Question

A corporation's pension plan provides a lifetime annual income to its employees upon retirement at age 65. The plan provides 3% for each year of service of the employee's salary upon retirement. Those who retire before 65 have their benefit reduced by 1.5% for each year before 65 that they retire.

Russ retires at age 60 with 26 years of service. If his salary upon retirement is $85,305, what is his annual pension benefit?

Answer 1

annual pension benefit can be calculated using below formula:

annual pension benefit = [(salary upon retirement*no. of years of service)*rate of benefit]*(1 - rate of benefit reduction if retired before age of 65 years)no. of years

There is a 1.5% benefit reduction for each year if employee retires before age of 65. Russ retires at age 60. so, he retires 5 years earlier and there will be a benefit reduction of 1.5% each year for 5 years.

annual pension benefit = [($85,305*26)*3%]*(1 - 0.015)5 = ($2,217,930‬*3%)*(0.985‬)5 = $66,537.9‬*0.927216502365625 = $61,695.04

his annual pension benefit is $61,695.04.