Pension Math: It's All About The Multiplier

When deciding to work in government or in any industry that offers a pension, knowing the pension formula for the pension offered to you is crucial.

It's all about the multiplier. Here's a stark example why.

Most pension formulas come down to three factors: Your highest salary x your years of service credit x a multiplier. The multiplier may increase the older you are when you retire.

I'm not certain whether this is the case for all federal jobs, but I know for a fact the pension formula for many federal jobs uses a multiplier of .01. For most jobs in the executive branch of the State of California, CalPERS uses a multiplier of .02.

Again, here's the stark difference. Let's say you have a married couple. One of the spouses works for the State of California and earns $170,000/year as a highest salary. The other works for the federal government and earns $200,000 as a highest salary. Both are sixty with 16 years of service credit.

$170,000 x 16 x .02 = $54,400 for the California state pension.

$200,000 x 16 x .01 = $32,000 for the federal pension.

To be fair, the federal government offers matching for 401K contributions, but it's on the employee to contribute to get the match. On the downside, you can outlive your 401K, but you cannot outlive a pension.

For many California State employees, the multiplier increases from .02 to .0225 if someone retires at the age of 64.

Again, another stark example. Holding the years of service the same but increasing the age for the State employee to 64, the difference is even greater:

$170,000 x 16 x .0225 = $61,200 for the California state pension.

$200,000 x 16 x .01 = $32,000 for the federal pension.

Know your pension formula. Do your pension math.