Pensions have almost become a benefit of the past, having been replaced by 401(k) plans. However, they still exist for state and federal employees and the military. Also, because the majority of my clients are older and have been in long term marriages, often they are grandfathered into a pension with their private employer.
What is a pension anyway? A pension is a promise to pay a monthly benefit for the rest of an employee’s life, and if there is a survivor benefit, for the rest of the spouse’s life when the employee dies. It is based on a formula which is commonly based on years of service, final pay and a multiplier. Pensions are put in place by employers to encourage long term employment.
In a divorce, pensions have to be valued. I tell my clients to think of the value of a pension in the following way: What lump sum of money would I need to invest to guarantee that starting at retirement, there would be enough money to pay me a monthly amount for the rest of my life? To answer that question, we need to know the following:
- What is the monthly amount of the pension payment?
- When do payments begin?
- Based on the persons age now, using an actuarial table, how long is that person expected to live?
- What is the discount rate? In more understandable terms, at what the interest rate would the lump sum have to increase so there would be just enough money to pay the monthly pension through the expected date of death.
As a Certified Divorce Financial Analyst, I have the knowledge to value pensions for my clients and understand the many other technicalities of dividing pensions. Since pensions are often one of the most valuable marital assets, it’s important to get it right!!