. In such cases, we suggest you take the commuted value. Essentially take the money and get it invested so it not only keeps up with inflation, but grows in excess of it, so the pension is more than $16,000 per year, in future buying dollars.
Personalized Pension Planning Solutions
Are you unsure about the future of your pension? Let us help you navigate your options, regardless of your career background understanding the intricacies of your pension is crucial.
By assessing your specific situation, we can help you determine whether keeping your pension with the administrator is the right move.
