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

Income from your "nest egg" supports your retirement life style.

Balancing On Gold Nest Egg image by Scott Maxwell from

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.