I’ve been thinking a lot lately about income during retirement. In the personal finance “blog-o-sphere” it’s always about hitting that financial independence milestone, where your annual expenses are 4% of your total investments, so you can live off of entirely passive income.

That’s a nice idea. But who said you had to rely just on dividends and withdrawls from your investments in retirement? There are other options. Today I’m going to be comparing and contrasting two other options we have available.

The pension

Rabbits: Content without a pension

Rabbits: Content without a pension

I work for a huge employer that still offers an honest-to-god pension. So the pension has always been a part of my retirement planning. And so it is for everyone else who works for this employer. In fact, from the way they talk, you’d think they were all planning to be completely reliant on the pension to cover their living expenses!

The talk is always about how many years they’ve put in, or how many years they “have left.” Like it’s some kind of prison sentence. I don’t know if this is an actual reflection of people’s financial standing, or just a misunderstanding of how pensions work, but everyone seems dead set to work at least 30 years, no matter how old they would be by that point.


Hopefully this picture will illustrate how many numbers we’re looking at today

The basic pension rules

Under our pension system, for up to 20 years of work, you get 1.66% of your final salary for each year worked. Once you hit 20 years, you get 2% for each year. And then at 30, it drops down to 1.5% for each additional year. So between years 19 and 20, you get a jump from about 31% to 40% of your income. Then it becomes less lucrative to stay longer than 30 years.

Pensions aren’t paid until you’re at least 55, and there is a penalty if you don’t have at least 30 years at that point. That penalty is reduced for each year you delay taking a pension until age 62, when you are not penalized at all.

But what does it practically mean to take a pension early? Let’s look at someone with a salary of $70,000:

Taking retirement at age 55:

15 Years of Service $12,770
20 Years of Service $20,440
25 Years of Service $25,550
30 Years of Service $42,000


Taking retirement at age 62:

15 Years of Service $17,493
20 Years of Service $28,000
25 Years of Service $35,000
30 Years of Service $42,000

Continue reading