Retirement Insights

Know Your Pension

If you’re like most people, there’s probably only one thing you know for sure about your pension plan — you’re glad you have one.

But what else do you know about it? More importantly, what should you know about it?

TYPES OF PLANS. First, your plan probably is a traditional-style pension, known as a “defined benefit” plan. You receive retirement benefits that are guaranteed for life, based on your years of service, final average salary and age at retirement.

Some public employers have tried to change their defined benefit pension systems into what’s called a “defined contribution” plan in which employer contributions may be guaranteed — but not the plan’s benefits.

These plans carry more risk than traditional pensions because benefits are based solely on a worker’s success in investing his or her personal retirement account in stocks and bonds. One danger in these plans is that workers who live into their 80s or 90s may outlive the money in their accounts.

In a defined benefit plan, however, the employer takes all the risk, not the worker, and retirement benefits are generally paid monthly throughout the retiree’s life.

GETTING VESTED. You gain equity in a public pension plan after participating for a set period of time; the time varies depending on your plan but usually ranges from three to 10 years. Pass this milestone and you are “vested” in your pension plan and will be qualified to collect benefits when you retire.

The first age at which you will be able to collect full benefits is called the normal retirement age. It varies depending on the plan, but is commonly 60 or 65. In some plans, employees can become eligible for full benefits even before the normal retirement age, but only if they’ve worked for their employer for a specific number of years.

For example, some plan rules permit full benefits for 30-year employees who are a least 55 years old.

Many plans also allow early retirement after a specified age — typically 55 — but benefits are reduced according to an actuarial formula.

CALCULATING BENEFITS. Your retirement system will calculate your benefits based on a formula. A common public-sector formula multiplies your years of service by your final average earnings (usually your final three to five years), times a specific multiplier (these vary according to the plan, but tend to be in the range of 1.5 to 2.5 percent).

If you are nearing 20 or 30 years of service but still are shy a few years or months to qualify for full benefits, check with your plan to see if you can purchase the credits you need.

While retirement systems are usually accurate in their pension calculations, errors can occur. That’s why it’s wise to keep a record of your applicable earnings. Be sure to record bonuses and overtime pay if your plan counts them for pension credit.

HOW YOU’RE PAID. Before retirement, you will get to choose among various payment options. Your personal circumstances will determine which is best for you. These are the most common plan options:

• Life annuity. Benefits are paid for life, but none are paid to survivors after the pensioner’s death.
• Joint and survivor annuity. Pension is paid for life at a reduced amount in order to allow for continued payments to a surviving spouse after the pensioner’s death.
• Ten-years certain and continuous annuity. Benefits are paid for life, but if the participant dies before receiving 120 monthly payments, the remainder of the payments are paid monthly to the retiree’s designated beneficiary.
• Lump-sum distribution. Some plans allow retirees to receive a single, lump-sum payment, equal to the value of the expected pension. While it may benefit some retirees, the danger is that the money will not be invested well or will be spent prematurely, leaving the retiree with little for old age.

VISIT A BENEFITS COUNSELOR. Hank Scheff, director of research and employee benefits for AFSCME Council 31 in Illinois, advises sitting down with a plan counselor three to five years before you hope to retire, “because that will tell you when you can afford to retire and what steps to take to maximize your pension.”