Not everyone has a pension plan, but if you do it could be a tremendous boon to your plans for financial independence. A pension plan seems cut and dry, but in this episode of Money Mile, you’ll hear five ways that you could optimize your pension so that you can maximize your benefits. Let’s share a mile together so that you can learn how to maximize your pension and maximize your plans for financial independence.
You will want to hear this episode if you are interested in…
- How pension benefits are calculated [1:22]
- How you can improve your pension benefit [3:27]
- How Social Security fits into your plans for financial independence [5:30]
- An example of how Harry and Jenny can maximize their pension [7:46]
- Your homework [12:21]
What is a pension?
Pensions are the dinosaurs of retirement savings because most people no longer receive benefits from them. However, employees that still participate in pension programs can find tremendous ways to benefit.
First of all, let’s define what a pension is. The pensions that I am describing are the old-school defined benefit plans where you work for the same employer for 20 years or more and receive a defined benefit. That benefit typically comes in the form of a monthly payment.
The monthly payment is calculated by using a basic formula derived from your years of service, your pension factor, and your salary factor. It is important to understand the formula, what each component consists of, and how the benefit works for you.
Listen in to hear how the basic framework works so that you can understand the various scenarios that you might face especially if you are married.
5 ways to maximize your pension
Most people take their pensions at face value, but there are ways to improve the benefits you receive from your pension if you know how the system works. There are five primary ways that you could increase the value of your traditional pension.
- Work longer. More years of service equals more benefits. Some pensions even have longevity bonuses. That means if you reach a certain amount of time in the system it will further increase your benefits.
- Change your pension factor. Changing your pension factor may require a career change. However, before jumping into a new career, you’ll want to fully understand what it would mean for your pension.
- Increase your income. It is important to understand how your pension system works to take full advantage of this factor.
- Evaluate all the survivorship benefit options. You may be able to increase how much you receive from your pension over time by carefully considering the different options regarding survivorship benefits. Your spouse may not need 100% survivorship benefits, consider whether a 75% or 50% benefit would make sense for them.
- Consider taking the lump sum buyout. Taking a lump sum may or may not be an option for you. Carefully scrutinize whether this could be a beneficial strategy for your retirement plans. A financial advisor could help you understand the pros and cons of this option.
Social Security is another pension program to consider
Social Security can be considered its own government-run pension program. However, if you are covered by other pension plans you may no longer qualify for Social Security benefits. Make sure that you fully understand how your pension affects your Social Security eligibility.
Social Security benefits are based on your full retirement age and your 35 highest earning years. Full retirement age is either 66 or 67 depending on your date of birth. Retirees are eligible to collect early retirement at age 62 or they could delay collecting Social Security until age 70 to receive an increased benefit.
It is important to remember that you don’t necessarily have to take your pension or Social Security when you stop working. There are other considerations as well. I encourage you to consider whether you want to take your benefits when you stop working or whether you want to break up your pension and Social Security benefits into separate time periods. Listen in to hear various possibilities.
Resources & People Mentioned
- Episode 15 – 6 Pro Tips for College Planning