The Pension Route to Early Retirement

Pension Route to Early Retirement

“I can just work 25 more years and ride off into the sunset with my pension.  I would be entitled to 90% of my salary (average of my last three working years) for the rest of my life!”


Coworker’s Plan

Pension Plan

Earlier this week, my coworker shared with me her potential early retirement plan.  It was a pretty simple plan but it involved working for the government for 25 more years.

Why 25 more years?  As city employees, that’s how our defined benefit pension plan is setup.  If you work 30 years, you are entitled to receive 90% of your salary (average of last three years), for the rest of your life.

Given the fact that we are around the same age, her plan piqued my interest!  If I followed her plan, I could retire at 56.  Given the standard retirement age is 65, that’s what I would call a late early retirement.

This plan excited me, until I remembered that I would have to work for the government for 25 more years.  This, along with other reasons, gave me pause.  I’ll discuss the other reasons later in this post.  For now, let’s get back to learning more about defined benefit pension plans!

Defined Benefit Pension Plans

For most people, defined benefit plans, are not even an option.  According to a CNN Money article, only 4% of private sector employees have access to it as their primary retirement account.

For comparison, 64% of state and local government employees have access to one.

As a local government employee, it is mandatory that I participate in the plan.  9.5%  (social security is not taken out) of my salary is taken out every paycheck, whether I like it or not.  The only voice I have in the matter is voting for our retirement plan administrator, which I failed to do this year.

Advantage of Pension Plan

To me, making it mandatory that I contribute a certain percentage of my salary, is an advantage of the plan.  If I were given a choice, would I be contributing 9.5 percent of my paycheck to retirement?

As a personal finance blogger, I would like to think I would contribute even more.  But not having a choice definitely helps!

Another advantage would be contributing a small amount into the system and reaping such a large reward.  Let’s say, I average $60,000 over my 30 year working career with the city.  That means I have contributed $171.000 towards the pension plan.

Using the social security actuarial life expectancy chart, I learned that there is a high probability that I will live to reach 78 years old.  With this information, I can project a payout of approximately 1.19 million from my pension.

Of course, that is highly speculative!  I have no clue how long I will live. However, I hope to live a long, fruitful life.

Disadvantages of Pension Plan

On the flip side of things, there are some disadvantages with having a pension plan as your primary option.  Maybe you can think of some more disadvantages (let me know in comments section), but here are two potential disadvantages that immediately come to my mind:

  • No 401 (k) match for me
  • Lack of control over how pension funds are invested

For those who have access to a 401 (k), most personal finance professionals recommend that they take advantage of their employer match, if one is offered.  I often wonder how much money I am missing out on by not having this option available to me.

Also, the lack of control over how my money is invested is something else I ponder sometimes.  Could I make more money by investing my dollars myself?

Other Investment Options Available

To counter the disadvantages above, there are other investment vehicles available to government employees.  You can, of course, contribute to a Roth or regular IRA (5,500 if you are under 50).  In addition to that, you can contribute to a deferred compensation account (up to 18,500).

For now, I have decided to supplement my defined benefit plan contribution by opening a Roth account.

Now that we have covered some advantages/disadvantages of the pension plan, let’s get back to taking a look at whether I should follow my coworkers plan.

Should I Take the Pension Route?

Taking the pension route to early retirement seems like a good strategy for my coworker.  She has purchased a condo and has recently married the love of her life.  It is safe to say she plans on living in her current location for a while!

I, on the other hand, am a single male who does not own a home.  Nor am I locked into a lease agreement.  I live with my brother and cousin and we split the utility bills and rent collected by my mother.

My unique situation allows me to take advantage of unforeseen opportunities.  While my brother and cousin would probably upset if I left (I pay more than my fair share), they would get over it.

Moreover, I intend to get married at some point.  My mom always jokes, “You are always the groomsman, never the groom!”  One day, Mom! One day I will be the groom.

I’d have to discuss living in my current location for the next 25 years with the future Mrs. Peerless!


While my coworker’s plan to retire early, seems solid, it probably will not work for me.  It requires a 25 year commitment to working for the same employer.  As a single guy who wants to get married, I don’t even have a clue where I will end up living five years from now.

