Pension

A pension (defined benefit plan) is a retirement arrangement where your employer promises you a specific monthly payment for life after retirement, based on a formula.

How Pensions Work:

Benefit Formula: Monthly Benefit = Years of Service × Multiplier × Final Average Salary

Example:

• 30 years of service
• 1.5% multiplier
• Final average salary: $80,000/year
• Annual pension: 30 × 1.5% × $80,000 = $36,000/year

Types of Pension Plans:

Type	Description	Risk Bearer
Defined Benefit	Guaranteed amount	Employer
Defined Contribution	401(k), 403(b)	Employee
Cash Balance	Hybrid approach	Shared

Pension vs. 401(k):

Feature	Pension	401(k)
Benefit	Guaranteed	Depends on market
Investment Risk	Employer	Employee
Portability	Limited	Rollover anywhere
Contribution	Employer funds	You contribute
Calculation	Formula-based	Account balance

Pension Funding Status:

• Fully funded: Assets ≥ liabilities
• Underfunded: Assets < liabilities (risk)
• PBGC: Federal insurance (limited protection)

Key Pension Decisions:

Lump Sum vs. Annuity:

• Lump sum: Control, inheritance potential
• Annuity: Guaranteed income for life

Survivor Benefits:

• Single life: Higher payment, ends at death
• Joint & survivor: Lower payment, continues for spouse

Vesting Schedule: When you earn the right to pension benefits (typically 3-7 years)

Pension Trends:

• Private sector pensions declining rapidly
• Government pensions still common
• Many plans frozen or terminated