Investing

How Much Is My Pension Worth?

August 13, 2019

“I can’t see a lump sum amount of money in my account, so how much is my pension worth? Is it even worth contributing?”

"I can't see a lump sum amount of money in my account, so how much is my pension worth? Is it even worth contributing?" Here's how you know! via @moneygremlin
top 15 posts
When did ordinary become a bad word
Benefits of pursuing financial independence
Now Trending:
Welcome to money gremlin!

I believe a happier life can be achieved through mindful money habits. It's not just about how much money you make; it's about how you use it!


hello,

Featured on:

"I can't see a lump sum amount of money in my account, so how much is my pension worth? Is it even worth contributing?" Here's how you know!
  • Save

I’ve received a lot of questions about defined benefit pensions since I wrote my article explaining the two common types of pensions. The common concern about defined benefit pensions seems to be: “I can’t see a lump sum amount of money in my account, so how much is my pension worth?”.

First: I get it. It’s not easy seeing a large amount of your paychecks deducted with “nothing” to show for it. Typically when you invest money you can log into your account and see a large sum of money sitting in your savings. It’s exciting and validating watching that number grow over time. You SEE that your contributions are worth it.

Show me the money…

Defined benefit pensions don’t work that way. Instead, money is deducted off your paychecks and at retirement you will receive a guaranteed amount of money monthly until your death. How much you’ll receive monthly typically depends on your average salary and number of years of contribution.

For example, if someone with LAPP (my pension) earns $100,000 a year and works 30 years they will receive a guaranteed pension of $3515 FOREVER (calculations done using the LAPP calculator on their website).

Ok, but how much is my pension worth?

So, $3515. Seems like a good amount of money, but is it? Was it worth contributing for 30 years?

"I can't see a lump sum amount of money in my account, so how much is my pension worth? Is it even worth contributing?".... Good news! You can calculate it easily
  • Save

If you’re curious how much money you would need in a conventional retirement account to be able to pay yourself that: good news! It’s actually quite simple to calculate.

If you haven’t read my post on “How much money do you need to retire?” go read that first because it will explain the background behind the math.

As mentioned, 4% is commonly referred to as the safe withdrawal rate. This means that you can take 4% out of your investments yearly with no fear of the money ever running out. Essentially, that’s what your pension equates to: a guaranteed payout with zero concerns of the money depleting.

Your yearly safe withdrawal= Total investments x 4%

So how much is your pension worth? You can calculate it!

"I can't see a lump sum amount of money in my account, so how much is my pension worth? Is it even worth contributing?" Here's how you know!
  • Save

Let’s use the $3515 from our previous example. Yearly that equates to $42,180 ($3515 x 12 months).

If we manipulate the equation:

How much you’d need invested= safe withdrawal / 4%

or

How much you’d need invested= $42,180 / 0.04

You would need $1,054,5000 to safely provide that kind of retirement income. Yup, over ONE MILLION DOLLARS!

So you tell me: is your pension worth paying into?

I understand that it might seem less exciting to see the promise of $3515 monthly for the rest of your life than it is to see one million dollars sitting in your account. I cannot even fathom logging into my bank and seeing that number staring back at me; it would feel amazing.

But maybe you’re looking at it wrong. I think guaranteed money is pretty damn exciting. You do not need to worry about market crashes, choosing the right investments, anything. All risk is gone. That $3515 is promised to you monthly for the rest of your life; you can count on it always being there. As someone who loves guarantees, I think that’s incredibly exciting.

Another way of looking at it: If you live in Canada, you’ve probably heard of the Set For Life scratch lottery tickets. If you win, you get $1000 a week for 25 years. You’re “set for life”.

However, the above pension pays almost the same but without the 25 year cap! You’re going to be paid the equivalent of a lottery win for the remainder of your life, and it’s guaranteed. How is that anything short of amazing?

Some things just require a change in perspective (or a little math). If you’re in a job with a defined benefit pension, you’re lucky. Yes it can feel like the deductions from your paychecks hurt, but it will definitely be worth it.

Who wouldn’t want to be a guaranteed millionaire?

How much is my pension worth
  • Save

For a list of all posts I’ve written, click here

"I can't see a lump sum amount of money in my account, so how much is my pension worth? Is it even worth contributing?" Here's how you know! via @moneygremlin
  • Save

If you enjoyed this post I would really appreciate a comment & share!

Thanks for reading!

+ show Comments

- Hide Comments

add a comment

  1. Anonymous says:

    At what divisor DB pension should be applied is subjective matter. I work at the University Hospital which offers HOOPP (Health care of Ontario Pension Plan) DB pension plan – available only for health care employees. Pension payment raises every year based on COLA (Cost of Living Adjustment), so I have less headache to calculate the present value of future pension when I retire.

    Financial Samurai suggested return divisor should be 2.55% instead of common 4%. The reason why he did, I think, because DB pension is as secure/safe as gov’t bond which doesn’t suffer market volatile as much as private company stocks do. This 2.55% divisor increase the actual value of DB pension than 4%. I think it makes sense if you really think about it. If DB pension pays $1,400/month for lifetime, the value of pension would be $650K @ 2.55% (instead of $425K@4%). I am already a Millionaire without DB pension

Feedback means the world to me. Share your thoughts!

Sign up for the monthly Money Gremlin newsletter! 

Never miss out!

Sign up today!

* indicates required
Share via
Copy link
Powered by Social Snap