How Much Will My Pension Be Worth at Age 65?

January 20, 2008 at 11:05 PM 1 comment

Anytime after age 55 I will have access to pension benefits for a plan that is currently frozen and without a COLA (cost of living adjustments). In order to receive the full benefits I have to wait until age 65. If I take the pension prior to age 65 I will be penalized for early retirement.

According to pension documents I will receive upwards of $1,000 per month in benefits at age 65. (I’m rounding the number down to $1,000 to keep the math simple.) Add $1,000 payments over 12 months and you’re looking at a sum of over $12,000 in extra income each year. $12,000 isn’t going to send me to the moon, but at first glance it seems like a decent boost to my 401(k) and Roth IRA savings. But after taking inflation into account those pension benefits appear far less than stellar.

In 35 years, after accounting for a 3% rise in inflation, my $1,000 a month pension benefit will be worth less than $350 in today’s dollars. And that’s the value in my very first year of retirement. Add an estimated 20 years of retirement and I’m looking at a value of less than $130 in today’s dollars. When I look at the numbers I can’t help but hear my grandmother saying, “how can a coke cost over a dollar? When I was young I could buy a coke for a nickel?”

Inflation is cruel to pensions without cost of living adjustments. When adjusted for a 3% rate of inflation a fixed pension will lose 50% of it’s value in 22 years. Raise the level of inflation to 5% and that same pension will lose half of it’s value in 14 years. This might not be such a big deal to those who choose to retire later in life, but inflation will quickly erode the pension benefits of those who choose to become young retirees. It will be even more cruel to pensions like mine that have been involuntarily frozen.

Let’s face it if my company had provided the option of receiving a cash payment for accrued pension benefits I certainly would have taken it. Furthermore, if my company had provided the option of additional 401(k) matching in lieu of the pension I would have opted for the alternative. But I wasn’t given either option.

Now I realize that most of today’s employees, particularly today’s 30-year-old employees, do not participate in pension plans. So I am happy that my company will send me a check at age 65, but by the time I’m ready to collect, that check will be an extremely small one.

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1 Comment Add your own

  • 1. Anonymous  |  April 19, 2011 at 12:47 AM

    I'm 57 and have worked for the same big company for 30 great years. I stand to receive a healthy pension in 5 years. It would take about 1.2 million to buy an annuity that would deliver as much. Don't pooh-pooh pensions Frugal Girl. The trouble is that way too few people stick around long enough to get their full benefit. By the way my company provides a 401k also.

    Reply

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