What's Your Pension Formula?

"When you get old, one of two things is going to happen: You're not going to want to work, or you won't be able to. Plan for both."

~ Herbert A. Robinson, Sr. (my dad)

Whenever I meet people who work in government or in industries that provide pensions, I tell them about my business of teaching people how to get California State civil service jobs. Then I ask them this question:

"What's your pension formula?"

To this day, I have yet to have anyone be able to answer that question. I get blank looks. Crickets.

I smile and tell them, "That's okay. I didn't know either for a long time, but I'm asking you now so you can start planning for retirement. You don't want to work forever, do you?"

At this point, I get vigorous headshakes indicating "no."

Here's the thing I tell my California State Jobs Bootcamp clients: Start with the end in mind. Have a plan for how long you want to work and how much you will need to maintain the standard of living you want when you retire. Know that that number will be a moving target based on your standard of living, inflation, and how well your investments perform. Then back into that number using the three-legged stool method.

A long time ago, someone told me that, just like a stool needs at least three legs to stand, a good retirement needs at least three streams of income. If a pension is one of those streams of income, you need to know your pension formula so you know how much you need to make and how long you need to work to retire while you work. For most California State employees, their "three-legged stool" of retirement consists of their State pension, Social Security, and their 401Ks. I have relatives who are retired State employees who live on their State pensions, travel on their Social Security, and never touch their 401Ks. Their "three-legged stools" are rock solid.

Most pension formulas are an equation with three variables (yes, I'm doing math here, so hold on to your seats, attorneys and creatives);

Variable one: Your highest salary you've achieved at age of retirement. For California State civil service, it's usually the highest salary you've achieved for one year or an average of the highest three you've achieved for three years.

Variable two: Your years of service -- how long you have been employed with a government entity that participates in your public employee retirement system. The public employee retirement system for California State civil service employees is CalPERS, the California Public Employees' Retirement System, the largest public pension fund in the United States.

Variable three: A multiplier, usually based on your age when you retire. It is a percentage.

For example, my pension formula is: My highest yearly salary X my years of service X .02 percent (the multiplier). The minimum retirement age for my pension formula is 50.

Here's the kicker: For most California State civil service employees, the multiplier increases the older you are when you retire. For my pension formula, the multiplier increases from .02 to .0225 at age 64. If you're dealing with small numbers, not a big deal. Bigger numbers? It matters. Someone dear to me works for the federal government and has a pension multiplier is .01. That matters A LOT when you're dealing with six-figure salaries.

The thing about a pension formula is that the variable you have the most control over is your salary. That's why I constantly urge my government employee friends to promote: The higher your salary, the higher your pension when you retire. You may not be able to control the number of years of service you put in (I see it all the time -- people retiring early to become a caregiver for their parents) or the age at which you retire, but you can, to a certain extent, control your salary by constantly promoting.

The other reason I constantly urge my government employee friends to promote is this: Use part of your raises to fund your 401K. Contributions to your 401K reduce your adjusted gross income and, thus, your taxable income. The contributions grow untaxed in your 401K until you start making withdrawals.

If you don't want to work forever, know your pension formula. You might not be able to work forever.