Plus, I would not want to limit my career options.  Like my coworker, I would love to enjoy a late early retirement, but I will likely choose another route there!

Am I crazy for doing so, though? Who knows!


*I am not a certified to give professional financial advice.  My blog is written purely for your educational entertainment.  Don’t listen to anything I tell you; I am just a personal finance addict who loves to write…*

Community Feedback

  • What would you do if you were in my situation?
  • What are some things that could go wrong with my coworker’s potential plan?
  • Did I overlook any potential advantages/disadvantages to having a pension plan?
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22 thoughts on “The Pension Route to Early Retirement

  1. The biggest issue I see is what if the pension fund becomes insolvent, a federal pension might get bailed out by the Treasury but city plans aren’t backed by anyone who can print money. Also the benefits are not inflation protected. 90% of your salary is fine in year one but it might be pocket change by year 20. Pensions are nice side benefits but I’d be nervous if that was my main source of income.

    1. Thanks for stopping by, Steve! Those are some important points I overlooked. The pension fund becoming insolvent would certainly be a nightmare scenario. How could I forget about inflation?

      Using the inflation calculator at Dollar Times, I found that $60,000.00 in 1993 had the same buying power as $104,238.48 in 2018

      Annual inflation over this period was about 2.23%

      I am not sure what inflation will look like going forward (maybe it will average 2%), but knowing that gives me pause.

      Thanks again for pointing out the oversight!

  2. Hey man! Great post… we just got into the pension plan world when my wife took a job with the state about 4 months ago. At first i thought i was missing something when i didn’t see a 401k match in my wifes account… that definitely threw me for a loop.I’m just now seeing that it’s actually pretty common. My biggest concern is that my wife probably isn’t looking to stay at this job for over 10 years. I just think the advantages begin to become less significant if you are only there for a short amount of time.Cheers man!

    1. Thanks for stopping by, Half Life! Haha, when I first started working, I was looking for that option as well.

      To become vested, I would have to work with the city for another five years. The good thing about working for the city is that the job security is high; I would have to do something extremely crazy to be let go.
      On the flip side of things, I could probably make more money by venturing into the private sector.
  3. I have a private work place pension. As someone mentioned both inflation and solvency would give me pause. But honestly it’s worse then solvency due to bankruptcy. Even a hint of government financial situation may result in decreased benefits. It’s already happening in some states. Diversification of retirement sources is key. My pension is just a small piece of a complex puzzle.
    FullTimeFinance recently posted…My Changing Views On Marriage and MoneyMy Profile

    1. Thanks for stopping by, FullTimeFinance! Yes, they give me pause as well.

      I’ll have to do some research on pension insolvency.
      What are some other investment vehicles you use for diversification purposes?
  4. I have a DB pension and am in the same boat as you – not yet married and uncertain if another 26 years in the public sector makes sense (which would be age 55 when I am eligible for retirement).The way I see it: I calculate my pension value into my net worth, but from a retirement perspective, I pretend I don’t have it and up my personal savings as much as possible!

    1. Thanks for stopping by, Albert! 26 years would be a huge commitment. While the public sector has high job security, I think I could potentially make a lot more money in the private sector.

      That sounds like a very sound strategy!
      How long do you have to stay with your employer before you become partially vested? With my employer, I’d have to make it to the ten year mark.
  5. Deferred Comp is nice because you can withdraw the money without penalty before a minimum age. I stuff my 457(b) to the gills as part of a FIRE plan to cover the gap years.

    1. Thanks for stopping by, Othala! Wow, I was not aware of that. After looking at my deferred comp options, I wasn’t happy with the high expense ratios. I’ll have to take another look.

