Pensions: still growing like clockwork

After mid-career, an old-fashioned pension turns out to be an amazingly valuable perk. Know what yours is worth.

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By Janice Revell, Money Magazine senior writer

janice_revell_new.03.jpg
Money Magazine senior writer Janice Revell
Your number: a quick estimate
The formula Example
Years on the job 15 years
x 0.015 x 0.015
x Salary x $100,000
= Annual benefit = $22,500

Note: Assumes private-sector job. Public employees use 0.02.

(MoneyMagazine) -- You may think that pensions are as dated as the proverbial gold watch. That's understandable. After all, they're arcane and rarely publicized (except to say how they are disappearing), and it's often unclear how much they're really worth. But understanding your pension will help you plan for retirement and value yourself better in the workplace. Here's what you should do.

Find out what you'll collect

Getting a handle on how big your pension is likely to be will help you figure out how much you need to save for retirement. Plus, if you're considering a new gig, you'll want to know how much more you'd earn by sticking with your current job for a few more years.

To a large extent, the size of your pension is based on how long you stay with your employer. Your HR department can give you the exact formula to determine your payout, but the back-of-the-envelope calculation to the right should give you a good idea.

Use it as a bargaining chip

Considering a new job? If you're giving up a traditional pension, you should negotiate a 20 percent to 30 percent higher salary to make up for the lost benefit, says Steve Vernon, an Oxnard, Calif. actuary and president of Rest of Life Communications. And then you'll have to invest every penny of that extra salary and earn 7 percent to 9 percent a year to amass the same amount of retirement money.

Figure out your replacement cost

If you make $100,000 and you've been on the job for 15 years, you've racked up a $22,500 annual pension for the rest of your life (see the formula to the right). Maybe $22,500 doesn't sound like an impressive amount - until you consider how much you'd have to save on your own to generate the same lifetime income.

To calculate that number - in effect, the total dollar value of your pension at your retirement - you need to estimate a host of factors, including how long you'll live. Vernon suggests this quick rule of thumb: Multiply your annual pension payout by 15. In this example, you'd need to amass another $337,500 by retirement to replace your pension checks.

Know your rights

From the dismal headlines, you might think your pension is flimsier than Barry Bonds' latest denials. Not true. Your benefit is protected in several ways. Once your pension is vested - which generally happens after you've been on the job for five years - you're entitled to a payout when you retire, even if you quit your job first or your company discontinues its pension plan (regardless, you may have to wait until you hit the plan's eligible retirement age, typically 55, to collect).

Even if your company goes bankrupt, the federal Pension Benefit Guaranty Corporation will insure your pension payment up to a maximum of $51,750 a year if you retire at age 65. Finally, if you work for a state or local government, your pension is likely protected by law and backed up by tax revenue.  To top of page

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