Pensions have become less and less prevalent over the decades and are solidly outnumbered by their defined contribution (401k, TSP, 529, etc.) cousins. Many people view this change as just another sign the world is getting harder for the average worker. However, if you plan to retire early, then defined contribution plans I think are the better deal.
The problem with pensions is that like social security they generally require you reach a certain age before you can begin drawing them. This makes sense for the company because someone drawing from a plan for thirty years will be paid much more than someone who starts drawing at an older age for less time. However, for those of us who plan to retire early then likely the only possible option with your pension is to delay taking it by deferring it until later. This doesn’t help much if you are retiring early. Sure it will help later, but only a few calculators and tools I have used have the complexity to model deferred pensions correctly. Also as a federal employee, the federal government is putting a huge amount of money to fund my pension. I would appreciate the option of being forced to put in my part and the government put in their part into a defined contribution instead.
Many pensions are extremely complex and the best book I have found helping to dissect and explain them is Grumpus Maximus’ “The Golden Albatross.” However, to paraphrase him, all pensions are unique and you need to dig into the documents to fully understand them.
Most of the federal pensions I have looked at are a formula which consist as a coefficient X years worked X some sort of average of your income. This means that increasing the numbers you work or your income will directly impact the size of your pension.
Another common attribute of pensions include either increasing based on some sort cost of living adjustment or not. This may include during the deferred years or not.
Some pensions allow you to retire as long as you have the required number of worked years, disability benefits, or a combination of years worked and age.
As you can see the complexities of pensions really require for you to dig in and read and probably reread the documentation. Even among Federal pensions they are vastly different. Army NAF, Air Force NAF, Marine NAF, Navy NAF, Appropriated Fund, Active Duty Legacy Retirement, Active Duty BRS, Wage Grade, etc. may all work similar jobs or in the same squadron, but have entirely different pensions. Making it more confusing is moving between the systems and how certain things will move or port with you, while some other you fully adopt of the other system.
In conclusion, pensions are extremely complex and a bit antiquated, but are a form of forced saving for retirement that is needed in many fields. The majority of pensions today can be found working in government and in especially dangerous or jobs that require youth like military, police, or fire department. Though some pension attributes might be similar or rhyme it is rare to find an exactly same pension in two different systems. Therefore, find or request your plan documents and spend time becoming familiar with them. In my experience, even human resources barely understands much of the pension system and its just best for you to do your own research.
Millionaire Librarian 