Imagine leaving federal service to start the next chapter of your life only to get the rude shock that your pension is 30% lower than expected. Jeanne writes in to discuss this particular perplexing problem. How do you make sure that doesn’t happen to you? For Micah, the answer starts with how you calculate your pension.

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If you have more questions on how to calculate your pension, let us know in the comments and we’ll try to answer it in a future episode

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Micah Shilanski, CFP®
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Using Years Of Service To Calculate Your Pension

As retirement approaches, many individuals start to think about their pension and how it will sustain them in their golden years. One of the crucial factors that impact the calculation of your pension amount is the number of years you have served in your employment. The formula used for calculating pensions often takes into account the number of years worked, along with other factors like salary and age.

Years of service is an essential component when calculating your pension. It refers to the duration of time you have spent working for the same employer or within a specific retirement system. Each year of service contributes to the accumulation of benefits that you will ultimately receive in retirement.

The calculation of your pension typically involves multiplying your years of service by a specific percentage factor. The percentage factor is usually determined by your employer or governmental retirement system and varies depending on the pension plan in place. For example, a common formula could be multiplying your years of service by 1.5% to determine the annual pension amount. So, if you worked 30 years, your pension would be calculated as 30 years × 1.5% = 45% of your final average salary.

It’s important to note that some pension plans may have a cap on the maximum number of years considered for the calculation, such as 25 or 30 years. Any additional years of service beyond the maximum limit may not contribute to a higher pension. Thus, it is crucial to understand your specific pension plan’s rules and regulations.

To ensure accuracy, it’s essential to keep track of your years of service diligently. Your employer or retirement system should maintain records of your employment history, including start and end dates for each position. These records will serve as vital documentation when it comes time to calculate your pension.

In some cases, individuals may have worked for multiple employers over their career. If each employer offers a pension plan, the years of service for each plan are typically added together to calculate the total pension benefit. However, this process may vary depending on the retirement system or pension plan in place.

Additionally, it’s worth mentioning that some pension plans offer enhanced benefits for individuals who have served for a more extended period. These enhancements are often referred to as “service credits” or “service increments” and can significantly increase your overall pension amount. For example, a pension plan may offer bonus percentages or extra years of credited service after completing a predetermined number of years of service.

In conclusion, when it comes to calculating your pension, years of service play a vital role. The longer you have worked for an employer or within a specific retirement system, the more beneficial it is for your pension amount. Keeping track of your employment history, understanding your specific pension plan rules, and being aware of any additional benefits for extended service will help you plan for a secure and comfortable retirement.