Pensions

A defined benefit pension is part of an earned income stream. You enable the defined benefit pension plan on the job that earns it, pick your Pension Plan from the catalog, and enter your service so far. FinZot computes the benefit from your projected pay using the plan’s own rules, and pays it as income from the year it starts (how a year works). The catalog covers 186 plans, listed on the generated pension plans page. A plan that is not in the catalog can carry its own rules through the connector (custom pension rules). A worked example for FERS is in How FinZot Models Pensions.

A pension with no catalog plan and no connector can be entered as an Other Income stream instead (income streams). That stream is ordinary income with no state pension exclusion, and it does not raise the variable spending budget.

What you enter

• Initial Service Credits. Years of service earned before the plan starts.
• Highest Prior Years. Pay from past years, for plans whose final compensation looks back further than the projection. Left blank, FinZot uses the projected salary path.
• Pension Starts. When payments begin. By default that is the first month the plan’s rules allow, never earlier. You can postpone the pension start to a later age, which most plans reward with a larger benefit. A postponed start given as an age with no month begins the month after that birthday, and the first year pays only the months from the start.
• Survivor benefit election, covered below.

Everything else comes from the plan’s rules.

How the benefit is computed

Each plan in the catalog carries its own version of these rules, and FinZot applies them as written.

• Service. Years of service accrue from the income stream’s period plus your initial credits. Plans that convert unused sick leave into service credit do so at the plan’s rate, counting it only where the plan counts it. FERS counts it toward the 20 years for the 1.1% multiplier but not toward eligibility, and drops any days left over once it is added to service.
• Final compensation. The plan’s averaging rule, such as the highest three consecutive years, applied to the projected salary path.
• Benefit formula. The plan’s multiplier, which can step with age or service, times service, times final compensation.
• Vesting and eligibility. The plan’s minimum service for any benefit and its age and service combinations for an unreduced benefit. Eligibility for an annuity that starts right away is judged on your age the day after you leave, so leaving a month before your minimum retirement age makes the annuity deferred. Retiring before an unreduced age applies the plan’s reduction, measured on your age at the start date. The FERS MRA+10 reduction counts months: 5/12% for each full month under 62.
• Minimum retirement age. Some plans set it by birth year, and FinZot follows the schedule.
• Supplements and bridges. A plan that pays a supplement for a limited time, such as the FERS supplement until 62, pays it on the plan’s terms: the plan’s own formula decides the end age, and in the year it ends the supplement is paid through the birthday month. The FERS supplement ends a month sooner for a birthday on the 1st or 2nd, whose birthday month is already a Social Security month. The FERS supplement counts service rounded to the nearest whole year. Where the plan applies the Social Security earnings test to the supplement, continuing wages reduce the months it is paid.
• Cost-of-living adjustment. Each plan’s formula runs on the year’s inflation. In a Monte Carlo trial it runs on that trial’s inflation path, so a plan whose COLA lags inflation loses purchasing power in high-inflation trials. FERS pays no COLA to a regular retiree under 62, judged on the December 1 each COLA takes effect, so the first one is paid the January after the first December 1 at 62.

Payout elections

• Single life. The full benefit for your life.
• Joint and survivor. Your benefit is permanently reduced by the plan’s percentage, and your spouse receives a percentage of the benefit for life after your death. The Continuation Basis says whether that percentage applies to the reduced or the unreduced benefit. A 0% reduction means the plan provides survivor coverage at no cost.

Taxes and interactions

• Payouts are ordinary income unless the plan marks them tax-free. The catalog records whether a plan is military retirement, and states that exclude military pensions use that (income taxes).
• Employee contributions come out of pay at the plan’s rate, either pre-tax or after-tax as the plan specifies.
• Because a pension is ordinary income, it changes how much of your Social Security is taxable, your IRMAA tier, and your ACA credit before 65. Starting the pension earlier or later changes the bracket room for Roth conversions, and tax-targeted entries re-size to match.
• The pension raises the variable spending budget dollar for dollar from its first payment, after an assumed tax. A supplement that ends at 62 does not.