Retirement and Social Security
Definition
A retirement plan that pays a set monthly income for life, based on a formula using your pay and years of service.
What it means
A pension, or defined benefit plan, promises a specific monthly benefit at retirement rather than an account balance. A common formula multiplies years of service by a percentage of your final or average salary. The employer funds the plan and bears the investment risk. Most private-sector pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency that pays benefits up to legal limits if a plan ends without enough money. Many public employees, such as teachers and police, have state or local pensions instead, which are not PBGC-insured. Married participants usually receive a joint and survivor annuity unless the spouse consents in writing to another option. Some plans offer a lump sum instead of monthly payments, and pension income is generally taxable.
Example
A worker with 25 years of service and a final average salary of $60,000 in a plan paying 1.5% per year of service receives $22,500 a year, or $1,875 a month.
Illustrative numbers only. Your situation will differ.