Calculation of Personal Guaranteed Pension of $40,000
The analysis below is for the would be financial wonks in the crowd. How did we arrive at those numbers and are they realistic? We started with the assumption that the average pay for the last three years was $50k. The pension is 80% of the last three years average wages. We then adjusted the wages down back to 1981 using the U. S. Inflation numbers from the federal government. That gave us a starting wage of $19,599 in 1981. Next we took the $10,000 annual contribution as a percent of each year's wages. It was obvious that no one would contribute over 50% of their 1982 income to a retirement plan so to bring the annual contributions in line with what one might contribute we averaged the annual percentage of each year's contribution. This gave us the average of 31.29%. Next we took 31.29% of each years inflation adjusted income as that year's investment amount and applied to that the historical annual returns of the S&P 500 Index. Even with this calculation it is highly unlikely that anyone would be able to invest 31% of their income each and every year. Furthermore, this is well beyond the amounts historically available in tax deferred retirement accounts such as IRAs and 401(k)s. What does this mean? It means that in the private sector it would not be financially sustainable for anyone to self fund a $40,000 guaranteed pension. The numbers below actually come out to $1.5 million, but once adjusted for taxes they are consistent with the $1.2 million figure required in the example. It would also be prudent to point out that even with a 30 year treasury bond there is no guarantee that the new bond in 30 years would have the same or higher yield, but the municipal pension is not subject to changes in rates of return.