How to calculate pensions

Written by michael wolfe
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How to calculate pensions
With the right information, calculating a pension can be relatively easy. (senior person image by Peter Baxter from Fotolia.com)

Many long-term employees of an organisation are, upon retirement, rewarded for their years of dedication with the issuance of a pension--a sum of money paid on a regular basis after you retire. The amount of money a pensioner receives generally will depend on a number of factors, such as salary, position and years with the employer. While calculating a pension at retirement is generally easy (just look at the number on your first check) calculating it years in advance can be tricky, and will require you to make some educated guesses.

Skill level:
Moderate

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Instructions

  1. 1

    Ask your employer for information about your pension and your salary. In order to calculate your pension, you must gather as must data as you can about your employer's policies. Ask your company's human resources department to provide you with information on the rules for issuing pensions and, if the pension fund is invested, the investment strategy.

  2. 2

    Calculate your base pension under different scenarios. Using the information given to you by the company, calculate how much you would receive depending on when you retire, what title you hold and the salary you'll be making. For example, if at the time you retired you had been with the company 40 years and held the position of president, you would probably have a much larger pension than if you left after 20 years as a sales manager. Try to determine the most likely scenario.

  3. 3

    Factor in restrictions and offsets. Many organisations will reduce a pension if you have income coming in from other sources. For example, the U.S. Department of Veterans Affairs sets a household income limit for veterans of £9,005; so, if a veteran made £3,250, his pension for that year would be £5,755. Similarly, part of the money a retired employee of the City of Philadelphia receives is offset by Social Security payments.

  4. 4

    Allow for medical deductions--in some cases, such as with military veterans, medical expenses can be deducted from the income limit. This may be difficult to factor in unless you can reasonably guess the sort of medical treatments you will need at retirement, so you may have to leave this as an unknown variable.

  5. 5

    Factor in inflation, which will likely reduce the buying power of your pension at the time you receive it than an equivalent amount would be able to purchase today. Some pensions are adjusted yearly to compensate for inflation, but others do not. Although the precise future rate of inflation can only be guessed at, you can use a financial calculator to make an estimate based on past rates. This will give you an idea of the worth of your pension in today's dollars.

Tips and warnings

  • Some employers have multiple-tier pension plans depending on when an employee started with the company.

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