Blog Post

Life after the Pension Freezes

Many companies have terminated their pension plans.  Kellogg is one of the latest, which has scheduled to freeze benefits at the end of 2018.  While the match may be increasing, the loss of additional pension accrual will not be made up by increased match.  Therefore, to adequately fund retirement, it is even more important to maximize contributions

In this paper, I give a generic example of the value of a pension and the amount of savings required to match its value.

A common calculation for pensions is based on 1.5% of final average pay times the number of years worked.  This could be the average of the three highest consecutive years worked or five highest consecutive years worked.

For this example:

Final Average Pay = $100,000

Years Worked = 30

Pension = $100,000 * .015 * 30 = $45,000

The monthly amount is $3750

Keep in mind that this amount is adjusted down for early retirement which could be any age less than 65.  Let’s say, for our example, retirement takes place at 65.

When a pension is frozen, typically it no longer accrues but service continues until retirement.  So, when your pension is frozen, if you continue working until full retirement age you will get an unreduced pension.  If you leave your job or retire early it may be reduced.

Now, let’s say instead of 30 years your pension is frozen at 20 years.  You plan to work 30 years but your pension will quit accruing at 20 years.

Final Average Pay = $100,000 (Based on last years worked before the plan is frozen.)

Years Worked = 20

Pension = $100,000 * .015 * 20 = $30,000

The monthly amount is $2500

So, now the question is how do you make up the difference of $1250/month?

Let’s say you are 55 and plan to start withdrawing the pension at age 65.  You have ten years to save this difference.  Let’s say you average a 6% rate of return.  How much do you have to save over 10 years to withdraw $1250/month for life?

There are two ways to accomplish this:


  1. Withdraw from an investment account.
    1. Let’s assume a withdrawal rate of 3.6%.
    2. 1250*12/.036 = $416,667.
    3. To get there in 10 years at 6% rate of return you would have to save over $39,000 per year extra to make up for the lack of pension.
Year Annual Savings Year End Account Value
1  $39,312.00  $41,670.72
2  $39,312.00  $83,341.44
3  $39,312.00  $125,012.16
4  $39,312.00  $166,682.88
5  $39,312.00  $208,353.60
6  $39,312.00  $250,024.32
7  $39,312.00  $291,695.04
8  $39,312.00  $333,365.76
9  $39,312.00  $375,036.48
10  $39,312.00  $416,707.20


  1. Use an immediate annuity

Another alternative to make up the $1250 shortfall is to save up for a lump sum of money and to put it into an immediate annuity in 10 years.  I’m showing for today a 65-year-old male today can purchase a single life immediate annuity paying $1250 a month for life.  The downside is, once this is done, the lump sum of money is gone, nothing to heirs upon death.  The lump sum needed to provide the $1250 per month today is $227,000.  This makes the savings goal a bit easier to achieve:

Year Annual Savings Year End Account Value
1  $21,324.00  $22,603.44
2  $21,324.00  $45,206.88
3  $21,324.00  $67,810.32
4  $21,324.00  $90,413.76
5  $21,324.00  $113,017.20
6  $21,324.00  $135,620.64
7  $21,324.00  $158,224.08
8  $21,324.00  $180,827.52
9  $21,324.00  $203,430.96
10  $21,324.00  $226,034.40


So, it is imperative to increase savings now to start to overcome this shortfall in pension.  Don’t worry if you can’t do the whole amount.  Any amount you can increase will help you later.

Loren C. Rex, CFP®, AIF®, MA


Generations Financial Planning & Wealth Management

77 E. Michigan Ave, Suite 140

Battle Creek, MI  49017

Tel  269-441-4090

Toll Free: 800-513-8180

Fax  866-381-2301

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Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC.  Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor.  Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.

Examples are hypothetical and for illustrative purposes only. The rates of return do not represent any actual investment and cannot be guaranteed. Any investment involves potential loss of principal.


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