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People Do Not Always Earn As Large of Pensions as They Think

Because pension benefits accumulate slowly, for your first 15 to 20 years as a teacher the value of your contributions may be worth more than the value of the pension benefit itself. In any given year, you can estimate the value of your pension wealth—that is, your pension benefit earned to-date, projected out over your expected life span, all reported back in current dollars—and compare that figure to the total amount you’ve contributed. The backloaded nature pensions means it can take a while before your pension wealth is greater than the money you’ve put into it.

Federal law governing retirement plans require that you can always get your money back from a pension plan if you want to leave. So, if you’ve spent 10 years with employee contributions going into a pension fund and you want to leave for another state, you can always apply to get a check for the amount of contributions made in your name. However, unless you’ve vested in the system, which can take as long as 10 years in an increasing number of states, you probably won’t get any money from contributions that your employer made on your behalf. At best, your pension plan will pay you interest on your accumulated contributions.

To determine if your pension contributions are worth more than the pension benefits you’ve earned, you can measure the value of your contributions into the pension fund each year, plus interest, and compare that to the value of the pension benefits you’ve earned over the same time.

In the scenario below, the value of the pension benefits earned—totaled up over expected lifetime and reported in current dollars—is actually less than the amount of money the teacher has contributed to pension fund, plus interest, up until 24 years into their career. If teachers work more than 24 years, they are still getting what will become a good retirement benefit. Those who work fewer than 24 years, in this scenario, would likely have been better off participating in another kind of retirement plan, such as a guaranteed return plan or even a defined contribution plan invested in a basic index fund.

Comparing Retirement Wealth Accumulation

Source: Aldeman, C. and Johnson, R. 2015. Negative returns: How state pensions shortchange teachers.

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