How to Figure Out How Much a Pension Reduces the Nest Egg You Need

In retirement the income you live on will come from Social Security, any pension you have earned and withdrawals or earnings from your accumulated savings and investments -- your "nest egg." Receiving a pension from an employer definitely reduces the size of the nest egg you need to personally build to provide the income for your standard of living in retirement.

Step 1

Determine or estimate the amount of pension you will receive after retirement. If you are near retirement, the human resources department can provide you with your expected pension amount. If you are more than a few years away from retirement, estimate your pension amount based on the pension rules concerning your years of service and average income. State the expected pension in an annual amount.

Step 2

Divide the projected amount of your annual pension by 4 percent. The percentage can also be written as 0.04. For example, if you receive a pension of $20,000 per year, $20,000 divided by 0.04 equals $500,000. This means it would take $500,000 in a diversified investment account to provide $20,000 of annual income.

Step 3

Determine the total amount of your desired nest egg. Subtract the calculated lump sum amount in Step 2 from your total nest egg requirement. For example, if you wanted to retire with a nest egg of $2.5 million. The receipt of a $20,000 per year pension reduces your personal nest egg requirement to $2.0 million.

Tip

  • A 4 percent withdrawal rate has been shown to be the maximum amount that should be drawn from retirement accounts to ensure the account lasts for the life of the retiree.
  • The 4 percent withdrawal rule allows the annual amount taken to be increased each year for inflation. Check to see if your pension also increases with inflation. If it does not, plan to make your nest egg a little bigger.

Photo Credits

  • Balancing On Gold Nest Egg image by Scott Maxwell from Fotolia.com

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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