How a Defined Benefit Pension Works
A pension is not an account with a balance. It is a promise, computed from a formula that almost every plan shares:
Annual pension = Years of service × Multiplier × Final average salary
The multiplier is set by the plan, typically 1.0% to 2.5% per year of service. A 25-year career at a 1.8% multiplier produces 45% of final salary for life. This is why pensions reward long tenure so heavily — both terms in the formula grow together.
Final Average Salary Is Not Your Last Paycheck
Most plans average the highest three or five consecutive years, not the final one. Overtime, bonuses and unused leave may or may not count, and the rules vary sharply between plans. Since the multiplier applies to this figure for the rest of your life, a year of high earnings inside the averaging window is worth far more than the same earnings outside it.
Survivor Options Cost Real Money
A single-life annuity pays the most and stops at your death. Joint-and-survivor options continue paying a spouse, and the plan reduces the payment to fund it:
| Option | Typical reduction | What the survivor receives |
|---|---|---|
| Single life | None | Nothing |
| 50% joint and survivor | About 10% | Half the pension for life |
| 75% joint and survivor | About 15% | Three quarters for life |
| 100% joint and survivor | About 20% | The full pension for life |
The reduction is priced on both lives, so a younger spouse means a larger reduction. Federal law requires spousal consent in writing to waive the survivor option on a qualified plan.
Lump Sum or Income
Many plans offer a lump sum instead of monthly payments. Comparing them requires discounting the income stream back to today at a rate that reflects what you could safely earn. The calculator does this and reports the result as a multiple of the annual pension.
Rules of thumb for reading that multiple: at a 5% discount rate over roughly 23 years of payments, the fair multiple is near 14–16× the annual pension. Offers materially below that favour the plan. The lump sum also transfers investment risk, longevity risk and inflation risk to you — risks the pension absorbs at no charge.
Inflation Is the Silent Threat
Most private-sector pensions have no cost-of-living adjustment. A $38,250 pension keeps its face value for thirty years while its buying power falls to about $18,000 at 2.5% inflation. Public-sector plans more often include a COLA, sometimes capped at 2 or 3%. Whether the plan indexes payments is arguably more important than the multiplier.
Frequently Asked Questions
Is my pension guaranteed?
Private-sector defined benefit plans in the U.S. are insured by the Pension Benefit Guaranty Corporation up to a limit that varies by age — roughly $7,100 a month at 65 in 2025. Public plans are not covered by the PBGC and depend on the sponsoring government.
What happens if I leave before retirement?
Once vested, usually after five years, the accrued benefit is preserved and paid from the plan's retirement age. It is frozen at your salary on the day you left, so inflation erodes it over the intervening years.
Can I take a pension and keep working?
Generally yes with a different employer. Returning to the same employer often suspends the pension under re-employment rules.