# Pension Calculator

Published on :

21 Aug, 2024

Blog Author :

Wallstreetmojo Team

Edited by :

N/A

Reviewed by :

Dheeraj Vaidya

## What Is Pension Calculator?

*Employers contribute pension funds to fund the employees' retirement, and this pension calculator shall be useful to calculate the eligible amount for which the employee is eligible. Therefore, this is a tool that helps pensioners calculate the amount of pension.*

This is quite important for people who are on the verge of retirement and want to plan their expenses in such a way that the pension amount compensates them. This also helps them to decide whether they need any other source of income apart from pension, depending on the possible expenses they may have to incur.

##### Table of contents

### Pension Calculator Explained

The pension calculator is a valuable tool that helps employees calculate the amount of pension that may receive after their retirement. Pension is the fund that employers create for the employees of the organization, from where a fixed amount is paid to the employee every month as a fixed source of income during their lifetime.

This **Federal pension calculator** is a useful tool from the point of view of the employee because it helps them to plan their finances in a systematic manner. Since retirement happens at a future date and there are many factors that affect the value of money over the years, like inflation, unexpected expenses, etc, every employee, during their working years, try to estimate the pension amount that they will receive and check whether it will be enough for meeting expenses after retirement.

The tool of **annuity pension calculator** acts as a guide to selecting a proper investment opportunity that will compensate for any shortfall from the pension amount and leave the employee financially steady, even though there is no flow of salary.

It is to be noted that once the retirement years start, the fixed salary does not come into the bank account anymore, but expenses remain as before. Therefore, it is crucial to make proper financial planning and select a profitable portfolio for investment that will help maintain the lifestyle as it was before retirement. This can be made possible using a **Federal pension calculator**.

The calculator will take the personal details of the employee like age, investment, income, savings, and so on. Then these details are used to calculate the possible pension amount that will help in keeping life hassle-free, post-retirement.

### Formula

The **annuity pension calculator** can guide the individual with the selection of the right kind of pension plan that will suit them according to their current lifestyle, risk capacity, expense levels, etc. It makes accurate computation and based on the pension amount, the individual can start investing in a plan that will give them the desired return once the retirement years start. The financial goals and expense levels will play a very important role in this regard. This is also important to make provision for any unforeseen expenses.

The formula and steps for calculating Pension as per below:

**AS * F * N**

** **Wherein,

- AS is the average salary as per company rules
- F is the factor in terms of percentage, which the company again decides
- N is the number of years worked in that company

Pensions are the type of retirement plan funded by the company and are paid to the employees either in lump sum or installments until death if sold to the insurance company. The pension amount varies from company to company. A pension calculator will be used to compute the eligible amount the employee will receive, depending on the years he has served the company.

The percentage amount or the factor also varies from company to company, which will determine the amount calculation. Pension is usually paid in two ways: one is a lump sum, and another one is in the form of an annuity if the employee desires it.

### How To Calculate?

One needs to follow the below steps in order to calculate the amount of pension using **tax and pension calculator**.

**Step #1: **Determine the average salary of the employee. The salary number that will be used to calculate will be the salary the employee would be eligible to receive just before retirement.

**Step #2: **The Average salary will be mostly the highest-paid years and generally its average of 3 years or more depending upon the company's policy.

**Step #3: **Add the salary for those years and divide the same by the number of years the salary has been considered.

**Step #4: **Now, one needs to determine the factor or percentage the company shall pay as a pension.

**Step #5: **Now Multiply the value arrived in step 3 by the factor determined in step 4.

**Step #6: **In this step, determine the number of years that is served by the employee for the company in which he shall be eligible to receive.

**Step #7: **Take the product of values arrived in step 5 by the number of years that were determined in step 6 to get the amount of pension.

**Step #8: **Divide the value arrived in step 7 by 12 to get a monthly pre-tax pension amount.

A good **tax and pension calculator** will act as a guide to lead a comfortable life even after retirement withoit any worries. The financial planning will also help in supporting any dependent family member as well as follow hobbies and activities as per their own choice, without worrying about financial pressure. Thus, through this calculator, an individual can create a stable and good amount of corpus that will support them at their old age.

### Examples

Let us understand the concept **family pension calculator** with the help of some suitable examples, as given below:

#### Example #1

Mr. A, aged 58 years, has been working in a multinational company for around 25 years and will be retiring at 60. The company has the policy of contributing towards pension funds for employees who have worked a minimum of 10 years in the company and have been determined to pay 0.05 percent of the average of 3 years' highest-paid salary during his entire tenure. Below are the details of Mr. A’s top 5 years’ salary and bonus that he received during his tenure (per annum basis):

Based on the given information and policy of the company, you are required to calculate the amount that Mr. A is eligible to receive the pension amount.

**Solution:**

We are given the factor as 0.05 percent, and the number of years he served would be 25 plus two years remaining in his employment, which equals 27 years.

However, we now need to determine the average salary of Mr. A, and for that, we need to take the highest of below three and take the average of the same.

Hence, we shall take an average of year 2, year 3 and year 5

- = (125,000 + 121,000 + 121,000) / 3
- = $122,333,33

Now, we can use the below formula to calculate the pension amount.

**Pension formula = AS * F * N**

- = 122,333.33 x 0.05% x 27 years
**= $1,651.50**

Therefore, the monthly pension amount would be

- = $1,651.50 / 12
- = $137.63.

#### Example #2

Company MNC has a policy for funding their employees' pension for those who have served the company for at least five years, and the factor that it uses to determine the pension is 2%. It is based on the estimated average salary drawn just before retirement. Mr. Crane has been serving the company for around eight years and is currently drawing an average salary of $10,000 per annum.

The actual person determines that the average salary for the department in which Mr. Cane is working would be around $32,000 per annum and estimates that the person will work for an average of 20 years. Based on the given information, you must calculate the pension amount using **family pension calculator** for which Mr. Cane could be eligible.

**Solution:**

We are given the factor as 2 percent, and the number of years he served would be 20 years.

The average salary determined by the actuary person is $32,000.

Now, we can use the below formula to calculate the pension amount.

**Pension = AS * F * N**

- = 32,000 x 2.00% x 20 years
- =
**12,800**

Therefore, the monthly pension amount would be

- = 12,800/12
**= 1,066.67**

A pension calculator, as discussed above, can be used to calculate the amount of pension the eligible employee would receive during the time of retirement. Any decision made related to a pension cannot be before retirement. Hence those need to be considered carefully. Also, the amounts can be transferred to IRA accounts without any tax considerations.

### Pension Calculator Vs 401(k)

Both the above concepts are related top pension during retirement age. But it is necessary to understand the differences between them, which are as follows:

- The former refers to a tool or online method that helps an individual to calculate the pension amount. But the latter is a contribution plan that an individual can choose to create a pension corpus.
- The former helps in selecting a plan for betterment of retired life, whereas the latter is already a plan where the employee can start contributing.
- The former already has a fixed and inbuilt formula that is used to calculate the pension amount. But the latter is not a formula, but method or process of creating a pension corpus.

Thus, the above are some important differences between the two concepts.

### Recommended Articles

This has been a guide to what is Pension Calculator. We explain the formula along with examples, differences with 401(k) & how to calculate it. You may also take a look at the following useful articles –