My wife is changing jobs, from city government into the private sector. She isn't fully vested on her pension, but has a couple options and I'm not sure about how to figure out which is best.

Here's the background: She has invested 11k of her earnings towards the pension fund, and in order to receive the minimum pension, she needs to have 37k invested. Because of the vagaries of the pension plan, if she opts out, we'll get back 7k. Therefore, in terms of the math, I don't think this 4k matters at all, as it's a sunk cost.

Option 1: Opt out of pension, Get back 7k, and invest it.

Option 2: Pay 30k to the pension fund, and when we are 57 years old, get back 7k/year until both of us croak. We are both 35 years old now.

I'm not sure what assumptions I should be making to solve this kind of problem (lifespan, avg return on equities, etc). How should I tackle it?

2 Answers 2


From Immediate Annuities .com I see it would take $132K to get $7k/year for the lifetime of a 57 year old couple. It would cost you $37K now (ignoring the other $4K). This looks like a fixed rate of just under 6%. 5.95% to be precise. If we include the $4K, it's 5.45%. It doesn't look bad to me. The numbers seem right.


While @JoeTaxpayer has given you the numerical answers, one thing to be concerned about, especially if you are in the US, is that pension plans of government employees are currently under severe attack as too generous, and are liable to change (read: cut back significantly) at any time. My own pension plan, for example, is changing the table that is used to determine the amount of the pension to be paid based on the contributions effective July 1. Since the change is a reduction in the amount of the pension, a large number of people who are eligible to (but are not required to) retire are choosing to retire by June 30, until which time the pension amount is still calculated using the current table. Those not yet eligible to retire just have to grin and bear it, because resigning and seeking a job elsewhere also has the same drawback that you have pointed out: the amount that is returned as a lump sum is smaller than the amount contributed. All this in spite of a clause in the State Constitution that pension benefits are a contract whose terms cannot be changed by Act of Legislature. In other words, do take into consideration the high probability that in the next 22 years, your wife's pension plan is going to reduce the promised benefits.

  • +1 - Good warning. Yes, I just offered the math, but ignored the not so small risk the plan itself could change. May 28, 2012 at 18:29
  • Out of curiosity, are you in Illinois? I was under the impression that every case ever brought regarding pension modification without explicit approval of the participants has failed due to the constitution.
    – Chuu
    Apr 1 at 15:40

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