Calculate your pension benefits, lump sum values, and retirement income from defined benefit pension plans. Compare pension options and understand your retirement income security.
A pension is a defined benefit retirement plan where employers guarantee specific monthly payments to employees upon retirement. Unlike 401(k) plans, pensions provide predictable income based on years of service and salary history, making them valuable sources of retirement security.
Pension benefits are calculated using formulas that typically consider your years of service, final average salary, and a plan-specific multiplier. Understanding these calculations helps you maximize your pension value and make informed retirement decisions.
Most common formula for calculating annual pension benefits
Current value of future pension payments
Percentage of pre-retirement income replaced by pension
| Plan Type | How It Works | Risk Bearer | Benefit Predictability |
|---|---|---|---|
| Traditional Defined Benefit | Fixed formula based on salary and service | Employer | High |
| Cash Balance | Account grows with pay credits and interest | Shared | Medium |
| Government Plans | Often more generous, COLA adjustments | Taxpayers | Very High |
| Union Plans | Negotiated benefits, multi-employer | Shared | Medium-High |
| Sector | Typical Multiplier | Final Average Salary Period | Example Benefit |
|---|---|---|---|
| Private Sector | 1.0% - 2.5% | 3-5 years | $3,000/month |
| Federal Government | 1.0% - 1.1% | 3 years | $2,500/month |
| State/Local Government | 2.0% - 3.0% | 3-5 years | $4,200/month |
| Teachers | 2.0% - 2.5% | 3-5 years | $3,800/month |
| Police/Fire | 2.5% - 3.5% | 1-3 years | $5,000/month |
| Retirement Type | Eligibility | Reduction | Considerations |
|---|---|---|---|
| Normal Retirement | Full retirement age | None | Maximum benefit |
| Early Retirement | Age 55+ with service | 3-7% per year | Permanent reduction |
| Deferred Retirement | Past normal age | May increase | Delayed credits |
| Disability Retirement | Medical qualification | Often none | Special rules apply |
Most common option for married couples
Maximum pension but no survivor protection
Ensures minimum payout regardless of lifespan
| Factor | Choose Pension If | Choose Lump Sum If |
|---|---|---|
| Longevity | Long life expectancy | Poor health |
| Investment Skill | Conservative investor | Experienced investor |
| Market Conditions | Low interest rates | High interest rates |
| Inflation Protection | COLA adjustments | Inflation hedge needed |
| Legacy Goals | Spouse protection | Inheritance planning |
Automatic COLA: Benefits adjust annually with inflation, common in government plans.
Ad Hoc COLA: Discretionary increases, less predictable in private plans.
No COLA: Fixed benefits lose purchasing power over time due to inflation.
Partial COLA: Limited increases, such as 3% maximum annually regardless of inflation.
| Plan Type | Protection Agency | Insurance Limit | Security Level |
|---|---|---|---|
| Private Sector | PBGC | ~$69,000/year | Medium |
| Government Plans | State/Local backing | Variable | High |
| Union Plans | PBGC (multiemployer) | Lower limits | Medium |
| Church Plans | None | No protection | Variable |
Coordinate with Social Security: Optimize timing of both benefits for maximum income.
Bridge to Medicare: Plan for health insurance coverage from retirement until age 65.
Tax Planning: Pension income is typically fully taxable as ordinary income.
Estate Planning: Consider survivor benefits and inheritance implications.
Leaving Before Vesting: Forfeiting years of service credit by leaving too early.
Not Understanding the Formula: Missing opportunities to increase final average salary.
Ignoring Survivor Benefits: Leaving spouse without adequate protection.
Poor Lump Sum Decisions: Taking lump sum without proper analysis or planning.
Not Coordinating Benefits: Failing to optimize pension with other retirement income sources.