  6. A couple of salient points were already made regarding the potential impact of inflation on your defined benefit amount over time, the risk of pension fund insolvency, and the additional withdrawal timeline flexibility granted by deferred compensation accounts. The other major risk factor with your pension beyond insolvency or reduced benefits is building a retirement strategy based primarily on it only to have circumstances out of your control like a layoff remove your eligibility 20+ years in. All of that said, don’t worry one iota about missing out on a 401K match. The benefits on offer through your pension plan far outstrip the typical 401K, even with a generous employer match factored in. From your example, you’d be contributing $5,700/year for 30 years into your pension, a total of $171,000. But in return, you could expect an annual stipend of $54,000/year for life. Using the Rule of 25 in reverse, we can calculate that this stipend means your individual pension fund benefit balance is $1.35 million.Compare and contrast this to a 401K example. A contribution of $5,700 for 30 years at 7% annual investment growth puts your balance at just $576,116. Even with a very generous dollar-for-dollar match of that $5,700 per year, your balance after 30 years would only be $1.15 million. Beyond this, you would still have the risk of investment performance to monitor / mitigate in retirement, vs. the guaranteed benefit of the pension stipend.One final advantage of the pension over a 401K is the lack of Social Security taxes owed out of every paycheck. That’s 6.2% which you don’t have to pay which a 401K participant would. Put another way, your current disposable income is 6.2% higher than it would be if you were working a private sector job. Your life situation could well change, so I wouldn’t recommend putting all of your eggs in the pension basket. But at the same time, pensions are usually retirement gold mines, and yours is no exception. The financial incentives to stay in that job are quite strong, and I’d recommend carefully weighing all circumstances prior to leaving.

    1. Wow, thanks so much for this brilliant, thought-provoking analysis, Mr. Financial Freedom Project! It definitely gives me something to ponder as I look at making my next move.

      I was just thinking about the social security piece yesterday. While I don’t have to contribute to social security, this means my social security benefits will be reduced greatly.

      In comparison, someone working in the private sector will have a greater social security payout during their retirement.

      It probably is a matter of small concern, given the fact that most bloggers I know do not include social security benefits in their retirement projections.

  7. I am a state employee, and as such, I contribute to the pension plan whatever the mandatory percentage is. If I stay at my current job for 28 more years, I will get 80% of the average of my five highest-earning years. That puts me at 64 years old. Nope!If I do ten years, I at least get vested in the insurance program, which means once I reach a certain age (I think 62) I would be able to get the retirement health insurance package, which is great coverage.I’m almost at the 6 year mark, so I’m thinking abut sticking it out for the next 4 years and then moving on. It’ll be a long 4 years, though.

  8. I am in a similar boat. I’m a city teacher and contribute to my pension. I would have to work 30 years to get a 55% of my final 5 years of teaching salary. In addition to the pension, I also contribute to a 403b and 457 plan from work and an IRA at Vanguard. Since I don’t plan to work that many years, I’m trying to build as big of a nest egg as I can so I can achieve FI way before all the other teachers in my district.

  9. I’ve just come across this now.
    I was in the same position with a company a few years back – I had worked 10 years and was entitled to 20% of my final salary when I turned 60 (I was early 30s at the time).
    A lot of employees were “lifers” – sticking in with jobs that they didn’t like because the pension was so good.

    Spending the next 25 years of your life working at something so that you can quit and retire isn’t necessarily a good way to live your life.

    I took voluntary severance and moved on. Got those 10 years in the bank for when I turn 60 but the change of workplace has been a real eye opener
    Gentleman’s Family Finances recently posted…Lenten Pledge: Digital DetoxMy Profile

    1. Hello Gentleman’s Family Finances,

      Thanks for reading the article and sharing your experience! It’s the same way here – there are a lot of lifers just drifting along until it’s time to collect that pension. I can’t really judge them though since I have been working this job way longer than I anticipated. The job is incredibly stable.

      Time for me to start looking for positions outside of the system.


      1. coming from a European mentality, I think that the brutality of the US workplace is not great – 14 days holiday a year? long commutes and long hours, job insecurity or bad conditions with fewer workplace benefits (maternty leave for example).

        However, what you do get is dynamism and people willing to job hop and people having the feeling of control over their destiny.

        In the UK, people will put up with all sorts of rubbish in work – motivation & morale is very low in my company and people are leaving – but the leavers are the ones who are more motivated and want to get out of a sinking ship. Those that remain are stuck working in the place that they don’t like – easier to sit and complain than move out of your comfort zone.

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