- Feb 22, 2017
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I found this article today about how to factor in a pension for retirement planning.
www.journalofaccountancy.com
A good rule of thumb is that the retiree would need $18,000 in retirement savings for every $1,200 per year ($100 per month) of earned pension income. In applying this rule, the amount of earned pension income an employee has at any point in time is based on the employer's pension formula, the employee's current earnings, and the time spent on the job to date.
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As an example, examine how much an earned pension income of $30,000 would add to a person's net worth. A defined benefit plan income of $30,000 annually is $2,500 per month, which is 25 times $100. Therefore, it follows that funding such a pension benefit with a 401(k)-style defined contribution plan would require retirement savings of at least $450,000 (25 × $18,000). Consequently, the defined benefit plan adds $450,000 to net worth.
What do you all think of this formula?
I get pretty close to the same numbers when I just calculate how much a pension will have paid if I live to be 85. So I feel the formula is pretty good.
Helping retirement plan participants understand their net worth
Two easy mistakes seen in retirement planning involve valuation of pensions and improper net-worth comparisons.
www.journalofaccountancy.com
A good rule of thumb is that the retiree would need $18,000 in retirement savings for every $1,200 per year ($100 per month) of earned pension income. In applying this rule, the amount of earned pension income an employee has at any point in time is based on the employer's pension formula, the employee's current earnings, and the time spent on the job to date.
...
As an example, examine how much an earned pension income of $30,000 would add to a person's net worth. A defined benefit plan income of $30,000 annually is $2,500 per month, which is 25 times $100. Therefore, it follows that funding such a pension benefit with a 401(k)-style defined contribution plan would require retirement savings of at least $450,000 (25 × $18,000). Consequently, the defined benefit plan adds $450,000 to net worth.
What do you all think of this formula?
I get pretty close to the same numbers when I just calculate how much a pension will have paid if I live to be 85. So I feel the formula is pretty good.
