Pension Calculator
Per year of service (typically 1.5-2.5%)
Usually highest 3-5 years average
Typical Multipliers
Replacement Ratio Goals
70-80%
Recommended target from all sources
40-50%
Good pension benefit alone
Related Calculators
Understanding Pension Plans
What is a Defined Benefit Pension?
A defined benefit pension guarantees a specific monthly payment in retirement based on a formula that typically includes years of service and salary. Unlike 401(k)s where your benefit depends on investment performance, pension amounts are predetermined.
Standard Pension Formula
Benefit = Years of Service x Multiplier x Final Average Salary
Example: 30 years x 2% x $75,000 = $45,000/year
Types of Pension Plans
Defined Benefit
- - Guaranteed monthly payment
- - Employer bears investment risk
- - Based on formula
- - Common in government jobs
Defined Contribution
- - Account balance varies
- - Employee bears investment risk
- - Based on contributions + growth
- - 401(k), 403(b), TSP
Key Pension Terms
| Term | Definition |
|---|---|
| Vesting | Years required to earn pension rights (typically 5-10 years) |
| Final Average Salary | Average of highest 3-5 years of earnings |
| COLA | Cost of Living Adjustment (inflation protection) |
| Survivor Benefit | Continued payments to spouse after death |
| Early Retirement Factor | Reduction for retiring before normal age |
Pension vs Lump Sum
Some plans offer a choice between monthly pension payments and a lump sum payout. Consider these factors:
Choose Monthly Pension If:
- - You expect to live long
- - You want guaranteed income
- - You are not comfortable investing
- - Your plan has good COLA
Choose Lump Sum If:
- - Health issues limit life expectancy
- - You want to leave inheritance
- - You are confident in investing
- - Plan has no COLA
Sample Calculations
| Years | Multiplier | Salary | Annual Benefit | Monthly |
|---|---|---|---|---|
| 20 | 1.5% | $60,000 | $18,000 | $1,500 |
| 25 | 2.0% | $75,000 | $37,500 | $3,125 |
| 30 | 2.5% | $80,000 | $60,000 | $5,000 |
| 35 | 2.0% | $100,000 | $70,000 | $5,833 |
Important Considerations
Pension benefits may be reduced for early retirement, and survivor options typically reduce the monthly payment. Check your specific plan documents for exact formulas, vesting requirements, and benefit options. Consider consulting with your HR department or a financial advisor.
Frequently Asked Questions
How is a defined benefit pension calculated?
Most pensions use the formula: Annual Benefit = Years of Service x Benefit Multiplier x Final Average Salary. For example, 30 years at 2% multiplier with $75,000 average salary equals $45,000/year. The multiplier varies by employer (typically 1-2.5% per year of service).
What is the final average salary?
Final average salary is typically the average of your highest 3-5 consecutive years of earnings. Some plans use your final year only, while others average more years. Higher-earning years near retirement significantly boost your benefit, so timing of raises and promotions matters.
Should I take a lump sum or monthly pension payments?
Monthly payments provide guaranteed income for life but stop at death (unless you chose survivor benefits). Lump sum gives you control but requires investment skills and carries longevity risk. Choose monthly if you expect to live long and want security; choose lump sum if health is poor or you want to leave inheritance.
What is pension vesting?
Vesting determines when you earn the right to your pension benefits. Cliff vesting means you get 100% after a set period (often 5 years) or 0% before. Graded vesting gradually increases your percentage over time. If you leave before being fully vested, you forfeit some or all employer-contributed benefits.