Replacement Rate
Categories: Accounting
You work as a street magician. Your parents worry about your ability to make ends meet now, and really worry about whether you can save for retirement (they've given up bothering you about that law degree they paid $100,000 for you to get).
Luckily, you've got the retirement part figured out. You are part of the union. A portion of all the dollars that get thrown into your hat at the end of every show (the ones you don't make disappear as part of the act, that is) go into a pension fund.
Right now, you're earning $4,000 a month. If you stay in the union for 20 years, your benefits will vest and you will be entitled to a pension of $1,000 a month. That means your replacement rate is 25%.
The replacement rate measures the percentage of monthly income you keep in retirement. Divide the amount you earn each month in retirement by the amount of your monthly salary as an active worker. That equation provides the replacement rate. The figure is used to judge the effectiveness of a pension plan.
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Finance: What is a Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]