Pension power

Don't Underestimate Your Pension

By Larry Ferstenou

Based on You CAN Retire Young

Most employed workers will not have an employer-funded (defined-benefit) pension to look forward to. The trend since 1985 has been away from employer-funded pensions and toward employer-sponsored plans like the 401(k) where employees primarily fund their own pensions. Employers may match their employees contributions up to a certain limit, or they may not. That means the pensions of most future retirees will depend on how much they contribute themselves—and few are contributing enough.

If you will receive an employer-funded pension, retiring early can be easier than if you didn't have that advantage. A defined-benefit corporate, civil service, or military pension, which could be available to you after 20 years of service (maybe less) and while you are still in your 40s, could comprise a significant portion of your retirement income. If that’s the case, you will need less net worth than would otherwise be necessary to generate the same monthly income.

Not all employees realize how valuable their future employer-funded pensions are and what a significant part they will play in retirement. For example, a $1,000 guaranteed monthly pension is equivalent to having $150,000 in an investment account earning 8 percent annually; a $2,000 monthly pension is equivalent to $300,000 in an investment earning 8 percent per year. And some pensions are even adjusted annually for inflation. We have friends who will not only have guaranteed monthly pensions, but they will also receive lifetime medical coverage by their employers. Since health insurance can be a significant expense for most early retirees, such coverage by an employer can be yet another major advantage.

If you do not feel you are earning enough to retire early, but you will receive an employer-funded pension, do not underestimate the value of that pension. It can allow you to retire younger with less net worth than would otherwise be necessary if you didn’t have that same guarantee. 

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Larry Ferstenou retired over ten years ago at age 42 and is the author of You CAN Retire Young: How to Retire in Your 40s or 50s Without Being Rich (American Book Business Press, 2002). More information can be found at www.youcanretireyoung.com. Copyright © Larry A. Ferstenou, 2002–2003.