Taking Care of Mom and Dad: Calculating Benefits

Pension plans use formulas to figure the benefit amount earned. Usually, they involve salary and years of service (for example, a percentage of final or average salary multiplied by the number of years of service) or a flat benefit amount per year of service. The actual dollar amount will depend on such factors as:

• age at retirement;
• earnings (in plans that use salary to compute benefits); and
• years of service under the plan.

The longer someone works under the same defined benefit pension plan, the larger the retirement benefit.

Some plans are integrated with Social Security benefits. In these plans, the benefit earned is reduced or increased to reflect the Social Security benefits a retiree receives.

Your parents receive pension benefits when they reach the normal retirement age set by their plans. The normal retirement age is usually 65. Your parents should check their pension plans for the normal retirement age and become familiar with other benefit provisions.

Most pension plans allow workers to take early retirement upon completing a certain number of years of service and/or reaching a given age. But if your parents decide to retire early, they may receive a lower monthly benefit than they would at normal retirement age because the benefit will be paid over a longer period of time.

There are a variety of ways in which a pension plan can pay benefits. Payments can be made as annuities (equal monthly payments) or as onetime payments (lump sums). If, however, the present value of the benefit is $5,000 or less, the plan may pay the benefit in a single sum without the worker's consent.

If the benefit is worth more than $5,000, the plan must provide the benefit as a monthly payment -- unless the participant has specifically elected otherwise.