Every government pension is tied to your years of service to the government. Unlike a 401k, a government pension limits your career options if you want to keep your government retirement. Most government employees trade their career mobility for the stability of a guaranteed government pension at retirement.
Calculating a government pension
Typically you get a percentage (1%-2%) retirement factor that is multiplied to your years of service and average salary for the last 3 or 5 years. Your annual pension at retirement is calculated from the following:
Annual pension = 0.02 x Years of service x average salary for last 3 years
For example, if you have 20 years of government service and your last 3 years of salary is $40k, 45k, and 50k, then your government pension is $18,000.
Annual pension = 0.02 x 20 years x $45,000 = $18,000.
For 20 years of public service, $18,000 is not exactly enough money to live affluently with your government pension without saving some money of your own. With a 401k, your retirement is portable. You can transfer the money from your old company's 401k to your new company's 401k. Your government pension is not even transferable within the public sector. You cannot transfer your service year credits from your old federal government job to your new state government job. In order to get the maximum benefits allowed, some employees have to work 35-40 years for the government.
Then what is the attraction of a government pension?
A government pension is guarantee for the rest of your life. How many other retirement vehicles can claim such a statement? The contributions to a 401k depend on the stock market for growth. As recent plummeting stock prices can attest, there is no guarantee you can't lose your contributions in a 401k.
The minimum retirement age for a government pension is often 55 years old. Once you hit 55 and feel that you can financially retire, you can start collecting your pension.
Do government employees get a pension for free?
A little known fact is that government employees have to pay a portion towards their pension. The contribution to their pension is approximately 1% â€“ 5% of their salary. Some government employees pay more for Social Security than for their pension.
When the economy is good, the tradeoff of being shackle to a government career with lower wages and limited career mobility does not look appealing to the private sector. But when the economy is bad, the tradeoff of a guarantee government pension starts to look mighty attractive.