Financial Algebra© Cengage/South-Western Slide 1

9-3

PENSIONS

Calculate pension benefits using various formulas.

Calculate pension benefits during and after vesting periods.

OBJECTIVES

Financial Algebra© Cengage Learning/South-Western Slide 2

deferred compensationpensiondefined benefit plan vested

cliff vestinggraded vesting

single life annuityqualified joint and survivor annuity lump-sum payment

Flat-Benefit FormulaCareer-Average FormulaFinal-Average FormulaPension Benefit Guaranty Corporation (PBGC)Employee Retirement Income Security Act (ERISA)Pension Protection Act cost of living adjustment (COLA)Consumer Price Index (CPI)

Key Terms

Financial Algebra© Cengage Learning/South-Western Slide 3

Example 1

Roberto worked for the Surgical Tools Corporation for 20 years. His employer offers a pension benefit package with a flat benefit formula using the flat amount of $40 for each year of service to calculate his monthly pension. How much will Roberto’s monthly pension benefit be?

Financial Algebra© Cengage Learning/South-Western Slide 4

Example 2

After one year of retirement, Roberto’s employer (from Example 1), offered a 2.21% cost of living adjustment to his monthly pension benefit. This year, the employer is offering a 2.35% COLA. Determine Roberto’s current monthly pension benefit.

Financial Algebra© Cengage Learning/South-Western Slide 5

EXAMPLE 3

Brian and Marina are married and each is planning on retiring after 30 years of employment. Marina worked the entire 30 years for Santa Fe Corporation. For the last three years she has been making $110,000 per year. Brian has been making the same salary for the last three years at Santa Fe, but has only been working there for 15 years. Prior to his current job, he worked for 15 years at a competitor and had a final average salary of $60,000. Both employers offered a defined benefit plan that calculated the annual pension as the product of the final three year average salary, the number of years of service, and a 2% multiplier. Calculate and compare Marina and Brian’s annual pension upon retirement from Santa Fe.

Financial Algebra© Cengage Learning/South-Western Slide 6

Ann’s employer offers a pension plan that calculates the annual pension as the product of the final three year average salary, the number of years of service, and a 2% multiplier. Her employer uses a graded 6-year vesting formula as shown. After 5 years, Ann decides to leave her job. Her average salary was $50,000. How much pension will she receive?

EXAMPLE 4