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Common Causes of Errors in Pension Calculation

Errors in Pension Calculation

It’s important to know the present value of your retirement fund or your pension. It’s also important to know the future value of both. And it’s vital to make sure that those calculations are right. That doesn’t always happen. Today we’ll break down the most common causes of errors in pension calculation.

The complexity involved in figuring out how much your retirement will bring you and how much you’ll need to pay means that people often make mistakes.

What are some of the most common causes of errors in pension calculation?

  1. Not Including All Your Compensation

The contributions that you make to your pension plan will be based on your total compensation. So you should make sure that you include all of your compensation.

If you’re regularly working overtime, for example, or depend on bonuses or commissions, you should include those payments when you calculate the amount you should be paying.

All of that money will be taxable, so putting as much as you can afford into your pension fund will reduce your tax liability. It will also bring your pension payments closer to your last salary.

As you calculate the amount you want to contribute, make sure that you know exactly how much you’re earning.

  1. Not Considering Your Years of Service

As we’ve seen, just because your employer has been putting money into your 401(k) doesn’t mean that that money belongs to you. A company’s vesting policy means that you could lose some of that money if you quit your job.

Fail to take those losses into account, and you could find yourself with a nasty surprise when you come to claim your payouts.

Vested contributions only become yours if you meet the vesting conditions. If you’re planning to leave before you meet those conditions, you’ll have to discount them.

  1. Using the Wrong Interest Rate

The future value of your retirement fund will depend on the performance of the fund between now and the day you begin claiming. The rate during your payout period will also determine how much you’ll receive and how long you’ll receive it.

It’s not always easy to determine how quickly your fund will grow. The rate will depend on the nature of the fund and the performance of the markets.

You might not be able to find a completely accurate rate that you can use to make your calculations. But you should be able to find a range of likely rates that will let you understand how much your pension is likely to be worth.

If you can’t use an exact interest rate, understand what the highest and lowest amounts are likely to be.

  1. Your Employer Hasn’t Paid.

When you receive your pay stub, you might focus on the bottom line, but you’ll also be able to see the amount that you’ve placed into your retirement fund or your pension.

What you won’t be able to see, though, is the amount that your employer has placed into your pension. You’ll just have to assume that they’ve done what they said they’d do and met their obligations.

An employer doesn’t always contribute what they say they will contribute to you. When companies are strapped for cash, it’s often employees’ pension contributions that are first to face the chop. The company will hope that the situation will improve and they’ll have time to make up for the late payments before workers retire.

If the company hasn’t paid its share, that missing money will have an effect on the value of your pension. When calculating how much your pension is likely to be worth in the future, it is worth taking the time to check that the pension money has, in fact, been being put into a pension account for you. Making sure the payments have been made.

  1. Your Life Has Changed

Some of the benefits you receive in retirement, particularly your Social Security payments, will depend not just on how much you’ve contributed but on who benefits from them.

Payouts can change depending on whether you’re single, married, and have dependents.

If you haven’t updated your company’s personnel department with any major life changes — such as a marriage, divorce, or the death of a spouse — you might find that there’s a big difference between the pension you expect to receive and the pension you actually receive.

If you’re employed, talk to the personnel office when your life takes a big change. And if you’re self-employed, check with your pension advisor what any life changes mean for your pension. You might find that you need to adjust your monthly payments to take those changes into account.

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