Financial Opinion and Insights

Understanding Your Pension

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

So, you received your pension statement stating that you can expect $50,000 a year for life when you retire in twenty years.   Is that good?

It depends.   You knew I was going to say that, didn’t you?

Count  yourself as lucky.  Not too many people even have pension plans anymore.   But, will that pension be enough to meet your needs? 

Of course, you may continue to get raises which could raise your pension amount; maybe you’ll even get $75,000 a year!   But, what will that money actually buy?

That depends on your outlook for inflation, of course, and my outlook may be different from yours.  My chief economist, who does the shopping for our family, tells me a different story from what I’m hearing from Washington.  Food and energy, which are not counted in the government’s figures, are two things we spend a lot on – and they’ve been going up dramatically!  Housing prices are down, true, but we’re in our house and not moving – meanwhile, the cost to heat and cool the house has also increased.

My personal CPI (cost of living index), which I’ll call my PCPI, is different from the CPI I hear about on tv.  While some advisors are now using 3.5% in their projections, I think the number going forward will be closer to 4.5% – especially as, I suspect, the government will print money to reduce debt even as the economy, sooner or later, begins to actually find its way to a real recovery.

But, even if you achieve a $75,000 pension – and even if inflation is only 3.5% –  just what will your money buy 20 years from now?  According to my trusty HP10BII, your pension will be worth $37,692 in today’s purchasing power.  You’ll probably receive Social Security, too; but both will be subject to income taxation, and what those rates will be in 20 years is anyone’s guess – I know I have mine.   Could you live in retirement  today on $37,692 + Social Security before taxes?  What will your car cost?   How often will you need one?

Inflation doesn’t end when you retire!   Every pension I know of, except from the government, doesn’t include cost of living adjustments (COLA).    In another ten years, your pension will be worth only $26,721; and only $18,943 ten years after that!   That’s right:  You’re losing purchasing power to inflation every year… and by your third decade of retirement, you might even be a pauper!   And, that’s using the $75,000, 3.5% inflation scenario!

Planning ahead is important.   The cliché’ is true:  If you fail to plan, you are planning to fail.  The sooner you know your situation, the sooner you can not only create a plan – you can actually ACT to change your future.



Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.