The COVID-19 crisis has complicated the employment situation for many Americans. Many companies are trimming their workforce, and some will offer early retirement packages or normal retirement to eligible retirees as part of their efforts. To help illustrate the considerations involved in the decision between working and retiring, we’ll look at a ‘paycheck to pension check’ comparison for a Defined Benefit (DB) plan. We’ll examine the particulars associated with Defined Contribution Plans in another piece.
Retire now? To many in the throes of the economic fallout, retirement is a distant and unfocused possibility. Getting back to work is the primary objective. There are significant differences between paychecks and pension checks, and the ‘work or retire’ decision should be based on a bottom-line comparison. First, let define what a DB plan is. A DB plan provides a fixed (or defined) benefit to the retiree. This is typically based on a formula of compensation times years of service times a multiplier. So, a typical DB might pay a retiree 2.2% of 5-year final average compensation times years of service. In that case, a 65-year old with 30 years of service with a final average compensation of $60,000 with a 2.2% multiplier (like a State of Ohio employee) would get $39,600 of pension. Most DB plans will have some form of reduction for retiring before a certain age, like 62 or 65. Other plans have supplements for early retirement, like the ’30 and out’ supplement at the Big 3 (in Michigan, the Detroit area is home to three major American Auto Manufacturers, we call them the ‘Big 3’). At first blush, $60,000 and $39,600 seem miles apart, but we’ll analyze that below.
View Leon LaBrecque's Forbes contributor profile and other blog posts here: https://www.forbes.com/sites/leonlabrecque/
For Important Disclosure Information click here: https://www.sequoia-financial.com/disclaimer
Image is Getty from original post on Forbes.com.